Becoming a Major Utility Company

Who is the next greatest energy producer in the country? Us. That’s who. Well, at least I feel important now that we own a solar power plant.

Salt and I didn’t intend to become a major utility company when we moved out to the country, but it seems to be our calling. We knew we were about to become a water company when we bought a house with a well and dropped several thousand dollars on a water pump, filtration, and treatment system.  Living in one of the sunniest places in the country, adding solar panels seemed like a logical next step. Interestingly, having  solar panels on the house, means partnering with the rural electric cooperative to buy and sell energy from one another. We buy from them when we don't produce enough and they buy from us when we produce more than we need. You're welcome, Consumers.

Call it common sense, rugged individualism or being green if you like. I prefer to think of investing in solar energy as the perfect marriage of form and function, civilization and nature, artistic expression and pragmatism.  In other words, the budget works out, and our property value goes up, and it's a clean energy source, and the panels look really cool on the house. We didn't do it to impress anyone, but that is an added benefit. Apparently, it is chic to be green. 

Lest I sound too proud of myself -- which I am most certainly too proud of myself -- you should know that the solar installation company did most of the legwork. We provided them with our utility usage for the past year. They provided a diagram of the panel installation, an estimate of how much energy would be generated in a year, a cost for installation, and information on financing including the monthly cost. Once the agreement was signed and the financing approved, the installation company took it from there.

We haven't heard good things about the longevity of the equipment used in most solar leases, so we were more interested in buying it outright. The panels we purchased have a 24 year warranty and they certainly are pretty. Sleek, polished, lightweight, gleaming in the sunlight, they are lovely.

I've been asked by several people how we could afford it.  Truly, the cost can't be justified by everyone, even in our region because of issues such as shade trees and orientation to the sun. The prices on solar installations have been dropping, but we were still pleasantly surprised when it became affordable enough for us to finance it.  That is to say, the cost of financing is lower than our utility bill. 

If you want to assess it for yourself, there are a few factors that impact the cost effectiveness of installing a renewable energy system. The first is whether you have good enough sun exposure or wind on your property to make it worthwhile. An installation company should be happy to assess that issue with your home's coordinates and a screen shot from Google Earth.  (Just give them your address and they'll do the rest.) 

If it's feasible then you'll want to consider money matters. Most people know there is a federal tax credit available to homeowners can who install residential renewable energy sources. For those of you who don't know about it, this is a 30% tax credit, meaning that 30% of the installation expense can be subtracted from the taxes you owe. (This is different from and better than a tax deduction.) Some states, counties and municipalities also have tax credits available, but you'd have to check where you live.

A lot of people don't realize that if their property is on the grid they can sell excess solar or wind power to their local electrical utility company. The installation company should assist you in navigating this arrangement with the electric company if they don't take care of it entirely.

Most renewable energy installation companies will help with financing. Potentially this could be like financing a car through the dealership, but that was not our experience. Our installation company was very straight forward about the cost and the loan terms. They did use the financing as a sales tool, but they didn't use it as negotiating leverage. They gave us a recommendation on the installation, an estimate of how much power that would generate annually, a total cost for the installation, and a breakout of the monthly cost of financing. When we talked to the bank the cost was almost exactly what we had been told and the installation company put the loan information in the purchase agreement as a record of what we had been told.

Even with the reduced or eliminated electric bills along with the potential for selling power to the electric company, installing solar or wind may not be for everyone. My answer to the question of how to afford solar (or wind for that matter) is to look at three factors:
1) affordable financing;
2) cost comparison between financing and just continuing to purchase power; and
3) tax credit eligibility

Financing

Affordable financing is pretty simple to figure out. Can one afford to pay a loan or not?  You would have to start by getting a bid from the installer, so you'll have a cost to work with.  The installation company will likely offer you a finance package, but you may want to check with your own bank or credit union to compare rates. All things being equal, the installation company is probably going to make getting a loan more turnkey. Ours broke the bill into two separate parts so there would be two separate loans: one for paying over time and the other to be paid off with the federal tax credit -- more on that later. You might look at the loan numbers and think that you might be able to make the monthly loan payment depending on the savings you will have from producing your own electricity.  That's when you'll want to do a cost comparison.

Cost Comparison
A cost comparison can be done one of two ways.  The first way is to look at your monthly usage and monthly production potential then factor in the sale of excess production and the purchase of energy during production slumps. It looks like this:

(Last Year's January Electrical Usage in KWHs - Estimated January Production in KWHs) X Price/KWH = January Electrical Costs

Do this for each month and then add together each month's income or expense to get a total for the year. Then multiply your the estimated monthly loan payment by 12 months and add it to the annual energy cost. Compare that with the total of your annual electric bills from last year.

The one problem with this method is that the production estimate you receive as part of the installation company's bid may not be broken down by month. If that's the case then a rough estimate can still be worked out, by working off of the assumption that production and usage will even out over the course of a year. This allows you to make a comparison based on average usage, but it leaves out the income you will receive in high producing and low usage months. 

Click for Larger View

 Here is a sample of what it looks like with real numbers...

Click for Larger View

This sample is roughly based on the installation on our house. You can see that the After Installation Cost on Line H is not much lower than the Current Cost on Line D. In our case we decided that it still makes sense, because the loan financing our installation will be paid off in 12 years. After that, our electrical cost will go down to the amount listed on Line F, though one should plan on setting aside extra money for repairs.

Tax Credit Eligibility
Another issue to consider is the federal tax credit. When we financed our system, the company actually gave us two loans.  The payment of $167 covers the loan on 70% of the cost, and we started paying that loan right away.  The other loan covers the cost of the 30% of expenses that we will get back as a tax refund when we apply for the credit of this amount. The loan terms on the second loan include language making it interest free with no payments due until the loan is 18 months old.  That is to allow us enough time to file our taxes and recoup the refund, which we will then use to pay off this smaller loan. Ultimately this keeps the payment on the larger loan down, which is part of the sales tactic used by the installation company. It’s all good, but the important thing to remember is that if the tax credit is handled in this way one shouldn’t plan on spending that tax refund on anything except the loan repayment. 

The bigger issue is whether you can actually get the full refund for the tax credit, because you must have withheld enough in taxes over the year and not owe too much in taxes. For example, if you are eligible for a $9,000 tax credit, but owe $24,000 in taxes before applying the credit, you’ll still end up having to pay the government $15,000 and not have a refund to pay any loans or expenses. There is a similar problem if you haven’t had enough withheld from your income over the year. If you are eligible for a $9,000 tax credit, but haven’t had $9,000 withheld in taxes then you won’t receive the full refund.  In this event it is possible, however, to apply any excess credit to your next year’s taxes. There are online calculators that can help you estimate the correct amount to have withheld from your taxes.

Bear in mind that I am not a tax expert, more of a tax enthusiast, so please look this up for yourself or talk to a tax professional before making a decision. For full information on how the tax credit works, check out these websites:

http://energy.gov/savings/residential-renewable-energy-tax-credit

http://www.irs.gov/pub/irs-pdf/i5695.pdf

I hope this information is useful to those of you considering a similar venture. Salt and I will be most happy to wish you success as fellow energy barons. Cheers!

#farmdiva