In many ways, your solar power system is a financial product—one that is capable of generating annual returns ranging anywhere from 10% to more than 30%.
Many people may look at a solar panel system as an expense, but that view does not take into account the tremendous value these systems are capable of producing over their 25-30 year lifespan. A solar PV system is one of the best ways to invest your money. Even if your return is at the lower end of the range (i.e. 10% return), it’s still fantastic because returns earned through solar power systems have many benefits over returns from your other investments such as stocks and bonds.
The biggest drivers of your financial benefits are your current electric rates, the incentives for which you might qualify and, of course, getting the best deal possible when you purchase your solar PV system.
Annual returns are calculated by dividing the financial benefits you receive each year by your initial investment in your solar power system. How large your returns will be is a function of several things:
How high are your current bills? This determines your savings over the life of your system. The higher your rates, the more you will save.
Are there local and/or state tax programs such in your area that encourage solar adoption? Are you a business or other organization that can take advantage of depreciation tax benefits, including accelerated depreciation?
Solar Renewable Energy Certificates (SRECs):
Does your state or utility offer SRECs for the electricity produced by your solar energy system? What kind of income can you earn by selling these SRECs?
Did you get the best deal? Were you able to take advantage of rebates and tax incentives that offset the cost of your installation?
How efficient is your system, i.e. is it producing electricity at optimal levels?
How sunny is it where you are? Which way does your roof face? What is the pitch of your roof? Is there shading? All of these things will affect your production levels to some degree.
Property Value Increases:
How much will the value of your property increase when you sell your home or commercial property?
How much will your profits increase because of your lower costs? What is the value of the goodwill your solar power system generated? What level of revenues is attributable to your green credentials?
While returns earned through investing in a solar power system are different than returns from investing in stocks and bonds, they offer many superior “return” characteristics that make them strong contenders for inclusion in your overall investment strategy.
Significant portions of your returns from solar are in the form of savings so they are not taxable. Stock and bond returns, on the other hand, are 100% income so they are subject to both federal and state taxes. Also, solar panel systems are not a liquid asset so they cannot easily be sold and converted to cash. Stocks and bonds can be. In general, you only cash in the value of your solar power system when you sell the home or property where it is installed.
Here are the reasons why you should consider an investment in solar power systems:
Your solar power system is designed produce free electricity for 20-40 years with minimal maintenance or upgrade expenses. Over that entire period, you will generate returns in the form of savings and potentially income from selling SRECs. Your savings will be equal to what you would have paid your utility. It’s safe to say, that the cost of electricity going forward will continue to rise. That fact makes the savings and returns from your solar PV system low risk and consistent over its useful life. There are not many other investment options capable of producing consistent, relatively safe returns of 10% or more over such a long period of time.
The chart below shows the historical returns of the stock and bond markets over the past 20 years.
The returns range from 4% for international stocks to 6% for U.S. Bonds to just over 10% for U.S. stocks. Because of federal and state income taxes, the actual income you will receive will be reduced by 20-40% based on your tax bracket. Other factors that impact your return include the timing of your initial investment and exit, and the duration of investment. Over the long-term, the results generated are reasonable, but short-term volatility within these markets requires investors to stay with their stocks and bonds for the long-term.
Historical trends suggest electricity prices will rise 2.5%-5% every year. When you invest in a solar PV system, that’s good news for you. As your utility costs increase your savings increase, which means that, your returns will increase. The higher the cost of energy, the more money you will avoid paying to your utility each year you have your solar power system.
The majority of the returns you receive from your solar PV system are savings, not income. This is an important difference because, unlike income, savings are not subjected to federal or state income taxes. This means more money going into your pocket and staying there. Depending on your tax bracket, your solar power system will deliver 20-35% more actual money in your pocket than a taxable mutual fund investment earning a comparable rate of return.
You can also take advantage of local, state and federal tax benefits designed to encourage solar adoption. The federal government allows you to apply 30% of the cost of your solar PV system as a tax credit to your income tax bill. So, if your system cost $10,000, you can reduce the amount you owe the IRS by $3,000. Additionally, some states also allow a 15% tax credit on your state income tax bills and some do not charge sales tax on solar power equipment.
There may be other tax benefits, as well. Most clean energy systems can be financed with a loan (e.g., home equity, solar loans or other loans) and the interest on these loans also may be tax deductible. Also, business owners have the added benefits of accelerated depreciation schedules that allow them to deduct the depreciation they take on their investment over a shorter period of time.
Studies show that properties equipped with solar power have increased property values 3-4% above similar properties in the same area. The same reasons that made solar power an attractive investment for you make it attractive to potential buyers of your home or business property. Buyers are interested in properties with low or non-existent utility bills and in reducing their impact on the environment. The good news is that they are willing to pay a premium to accomplish these goals.
Your investment in a solar power system doesn’t just benefit you. Your whole community reaps the environmental benefits it provides. Although it’s difficult to measure the increased bonhomie of your neighbors, it will be reflected in the premium you will receive if and when you sell your home. Goodwill is also one of the business benefits of solar power, but there are additional financial benefits as well. Businesses also may experience a top-line benefit in the form of increased sales from customers who are attracted to the company’s “green” credentials and demonstrated commitment to sustainable practices such as solar power.