Extreme Home Improvement: The Finances of Your Residential Photovoltaic Array

A reader writes:

I remember reading somewhere that you had installed solar panels onto your house yourself. You mentioned that you were able to do it in cheap enough that the initial outlay of cash was completely covered by tax rebates.

My husband and I just moved to California. Out here it is really popular to “rent” solar panels. We would much rather “own” them. I was hoping you could walk me through the process you used. I know times have probably changed a little with costs. Hoping your experience could be a starting point.

Most people think our money-saving methods, are crazy (why go to the extra work when you can rent them :)). Therefore we can’t really pull from our friends experiences for this questions :)

A photovoltaic array will accelerate your goal of financial independence, but it’s a challenge to install. I’ve written about this on several different forums over the years, so let me summarize it here. I’m going to do this in two posts: one for the finances and another on the mechanical/electrical construction.

By the way, even military base housing neighborhoods are adding photovoltaic arrays. Many bases in the southwest and Hawaii have installed solar water-heating and electricity-producing systems. Schofield Barracks on Oahu has one of the nation’s largest photovoltaic neighborhoods, with over a thousand homes on solar power and more on the way.

Reduce your consumption (and your electric bill)

The first step in going solar is an energy audit of your home’s power consumption. It’s always easier to reduce your electric consumption than to raise your production. Before you go photovoltaic it’s far more cost-effective to install solar water heating, wall insulation, rooftop reflective foil insulation, multi-pane low-e tinted insulated windows, and EnergyStar appliances. Maybe in some climates you can reduce air conditioning in favor of passive cooling. Rebates and tax credits may be available for these residential home efficiency improvements from your local utility, your city, your state, and the federal government.

Picture of photovoltaic and solar water panels on top of a home's roof.

Photovoltaic with solar water heating.

Grid-tied, not off the grid

Most residents dream of having unlimited power and no electric bill. A few fantasize of “firing” their utility company and maybe even having electric power after an earthquake or a hurricane. However, there’s a price to pay for going “off the grid”, and the engineering is expensive.

The resulting lifestyle is also not quite what most homeowners expect. When you’re off the grid, there are limits to the size of the household appliances that can be run on the system as well as the total electric load. You don’t want your family to start up a vacuum cleaner while your DVR is recording a show or your computer is trying to save the text of your next blog post– the transient voltage fluctuations can kill your sensitive electronics.

Residential photovoltaic companies offer a slightly scaled-back version of the dream: a “grid-tied” system. You still produce your own power, but you still have to work with the local electric utility. You have a (very small) electric bill but you enjoy the electric company’s backup power (at night or on rainy days) and rock-steady voltage. Your lifestyle doesn’t have to change, either, except for the part where you pay almost nothing for your monthly electric bill. Unfortunately a grid-tied array design still means that if your electric company goes down then your PV array shuts down too, but the system is much simpler and (here’s the good part) much cheaper.

The vast majority of residential photovoltaic solar systems are grid-tied, not off the grid, and the designs are very different. A grid-tied system is essentially connected to your local electric utility through your meter, and it only produces energy when your local utility is working. (Your PV voltage inverter needs the grid power to turn on and to convert the panel’s DC voltage to your house’s AC voltage.) An off-the-grid system is completely disconnected from the local electric utility, so it uses a bank of storage batteries and a charging system for those times when there’s not enough sunlight to power your house.

You want a grid-tied system because it’s a lot cheaper, it’s simpler to install, and there’s no maintenance. You’ll still have an electric bill but it will be close to zero.

Your financial challenge is buying a PV array of just the right size: enough to generate all the electricity you’ll need throughout the entire year. You want to generate just as much as you use. (You don’t want to generate too much extra because you won’t be compensated for it, as I’ll explain in a few paragraphs.) You figure out your array size by reviewing your electric bills and then using a photovoltaic calculator website to decide how many panels you’ll need. A typical residential PV system is between three and eight kilowatts, or (with today’s technology) roughly 10-25 panels.

Net metering, not wholesale

Your local electric utility may also credit your PV production at the retail rate. Some utilities offer residential customers a “net metering” program: you’re only charged when you use more electricity than you produce. During the day you’ll generate dozens of kilowatts from your PV system, use a few of them to power your house, and dump the remaining energy straight into the utility’s grid through your electric service panel (and your electric meter).

At night your PV system goes offline, or on cloudy days you might use more electricity than you produce. When that happens your house simply sucks energy from the electric utility’s grid to supply your needs. (It seems like magic, but electrical engineers design the system to let power move to wherever the voltage is lower.) Your electric meter keeps track of which direction the kilowatts are moving: either out to the grid or from the grid.

At the end of the month the utility reads the meter and sends you a bill. If you used more power than you produced then you pay the electric company. If you generated more power than you consumed then they credit your account. The price is the same whether you’re producing or consuming, and you’re only charged for the “net on the meter”.

Oahu’s electric utility charges ~$16/month just for the privilege of staying connected to their grid. Hawaii’s islands make undersea electric cables too expensive, so each island is its own isolated electric grid and we’re stuck with the benevolent dictator monopoly. Oahu electricity costs 30-35 cents per kilowatt-hour and people have $150 electric bills even without air conditioning.

The “good” news is that HECO credits residents the same retail price for production as we’d pay for consumption, which is a much better deal than being a commercial electricity wholesaler. They’ll also credit our excess power production on our account for up to a year, so we can generate extra power in the long summer days to make up for our lower production during the shorter winter days.

Some electric utilities use different rates for consumption and for production. They’ll sell you electricity for a dime per kilowatt-hour but they’ll only buy your excess for a nickel per kilowatt-hour. This power purchase agreement is not as sweet as net metering, but it’s better than no PV array at all.

Electric utilities are generally required to buy power from wholesale electricity producers, but they’ll negotiate the PPA rate. Most residents could hypothetically cover their roof with PV panels and generate far more power than they consume (during the day, anyway).

Unfortunately, if you have more panels than a typical residential system (~10 kilowatts) then the electric company may decide that you’re a commercial wholesaler instead of a retail customer. You’ll not only get paid a lot less for wholesale production than you’re charged for residential consumption, but you’ll be subject to additional “feed-in tariffs” and power producer fees. In effect, you’ll sign a wholesale PPA with the electric utility, and they’ll treat you like just another wholesaler.  It’s better to stick with a residential net-metering agreement.

Expenses and tax credits

I may have given the reader the wrong impression about tax credits. We built our PV array very cheaply from a combination of used & blemished panels and do-it-yourself labor, but the tax credits are based on a percentage of the price. You can look up your state, local, and utility credits on the Dept of Energy’s Database of State Incentives for Renewables & Efficiency. Hawaii’s state residential PV tax credit is limited to 35% of the total price or $5000, whichever is less. The federal personal PV tax credit is limited to 30% of the total price.

We built our PV system in three stages (three separate years of tax credits). Between 2004-2007 we spent a total of $15,682 for 3350 watts of panels on a single inverter. (We also installed a solar water heating system for an additional $920 of used parts and DIY labor.) We managed to take a total of $9376 in tax credits, and by late 2010 we’d generated enough power to repay the remaining $7226. We’ve enjoyed free electricity since then, and our elderly panels will probably last until at least 2030.

We produce about 250-350 KWHrs per month (lower in winter, higher in summer) at a net-metering rate of about 30-35 cents/KWHr. That saves us $75-$120 per month, which is a great annual dividend on the cost of the array.

As you can tell, our consumption is much lower than the average American home. Solar water heating eliminates about a third of the average family’s electric bill. Our south roof is insulated with foam and reflective foil (to keep the heat out) and our south/east walls are insulated with reflective foil and recycled shredded denim batting. Our windows are either shaded from the sun or double-pane tinted low-e glass.

We own EnergyStar appliances (bought used from Craigslist) and our main ceiling fans are EnergyStar special oversized DC-drive models. We do not have heating or air conditioning (e komo mai Hawaii!), and we only use our clothes dryer for about half of our laundry. (The biggest electric load in our house used to be our teenager, and now she’s away at college.) The energy-efficiency improvements made a huge difference. The house is comfortable all year long, even in September heat when the tradewinds die down. Frankly, in the winter it’s a little chilly: we have to close the windows at night and wear pants & long-sleeved t-shirts for a few hours in the morning.

Today’s PV arrays are much cheaper than when we started building our system in 2004. Worldwide subsidies and mass production have crashed the manufacturing costs and the industry is consolidating. Most panels are about $1/watt wholesale and their efficiency is maximized with microinverters (one DC–>AC inverter per panel). The designs and equipment are standardized across the industry and PV companies are familiar with residential electric & construction codes. Installation workers are equipped with special-purpose tools and trained to quickly & efficiently mount racks and panels. Today’s PV business is a commodity with thin margins, and a company’s revenues depend on installing as many systems as possible as quickly as possible. Sales teams have to give up some profit to reach a higher sales volume and undercut the competition.

However, the finances are still a problem. A low-end 3000-watt system can cost $15,000-$20,000. Only about half of Americans own their homes, and landlords aren’t eligible for residential tax credits. The average American family moves every seven years, so very few homeowners are willing to invest in solar power because they don’t know how long they’ll live there. Home sellers don’t get full value for their systems if they move after installing them because solar power is still an exotic product and home buyers aren’t willing to pay the extra money.

“Free Solar”?!?

Americans may be happy to finance a $30,000 pickup truck– but they aren’t willing to buy a PV system. Because of this marketing challenge, PV installers are becoming finance companies. They’ll offer cheap loans and extended payments to homeowners, but that’s still not as attractive as remodeling a kitchen or adding a spare bedroom. Their most effective sales tactic has been “Free solar!”

The “free” PV system isn’t really free: the homeowner is just renting it from the installer. The installer is buying larger volumes of panels and equipment, so they can negotiate wholesale discounts with the solar suppliers. Their installation crews stay busy so their margins improve. The installer gets the residential tax credits or writes off the equipment as a business expense, and they can even negotiate lower permit fees with the local authorities.

The result is that the PV installer assumes all the “risks” of ownership while the homeowner gives up all the credits and payback benefits. The homeowner doesn’t have to save up the cash to buy a system, and they don’t even have to take out a home equity loan. They just offload most of their electric bill and lock in a lower fixed expense for the life of the PPA. It’s the same math as leasing the pickup truck instead of buying it and driving it into the ground.

Should You Insure Your Photovoltaic Array?

If you decide to “rent” your panels through a PPA with a solar company, then let them handle the insurance.  It’s their job to make sure that your array is running reliably, and that includes disaster recovery as well as the usual wear & tear.  They’re taking all the risks– not you– and insurance is their problem.

If you buy your system, then consider your exposure.  The racks are bolted to your roof beams (or to your metal roof seams) and the panels are bolted on to the racks.  Both components are rated at hurricane-force winds, and the panel cover glass is even rated for hail impact.  The electrical wiring and the inverter(s) aren’t affected by hurricanes or hailstorms because they’re out of the direct weather.  If they have an electric fault or even if there’s damage, they’ll simply shut down.   The “protective layer” of panels above your roof may help shield your existing shingles from weather and erosion, and it’s extremely unlikely that weather would damage every single panel.  The likely “disaster” would be cracked cover glass, and that’s a cheap repair.  Most hurricanes and hailstorms would cause less damage to your photovoltaic array than your insurance deductible, and it’s not worth filing a claim.  I wouldn’t even ask the insurance company for a quote.

We don’t insure our panels, and we carry a very high deductible for our home’s hurricane insurance.  Our photovoltaic array and our solar water panels have been through many torrential downpours, several days of high winds (gusts to 70 MPH), and even a 5.5 earthquake.  No damage.  We’ve lost more shingles on other parts of the roof (especially the ridges) than around the array.

In my next PV post, I’ll talk about the mechanical and electrical considerations for installing an array. Spoiler alert: the electrician showed us how to do all the mechanical work, and we paid him for the initial electric connections. When we expanded the array, we just connected the new panels to the ends of the strings of the existing panels.

Related articles:
DIY home improvement
Lessons learned from DIY home improvement
Save money by fixing your own plumbing
Book review: “Abundance”

About Doug Nordman

Author of "The Military Guide to Financial Independence and Retirement" and co-author of "Raising Your Money-Savvy Family For Next Generation Financial Independence."
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8 Responses to Extreme Home Improvement: The Finances of Your Residential Photovoltaic Array

  1. GubMints says:

    Also a very timely post! We just switched on our rooftop PV system on Sunday. Unlike the reader, we elected for the ‘rented’ 20-yr PPA system.
    Advantge= No Money Down, save $$ from day one (~$250/yr).
    Would be happy to provide case study.

    • Doug Nordman says:

      Yes please, either here in the comments or for a guest post, or just send me raw data for me to write up!

      It’s tough to make a blanket statement on rent vs own because each company has their own business model. (They can’t all be right, either.) I’ve gone through a few investor spreadsheets but the average homeowner’s eyes would glaze over at the calculations. I think a case study would make a great example for people to apply to their own neighborhood deals.

  2. Mel M says:

    Good post on PV panels. We pulled the trigger on getting PV panels to augment our Solar Water heater back in March but it wasn’t until July that we were able to turn our PV system on. It took that long to obtain permits from HOA and inspections thru HECO. The installation was completed in mid-May but took a while to get the inspection done. We opted for the prepaid 20-year lease on the 3.2 kWh system (14 panels) due to the company’s 20-year maintenance service on the PV system and warranties on their work to include any roof damage (basically matching the roof’s warranty).

    I haven’t seen the latest bill with the PV system up and running, but I am looking forward to say goodbye to $135 – $150 a month electric bill for at least the next 20 years. Doing the math, the 20-year prepaid lease will pay for itself in about 7 years…paying just ~$17 a month for the HECO connection fee. We thought the lease was a better deal than purchasing the PV system (~$17K). With us not being Hawaii residents (at least not yet), we would probably only be looking at the federal tax credits anyway. There is an option to purchase later down the road but we would probably balk at that one.

    Like you, we use mainly EnergyStar appliances (we even make use of a clothesline in the backyard) though we can’t seem to part with our freezer in the garage that is not EnergyStar compliant. Living in Ewa Plain, we use our AC during the hot summers (not daily though, as tradewinds make things cooler in the summer negating the need for AC) so we can bank PV-generated electricity during the winter to pay off anticipated usage in the summer (at least that is the plan).

    • Doug Nordman says:

      Thanks, Mel, you make a good point about military not being eligible for state/local tax credits. Renting is a much better choice for your situation, although the payback is starting to get a lot closer to numbers that homeowners could feel more comfortable with.

      A warranty is essential, but what “maintenance” does the PV company offer you?

      I hear you on generating excess during the winter to balance out the summer A/C load. Every time we get ahead on our power generation, our daughter comes home from college for a few weeks and wipes out the excess…

      • Mel M. says:

        The solar company promises to “insure, maintain and repair the System (including the inverter) at no additional cost”, “provide money-back production guarantee”, and “warranty our roof against leaks and restore our roof at the end of the agreement”. The agreement being the 20-year pre-paid lease of the PV system.

        Maybe you can get your daughter rated as an EnergyStar daughter so she wouldn’t use so much electricity :-)

      • Doug Nordman says:

        I guess “insure, maintain, & repair” covers all the contingencies. I bet they’re hoping to make it 20 years and zero visits, and if you haven’t had any problems by now then you probably never will.

        She turns into an EnergyStar daughter when she’s paying her own electric bill!

  3. Deserat says:

    Late to the party – have a solar system on roof here in Tucson, AZ. Power bills are not zero during summer when a/c is kicking on and off. We do have net-metering and a yearly balancing where banking is done for future. Power we over generate for our usage is paid for a wholesale rates (no retail here!). When power is out (during monsoon storms), no power to the house. We have a nice metering program where we log onto a router and it tells us what we are generating and which panels are generating what and at what times during the day. What’s interesting is seeing how the utility bills are used as fee generators for local, state and federal government….the bill will never be zero.

    We bought the house with the panels – they came with it, however, the price of $15-25K for the system seems about right. So far we like it….we have energy star appliances and also use DC motor ceiling fans (another long story on that and the local installer thinking it’s a joke and many people not understanding…sigh. The solar company got the federal credits as part of the deal for the solar panels, but I seem to remember it came out to about $5200. We also got some state compensation, but that was for the solatubes.

    Good luck on riding out the hurricane..tell us when you pop back up ;-) I imagine a porthole opening up and Nords head peeking out looking around and sounding the all clear.

    • Doug Nordman says:

      Thanks, Deserat, I’ll steer Arizona questions your way!

      I love our DC-motor fans. (I wish we’d had that 21st-century DC motor tech in the 20th-century submarine force, too…) As prices drop over the next few years, we’re going to replace our other five AC-motor ceiling fans that we rarely use– but which are still breaking down.

      As I write this, it looks like Flossie has given Central Oahu a break. There’s damages, flooding, and power outages on the Big Island and Maui. Waikiki seems to have some flooding and damage, too. However so far all we’ve had at Hale Nords is a good soaking. If we get through the next 12 hours then we’re clear!

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