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Solar Energy Systems - Cost Analysis and ROI Viability

Submitted by Teo Graca | RSS Feed | Add Comment | Bookmark Me! print

Solar power as an energy source for low-income residential owners may not be viable currently at over $1 per watt. Although the current average price in Virginia for installed solar energy systems was about $7 per watt at the time of this writing, we decided to look into an easy way for people to determine the viability of these systems for themselves.

Although installed cost per watt versus current energy costs is our primary consideration in this article, let's consider some of the benefits of solar power first.

The Advantages of Decentralizing the Energy Grid's Power Supply

The architects behind our current centralized energy grid are worried about solar flairs, which seriously disrupted service in the north east part of the U.S. and parts of Canada a few years ago. This is going to require some significant changes in the way the grid currently works, and they are promoting plans to incorporate energy supplies from residences and businesses to offset the risk of this happening again. In most states, you can get a 1-to-1 trade on energy you produce and supply back to the grid. Having a huge number of small power generation and storage systems in our homes provides more reliability for the central grid..

Self Reliance (Sustainability)

Self reliance eliminates our need for importing energy resources and reduces potential conflict over these resources.

Cleaner Environment

Solar provides energy from our sun, which contributes to a cleaner environment.

Securing the Cost of Energy

According to the DOE, the average cost of residential electricity in 2009 was 12¢ per kWh in the U.S. This cost is poised to go up in price and once you have your own sustainable solar power system, your energy needs and costs are secured. One of the cost considerations is to include projected increases in energy costs over the next 10 to 30 years. Securing the cost of energy now may make sense in a few years and might be worth the investment.

What Size System Do I Need?

In 2007, the average household used 936 kWh per month according to the DOE, which is more than 10,000 kWh per year. It is less expensive per watt to install larger systems, and most are designed based on yearly usage. Keep in mind that most people that go with a solar energy solution are currently having 4,000 to 8,000 kWh per year systems - keep in mind that newer and bigger systems cost less per watt.

Do I Need a Battery Storage System?

There are many decentralization programs in place right now that allow your solar energy system to be plugged directly into the centralized power grid (no battery expense) where you take a 1-to-1 trade on energy used versus produced. Meters actually run backwards at times when more energy is produced than used.

When would it make sense for me to set up a solar energy system?

Let's look at what you are paying right now to determine viability.

One easy way to think about this question is to imagine having a 10,000 kWh system right now and use your current kWh charges to calculate your savings per year. Let's assume your average kWh charge is 12¢ - 10,000 kWh per year times 12¢ is $1,200 per year in savings ($100 per month). If the power company doubled this cost, you would be saving $2,400 per year ($200 per month). So, $100 to $200 per month to have this system installed would make this system viable right now to most, although some people might feel more per month to get the above mentioned benefits would make the system viable.

Resource: DOE/EIA - 2007 Census Report - MS Excel File - 936 kWh Average Monthly Use - US Average - 1,207 kWh Average Monthly Use Virginia

Let's look at what a financing plan would cost, tax credits and how much purchase power you would have.

If you financed this at 6% annual interest for a total installation amount somewhere between these two payment amounts, you would be able to afford a system that costs anywhere from $20,000 to $40,000 total, which is $2 to $4 per watt. This is far below the current average cost of $7 per watt. Even with the 30% tax credit on your investment, the total cost would be about $5 to $6 per watt, based on the cost of financing. The cost of a 10,000 kWh system was priced over $60,000 from several vendors we called in Virginia in 2010. A $60,000 investment will net an $18,000 tax credit, which you can use in the current tax year or over the next 5 years.

What Does This Really Cost For a Direct Purchase?

Few people have $60,000 to invest, but for those that do, the amount invested minus the tax credit in the above example changes the cost to $42,000. This provides a guaranteed return on investment (ROI) of almost 3% annually with the a cost of power is 12¢ per kWh, or a nearly 6% ROI if the price goes up to 24¢ per kWh.

What Does This Really Cost with a Loan?

If you have to borrow the money at 6%, this may not be a viable solution, unless you consider the free power after the loan is paid and the other benefits mentioned above. The interest charges alone would eat up all of the short term savings.

Things That Can Make Solar Viable For Most Home Owners

Larger Tax Credit: One thing that would make this a much more viable opportunity would be a lower cost of the system, which could be accomplished through a larger tax credit. If there was a 50% or 70% tax credit, the cost is significantly reduced to about what would be saved at the current kWh rates.

New Technologies: New technologies are coming out soon that will reduce the cost of these systems, so watch for them.

Lower Interest Rates: Another thing that would make this more viable to people that would have to finance this is to get a lower loan rate. Loans at 5% or less makes this viable at the current pricing mentioned for most people, and if somehow homeowners could get the same rate as banks (1% or less), this could become viable for most home owners.


Ultimately, if you can get a solar energy system for what you are paying right now in yearly electric costs, or if you can get it for less, the system is a viable option. If not, you might consider the benefits mentioned to make it personally viable to you. Otherwise, keep in eye out for things like tax credits, kWh charges, cost per watt and loan rates that could make solar viable to everyone soon!

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