How to Tell if Solar Is Right for You

We usually focus on stocks here on Industry Focus, but investing in one of the biggest assets most people own -- their house -- could pay off in spades, too. In this week's episode of Industry Focus: Energy, host Nick Sciple and Fool.com contributor Brian Feroldi explain how solar paneling your roof might just lead to a 12% return on investment.

Find out how to tell if solar paneling is right (i.e., profitable) for you, how much it all costs, the most important tax credits and grants to know about before hopping in, how to find the best installation deals, how your solar panels could turn your energy bill negative, and more.

A full transcript follows the video.

This video was recorded on Oct. 18, 2018.

Nick Sciple: This episode of Industry Focus was pre-recorded on October 18th, so some things may have changed. For more information on investing in residential solar, please be sure to check out Brian's write up on residential solar at the link in the description.

Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, and we're discussing residential solar. I'm your host, Nick Sciple, and today I'm joined by Motley Fool contributor Brian Feroldi via Skype. How are you doing, Brian? 

Brian Feroldi: I'm doing fantastic, Nick! How are you? 

Sciple: I'm doing well! I heard you just came back from a pumpkin patch this morning. Is that right? 

Feroldi: Yeah. My youngest daughter, I have two daughters, is in pre-k. This morning, her pre-k went on a field trip to a pumpkin patch. I don't know why, but today it's 43 degrees out in Rhode Island and super windy. So I froze my tush off at a pumpkin patch this morning. How's your day going? 

Sciple: It's going alright. We've got a little bit of that cold weather coming through here in the D.C. area, as well. I remember just last week, I was walking around in shorts and a T-shirt. Now I'm all bundled up. It really snuck up on us. 

Brian, I really like our topic today. We spend a lot of time at The Motley Fool and on Industry Focus specifically talking about stocks and investments, but probably not enough time talking about the average person's largest investment: their home. On today's episode, we're going to discuss how to figure out whether solar is right for your home. On the second half of the show, we'll break down how you can take advantage of solar incentives to guarantee yourself a double-digit return on your solar investment while increasing your home's value. 

First, let's talk about the federal tax credit that's making these types of returns possible. Brian, in 2006, the federal government put in place a 30% solar investment tax credit. That tax credit provides a 30% tax credit for investment in residential solar, as well as some industrial solar. That's been a big part of the explosion in solar access in the United States. According to Solar Energy Industries Association, since this tax credit was put in place in 2006, and it was extended in 2015, we've seen 59% compound annual solar growth since that tax credit was put in place. It's really been a boon for the solar industry. 

Brian, why don't you talk about, what does a homeowner have to do to qualify for this tax credit? When is that tax credit going to start coming off? Give us some details about that. 

Feroldi: As you said, the tax credit is 30% of the cost to install the system. It's important to point out that it's an actual credit, meaning that 30% literally comes off of your tax bill. It's a really powerful incentive to get people to adopt solar. As long as you own the system yourself and put it on your house, aka you're not leasing it from a solar company, that investment goes right back on your taxes. There's no cap on its value. That report that you mentioned, The Energy (unclear: 03:38) Solar Market, noted that the average person that went solar saved about $5,000 on the upfront cost of going solar in 2017.

Sciple: Exactly. This is a great benefit for investors and homeowners in general, to be able to put solar in place on their home, take some money off of their solar bill, and also get some tax savings. As you mentioned, it's dollar-for-dollar off of your tax bill, not like a deduction, where you're taking away from income. This is taking away from your actual final tax bill. 

To take advantage of this, someone needs to be in the right situation for their home. What are the things that someone needs to look at to decide whether solar is right for you? There are a few factors we're going to talk about. The first thing is how high your electric bill is. We actually got a question from a listener, Scott, on Twitter. I'm curious to see what your thoughts on this, Brian, are. He asked, "When your electric bill is been $95-225, how does solar makes sense for you? How does that investment fit with an electric bill in that range?"

Feroldi: The answer to whether or not solar makes sense for you is always going to depend on a huge number of factors. However, if you go to the general online calculators that are available, from what I've seen, if your electric bill is about $80 or more per month on average -- obviously, that waxes and wanes based on the time of year -- then it's definitely in your interest to at least check out solar if that interests you. 

But as you can probably guess, the cost of electricity varies hugely in the United States. I live in the Northeast. That is, in general, a very high electric cost part of the country. Hawaii, California are also very high-cost areas. That's very different from people that live in, say, the Midwest or the South. Their electricity prices are far lower. Where you live and how high your electric bill is are two major factors to determining if solar could be a good option for you.

Sciple: Right. There are some other, more common sense factors you have to think about for your home. No. 1: how much sunshine do you get? If you live in a part of the country where you get sun year-round, you're going to get a higher benefit out of your solar installation than someone that lives in a drearier part of the world. In addition, you have to think about the slope of your roof. The more southern-facing roof exposure you have on your home, the more likely you are to get a high benefit out of your solar installation. 

Another thing you have to think about is, how are you going to finance your solar system? These things can cost upwards of $10,000. There are a few different options you can pursue. Do you want to talk about the advantages and disadvantages of those financing options, Brian? 

Feroldi: There are a number of them. You can just pay straight cash for the system upfront. The big benefit of that is that you don't have any interest payments to make and you own them from day one. On the flip side, you have to have a decent amount of cash sitting around, and it can take several years for you to realize the return on your investment. 

Another option is to go out and get a loan. You can get a home equity loan or a straight bank loan. Doing that, you will pay interest on it, but you can put a down payment on solar panels. Because you're paying interest, that can reduce your return on investment. But that's another option.

The final one that I'm aware of is the leasing option. This is when you put them on your house and the solar company, in many cases, actually owns the panel, and you're just leasing them from them. In those cases, you can put solar on your house for, in some cases, basically $0 upfront. However, as we mentioned at the top of the show, if you go that route, you do not qualify for the federal tax credit. The company that actually owns the panels qualifies.

There are pluses and minuses to each system. It just depends on how much money you have and how much you want to invest upfront.

Sciple: The last thing we should call out to listeners is, you have to think about your roof itself. How old is your roof? When you're installing solar panels, if you have to replace your roof after a solar panel installation, you're going to have to remove the panels and go through this whole process. It's best to install solar panels on a new roof.

Or, there are some other options out there. We got a question from our listener Eric on Twitter. He asked about the Tesla solar roof and what our thoughts are on that opportunity vs. different solar panel installations available. I know, Brian, you put solar on your roof about a year ago. Did you ever look at the Tesla solar roof opportunity? What are your thoughts on that product? 

Feroldi: I think that's an extremely compelling product. I will say that when I signed my agreement for my solar panels, I think Elon Musk made the announcement about three months later. When I signed mine, that was not available. But I did watch the presentation that he made. I think that having an actual solar roof tile, it looks like a fantastic option. 

However, those are so new. From what I understand, they're extremely expensive when compared to just doing a roof. It's just a technology that hasn't had enough time to scale. But my guess is, over time, the cost of doing so will come down tremendously. 

Sciple: I think there's about 12 of those on the market today, according to CNBC's reporting. It's still early days for the Tesla solar roof. It's definitely an exciting product and something to keep an eye on going forward. 

Brian, on the second half of the show, we're going to talk about your experience putting solar on your home and how you used that process and took advantage of these tax credits to guarantee yourself a double-digit rate of return on your solar panel investment. 

Brian, we laid out in the first half of the show how you can decide whether solar is right for you. Once you've made that decision, you've realized solar works for you -- your home is set up in such a way that it's going to provide an advantage for you, you know how to qualify for the tax credit, you have the funds available to afford this installation -- what's the next steps? I know you went through this process about a year ago. What were the steps that you followed to install solar on your home? What benefits did you realize?

Feroldi: The very first thing that anybody who's interested in going solar should do is some extremely basic market research. Which solar companies exist in your local area? The number of solar shops have exploded in the U.S. There well could be five or 10 or more local installers. The very first step is to call each of them and have them come to your house. I hired a bunch of installers. They came to my house. They put this little dial on my roof to figure out exactly my sun exposure. Then they put it into their system. That's when they presented me with their options. They went through all the different pricing schemes, all the different financing options. They gave me estimates for what they thought my return on investment would be, my power generation and everything. If you're interested, shop around. There's guaranteed to be solar places by you. 

Sciple: There are a few important things to call out here. First, it's very important to shop around when you're looking for these solar installers. What at first may appear to be the obvious choice, these large national installers, may not be the best value for you. The U.S. Department of Energy's National Renewable Energy Laboratory has quoted that homeowners who get three or more quotes for their solar installation can save $5,000-10,000 on an installation. And, they found that large installers are often $2,000-5,000 more expensive than small solar companies. You had an experience like this, that matched that Department of Energy report, when you installed solar in your home. Is that correct, Brian?

Feroldi: Yes. I'm a Tesla shareholder. I followed SolarCity before that, which is now a part of Tesla. I'm a big fan of Elon Musk. Before I even started this process, I assumed that SolarCity, because it was the largest installer in the country, was going to give me the best deal. I contacted SolarCity. And just for comparison, I contacted a local solar installer called Newport Solar, which is just in my area of Rhode Island. I was floored when I found out that the options through my local installer, Newport Solar, were actually several thousand dollars cheaper than going through SolarCity. I went in with a preconceived notion that going with the big one, a national installer, made sense. But that wasn't my experience.

Sciple: Another thing I want to call out when it comes to this installation is that this is a time-consuming process. When you did your installation, it took you around seven months, is that correct?

Feroldi: It took me about three weeks from start to finish to sign the agreement, to get my solar measurements. But once I actually signed the deal, from that point to when the panels were actually installed on my house and working, was about six months. This is a time-consuming process.

Sciple: To call this out, too, my understanding of the way the tax credit works is that it triggers whenever the system is installed and operational. If you want to get it for the end of 2019 deadline, you need to give yourself at least a six-month lead time to go through all the installation procedures and inspections, and shop around, as we said, to get the best price. If this is something you're thinking about, you're going to want to start looking at it in the next six months, so you can get under the wire before the beginning of 2019. 

Feroldi: Yeah. I would say to listeners that are interested to even get started today. So many people know that that December 31st deadline is coming up that there's going to be a huge bolus of people that are rushing to get in. You might want to even extend out your lead time to more than six months.

Sciple: Right, because part of that lag for you was that there was a backlog of people who want these things installed relative to the capabilities of the installers to meet that demand. 

Feroldi: That was 100% of the reason why it took so long. They were so jammed up. Solar is absolutely exploding. If you're interested, get in line, is basically the message.

Sciple: Exactly. Another thing your installer may talk to you about whenever you reach out to them is the different state benefits available to you. There are 50 states in the country. Your mileage may vary depending on what state you're in. But these are important additional benefits you can get from your state up to and on top of that federal 30% tax credit. Do you want to talk about what state benefits you had available whenever you installed your solar panels, and how you became aware of them? 

Feroldi: Sure. That's another benefit of working with a local installer. They tend to know all the state's rules and regulations inside and out. I did make a call to my local state government's energy. They actually recommended I go with a local installer, because they said they know the system so much better. SolarCity was new to my area, so they said, "We haven't even done an installation with SolarCity."

When Newport Solar came to my house, they did the math. Then they presented me with two options. The first is what's called a net metering program. That's when your utility meter spins forward when you're a user of electricity -- so, at night and when the sun's not shining. And it spins backwards during the day when the sun is out, and your electricity is low. By doing that, your electric company is billing you for the net usage that you have. If you make 1,000 kilowatt hours and you use 1,300, they're billing you for the 300 additional ones that you used.

If I went through that program, my state had a grant that was pretty sizable that they were willing to fund me. To give you some hard numbers on that, my solar panels were pretty expensive upfront. The upfront cost was $26,100. If I went through the net metering program, my state would have given me a $7,300 grant to immediately reduce that price upfront. Then, if you subtract out the 30% tax credit from that, the net cost to me upfront, after everything was said and done, to go with the net metering program, would have been about $13,000, slightly more than that. The numbers that they told me was that my annual electric bill was estimated to drop from about $1,500 dollars per year to about $300 per year. In essence, I would have saved myself about $1,200 dollars per year in electricity costs. If you divide that out by the $13,000 cost upfront, that would have been a cash-on-cash return of just over 8%, which I thought was very good. 

However, in my specific state, Rhode Island, they also had something called the renewable energy growth tariff program. Under that program, the electricity that I produced wouldn't be used by my house, but instead would go out to my local grid. It would be used by my house and my neighbours. And if I did that, the electricity that my panels produced, National Grid, my electric company, would buy them from me at almost double the rate that I would buy from them on the open market. My electricity costs here are about $0.18 per kilowatt hour. National Grid was willing to buy my solar electricity at a price of $0.35 per kilowatt hour. 

Under that program, the math would have been that same $26,000 upfront to get the panels installed. I would not qualify for the grant, so, taking the 30% federal tax credit into account, the net purchase price to me upfront would have been $18,000. However, because of that $0.35 kilowatt hour that I was selling at, and I was estimated to produce about 6,500 kilowatt hours per year, the value of the electricity that I would be selling back to National Grid would be about $2,200. If you divide that by the $18,000 upfront, that was a cash-on-cash return of about 12%. That number really attracted me.

Sciple: A 12% return, that's better than that the long-term return of the stock market, and it's something that's guaranteed, it's in probably your largest investment, your home. 

Maybe you haven't seen this, but have you seen any response in your appraised home value or any anything like that after installing solar in your home?

Feroldi: I have not. If you go to websites like Zillow and look at your house, I don't think there's an option for me to put that in there. But they do say that putting these panels on my house would theoretically be a capital improvement of the $26,000 that I put into them. If you think about it, if I was ever to go to sell my house, I could market my house as having a negative electric bill of $60 a month. If you were a homebuyer, would you pay more for a house that had a -$60 electric bill vs. one that you'd have to pay $100 for? I know I would.

Sciple: Exactly. You get a 12% cash-on-cash return by holding your home and taking advantage of your solar panels, as well as, if for some reason you need to move, you have an increased resale value of your home. There are some other benefits you've seen, non-financial benefits outside and apart from this 12% cash-on-cash return. You've talked about it being a great conversation starter with friends and family. How have friends and family responded to your solar panels on your roof? Do people notice them when they drive by? How does it affect the curb appeal on your home? How has that shaken out since you've had your solar panels the past year?

Feroldi: This was something that we were very worried about upfront. We live in a very nice neighborhood. We were worried about the panels detracting from the curb appeal of our home. They are in the front and back of my house. When you pull up to my driveway, they are literally on the roof in front. But I have yet to have a friend that says "Hey, I've noticed you have solar panels." I always have to tell people after they come to my house. I'm like, "What do you think of my solar panels?" And they're like, "I didn't even notice them." That was a pleasant surprise. We thought that they were going to be an eyesore. In fact, most people don't even know about them. We have been talking to some of our neighbors that have been interested in going solar. 

Another benefit is that it hedges me from rising energy prices. I will tell you that just this year, National Grid just pushed through a substantial increase in the price that consumers are going to have to pay for electricity by going through this program. I am kind of hedged against that. That's a big benefit to going solar, too.

Sciple: Right. You get these financial benefits without really detracting from the curb appeal of your home, while increasing the resale value of your home. It's really a lot of strong benefits in place, and really supported by these government incentives that make it even more appealing than it would be otherwise.

For our listeners, a year out from having solar installed on your home, what are your final thoughts? What would you share with listeners who were thinking about installing solar? What would be your message to them?

Feroldi: I would set their expectations upfront. They have to know upfront that it's going to be a lengthy process from start to finish. As I mentioned, for me it took about seven months. Every house is going to be different. The pitch of my roof, I will tell you, is not ideal at all. My house faces east and west. The best pitch is directly north and south. Curb appeal is not a big issue in my particular case, but it can be in others. 

The other thing that I learned is that you have to take the productivity assumptions that they provide you with a grain of salt. As you can imagine, the solar companies really want you to sign the deal. They're going to be putting numbers in front of you that project optimism about sunshine and everything like that. When they gave me my deal, for example, they told me that my panels were going to produce about 6,500 kilowatt hours of electricity in the first year. My actual production was 6,100. That was about 6% less. It didn't make the math shake out that different one way or the other, but you need to know that upfront, they're going to present you with the best thing possible. 

But the big takeaway is, if you're interested, get started. Make some phone calls. And definitely shop around to get the best deal. 

Sciple: If our listeners have any questions, feel free to reach out to us @MFIndustryFocus on Twitter. I know, Brian, you're on Twitter. People can reach out to you there. You can also email us at [email protected]. We'll be happy to answer any questions you have. 

I enjoyed having you on the show, Brian! Looking forward to doing it again sometime!

Feroldi: Sounds great, Nick! Thanks for having me here!

Sciple: Enjoyed it! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass. For Brian Feroldi, I'm Nick Sciple. Thanks for listening and Fool on!