Photo by Razvan Nitoi, Dreamstime.com.
Razvan Nitoi
Razvan Nitoi
Razvan Nitoi
Razvan Nitoi
Razvan Nitoi

Residential Solar: Is It Time?

March 24, 2020
Dave Shadle analyzes the ups and downs of the solar energy market in the recent past and looks at whether investing in solar can be a smart buy for certain kinds of people

Four years ago, T&D Grid Ops ran an article by this author titled “Four Reasons Why I may Never Install Solar Panels on my Roof.” The market for solar, including residential solar, has mushroomed during the intervening four years, so I decided to revisit my analysis to determine if I should get prepared to eat that previous prediction.

As before, we will begin this assessment with the usual precaution: each case is somewhat different, so the conclusions below are not necessarily applicable to someone else’s situation. Hopefully, however, this article will provide enough information to help others analyze their potential solar application or those being pitched to their electric customers.

Let’s start with a quick review of what’s been happening with solar in general over the last several years. After slumping post 2016, residential solar installations hit an all-time high of about 700 MW in the U.S. during the 3rd quarter of 2019. According to Wood Mackenzie and the Solar Energy Industry Association (SEIA), the year-over-year growth rate in residential solar is near 20% (for more, see SEIA's report). This is due in part to a steady decline in the cost of solar panels, but also local (state) circumstances. As with politics, a preponderance of the factors that drive the viability of residential solar are local.

It’s also worth mentioning the decline in solar costs. Nationally, NREL reports that the installed cost of an average residential solar system has declined by close to 65% since 2010. NREL cited the cost at $2.70/Watt DC in 2018. SEIA cited the cost at $2.84/Watt DC in Q3 2019. Of course, the quality of the components, the labor market and other factors affect the capital cost for a specific system.

Let’s review major considerations relating to a specific residential solar installation. One of the most important factors affecting a specific installation is the solar radiation available to harvest at that location. It is affected by latitude, the season, time of day, local weather, direction of exposure, shading and even air pollution. Commercial and utility scale developments are monitored for a year or more pre-construction to measure the actual resource.

Thankfully, those considering a residential project can get a decent estimate of the solar resource and energy production for a basic grid-tied PV system in a specific geographic area using NREL’s PVWatts calculator. By varying only the project location and rerunning this model, one can see significant changes in the average annual solar radiation available to the project. This results in capacity factor differences of up to 20% and annual production level differences as high as 33%. Location really matters! Use this tool to get your own solar estimate or to check estimates provided by vendors.

Other major solar considerations are also location based. They include local zoning and state and local incentives and taxes. Some states still offer incentives for new solar installations. My state, Pennsylvania, had a $1.25/watt rebate at one time, but it has since expired. Tax rebates are often modeled after the federal investment tax credit (ITC). They are deducted from one’s tax liability as opposed to a direct payment. A second tax related factor is whether one’s solar investment is exempt from state and local sales tax or from property taxes. Given that the average residential solar installation is 6,000 watts, the price tag using round numbers might approach $18,000, so tax breaks help.

Another major local factor is utility related rules. Does your state offer net metering? Pennsylvania requires all electric distribution companies to make net metering available to their customers. In PA, the rules require that any excess kWhs delivered to the grid from a residential solar system must be credited to homeowners at the full retail rate. These rules are in flux in some states, so real care in sizing one’s system is important if excess generation is at risk of not being compensated.

In some parts of the country, residential solar is required for new home construction (California). Also, solar systems that can be used for backup (i.e.; part of a microgrid) are receiving much greater attention due to fire risk related public safety power shutoffs. In other parts of the country, ignoring the tinkerers, the early adopters and the strong environmentalists, the solar decision is based on cold, hard economics. This is the realm where homeowners may be led astray. Like PA, some states have alternative energy portfolio standards that require electric distribution companies to derive a percentage of their electricity from renewable energy sources.

These states have essentially created a market for alternative energy credits (AECs) which represent the positive environmental attributes of generating 1 megawatt hour of renewable energy. Vendors sometimes use the predicted value stream of the AECs created by a solar installation to help justify the initial investment. Eight years ago, solar AECs were predicted to reach a value of $400 per credit in PA. They are now $40 on a contracted basis and less on the spot market. No one should use the forecast value of AECs to justify a build unless they have a fixed price contract in hand.

There are two final economic factors that drive the solar proposition. The first is the ITC which is stepping down to zero for residential customers over the next few years. This year the Federal tax credit is 26% and it works as described above. The other factor is one’s current electric rate and the forecast escalation for electricity. Estimates I’ve seen from vendors predict electric rates will rise at between 3.5 and 4.0 % per year. That is above the current rate of inflation.

No one can predict the future, but there are informed sources to draw upon for a comparison. The U.S. DOE’s Office of Energy Efficiency and Renewable Energy (EERE) provides a downloadable program for calculating energy escalation for contracts and related uses. It factors in one’s location for local economic conditions and allows the user to specify a starting year and a contract duration. Using this tool, I found that the real escalation rate I should be using for electricity in contract considerations to be 0.81% based on a 20-year term beginning in 2020.

Using the EERE derived escalation rate, one can use another NREL program to calculate the levelized cost of energy (LCOE) from the utility and from a grid connected solar project. This program determined that my 20 year levelized electric rate should be 13.1 cents and the 20 year levelized rate from a solar project with the pricing and configuration I was quoted would be 14.8 cents. The numbers reveal that on a levelized basis I would not save money by installing solar panels. However, this simple calculation methodology does not factor in financing issues, discount issues, future component replacement, or degradation costs. Each of these factors would need to be included for a thorough analysis. Of note, while they seem like small details, inflation and discount rates as well as ensuring consistency between the two (both real rates or both nominal rates) can completely alter a capital investment decision.

The analysis presented above indicates the economics remain unfavorable for a residential solar application in my area and situation. The picture may be very different where tax credits, rebates or other differences apply. Also, I will note that the electric cost difference between residential solar and relying on the electric company has narrowed in the past four years. The simple tools referenced here should allow you to obtain a starting assessment of your situation or that faced by your customers.

Going forward, changing state regulations and wholesale market rules relating to grid modernization may lead to greater uncertainty from state to state in the value proposition for distributed energy resources, including residential solar (for more on that, see this .pdf). For Joe Homeowner, the takeaways for analyzing the solar option are several: be clear on the rules; attempt to build project parameters on guaranteed performance and income streams; and where use of forecasts is unavoidable, use reliable sources and run several scenarios to understand the range of possible outcomes. 

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