How to Use Residential Solar to Guarantee a Double-Digit Return

You may have noticed that solar panels have been popping up on homes and businesses over the last few years. That rising popularity of solar has been caused by falling prices. Costs have dropped so much that solar is cost-competitive with fossil fuels in many regions. In fact, choosing solar can literally save thousands of dollars in energy costs over the long term. 

Last year, I decided to make the switch and put solar panels on my roof. I liked the idea of permanently driving down one of my fixed costs while simultaneously lowering my carbon footprint.

I recently crossed the one-year anniversary of putting solar panels on my roof. Here's a review of my experience with solar and what I've learned from the process.

Image source: Getty Images.

The options

The first step in my switch to solar was to solicit bids from a few local solar companies. I got bids from SolarCity -- which is now owned by Tesla -- and a local installer named Newport Solar. I figured that SolarCity would be the slam-dunk choice since they are a national installer (and also because I'm a shareholder), but I wanted another bid as a point of comparison.

Both vendors came to my house and spent some time on my roof collecting data before presenting me with options.

To my surprise, Newport Solar ended up being the low bidder. They also had a great reputation in my area, so I decided to choose them.

Newport Solar presented me with two options.

The first choice was called a "Net Metering" program. Using this option, our utility meter would spin forwards like normal when we were a net-user of electricity (at night or on rainy days) and back when we were a net-producer of electricity (when the sun was shining).

Under this program, the value of the electricity that we generated would have been equal to the retail price at which we purchased it (which in Rhode Island is quite high, at $0.172 per kilowatt/hour).

Choosing this option would have qualified us for a tax incentive through our state's "Renewable Energy Fund."

Here's how that math would have worked out.

Table source: Author's data. 

Choosing the net-metering option would have reduced our annual electricity bill from $1,450 per year to an estimated $330 per year. 

That's a $1,120/year savings, which works out to a cash-on-cash return of 8.5%. ($1,120 yearly savings / $13,154 net upfront purchase price). 

The second option was called the "Renewable Energy Growth Tariff Program." If we signed up for this program, then all of our solar production would be fed back into our local grid to be used by us and our neighbors. While we wouldn't use all of our electricity ourselves, our utility agreed to buy the electricity from us at a price of $0.3475 per kW/hr for 15 years. That's nearly double the price that we paid to consume electricity on the open market.

However, if we chose this program, then we wouldn't qualify for the state's generous upfront grant.

Here's how the proposed math worked out for this option:

Table source: Author's data.              

Newport Solar estimated that the system would produce more than 6,500 kW/hrs of electricity per year. When multiplied by the price that we would get to sell our electricity back to the grid at ($0.3475 kW/hr), the value of the energy that we were expected to produce was over $2,200.

That works out to a cash-on-cash return of about 12% annually.

While the lower upfront cost from the Net Metering program was highly attractive, we ended up going with the Renewable Energy Growth Tariff program because of the higher return on investment.

The actual numbers

Our solar panels went live a little over a year ago.

Here's how the actual math shook out in the first year:

Table source: Author's data.   

Why does the Renewable Energy Growth Tariff Program even exist?

You might be scratching your head as to why my local utility company (National Grid) would be willing to pay me nearly double the going rate for electricity. I asked that question to Newport Solar, and here is what they said:

• National Grid is required by law to prove that a certain percentage of its electricity comes from renewable sources. Paying an above-market rate incentivizes homeowners to make their own power and helps National Grid to meet this regulatory requirement.
• Homeowners who add solar to the grid reduce the need for high-cost peaker plants, which are generally only turned on (at great cost) during periods of maximum demand (such as during a heat wave).
• Residential solar turns one of the utility's fixed capital costs (building a new plant with a high upfront expense) into a variable cost (with no upfront cost). They only pay for the electricity that is produced, so the "risk" of non-production is transferred to the homeowner.
• Utilities are monopolies that are heavily regulated. They usually operate on a "cost plus" model. They have a built-in profit margin, and all costs are passed along to consumers. National Grid still comes out ahead financially by using this program.
• Producing and consuming power in a local microgrid lowers National Grid's transmissions costs. It also reduces the stress placed on long-haul equipment and lowers vampire losses.

My rep told me that the reimbursement rate has been falling in recent years as solar continues to become more popular. A few years ago, National Grid was paying homeowners as much as $0.44 per kW/hr for solar production. The contract I signed was at $0.3475 per kW/hr. The current reimbursement rate is under $0.30 per kW/hr and falling fast.

Other benefits of solar

Beyond reducing my electricity bills and locking in a double-digit return on investment, there are other benefits of choosing solar:

• Solar panels increase the value of your home (wouldn't you pay more to own a home that featured a negative electricity bill?)
• Solar creates local jobs.
• Solar protects you against rising energy costs.
• Solar reduces your carbon footprint.
• Solar is a great conversation starter with friends and family.

Is solar right for you?

Here are a few questions you can ask yourself to figure out if solar is worth investigating.

• How high is your electric bill? The higher your monthly bill is, the greater your savings will be over the long run. As a very rough rule of thumb, you should investigate solar if you average monthly electric bill exceeds $75.
• What do you pay for electricity? Electricity prices vary widely from state to state. In the Northeast, Hawaii, and California, costs are very high. However, electricity costs tend to be much lower in the Midwest and Southern U.S.
• How much sunshine do you get, and what is the slope of your roof? The more sunshine you get and the more southern exposure your roof has, the more productive your panels will be.
• How are you going to finance the system? Do you have the cash on hand to pay for the system up front, or will you need to take out a loan or lease them? We chose to pay cash for our system, but using other financing options can also be smart. In fact, many leasing options allow a homeowner to put solar on their roof for $0 upfront! However, keep in mind that you may not qualify for the federal solar tax credit if you choose to lease your solar panels.
• How old is your roof? If you need to replace your roof in less than five years, then choosing solar might not make sense. We replaced our roof two years ago, so this wasn't an issue for us. However, it is worth pointing out that companies like Tesla are now starting to offer solar roofing options that might be worth checking out.
• Is there competition where you live? Just like any other major purchase, it can pay to shop around. Shopping portals like energysage.com can help you find local companies that will compete for your business. 

What I've learned after a year:

• It's a lengthy process: From start to finish, it took us about seven months to get the panels installed on our house. Scheduling time for multiple roof inspections took about a month by itself. Even after we placed an order, we were told that it would be a six-month wait before our installer could get through its backlog and get the paperwork in place. Even after the panels were installed on our roof, we had to wait for our utility to come and inspect the panels before they could be turned on.
• Curb appeal is not much of an issue: My wife and I were very concerned that the panels would look ugly and subtract from the curb appeal of our house. We asked the installers to put them in the most inconspicuous spot of our roof to minimize the loss of curb appeal. However, more often than not, we have to tell our guests that we have solar installed on our house. We've found that very few people look at our roof directly when they are pulling into our driveway, so the panels do not detract from the curb appeal of our house at all.
• Take productivity assumptions with a grain of salt: We were initially told that our panels would generate about 6,500 kW/hrs of electricity in any given year. Our actual production in the first year was 6,100 kW/hr, or about 6% less than projected. This didn't alter the math too much, but the solar company obviously wanted to present me with the best possible scenario data to make choosing solar as compelling as possible.
• I wish I'd started sooner: The math would have looked even better had I been able to sign a contract with National Grid at above $0.40 per kW/hr.

If you've ever thought about solar, start today by giving your local solar company a call. Panel prices have continued to drop since we had our installation, so it's possible that you could even get a better deal than we did.

Also, the 30% tax credit is set to start phasing out in 2019, so if you're at all interested in solar, make sure you get started today.