Solar Financial Q&A
Ambassador Energy is here to answer all of your financial questions about solar. Don’t see your question below? Get in touch with one of our Solar Experts today.
[accordion][spoiler title="How do you calculate the payback time?" style="2"]Years to Breakeven occurs when the total utility savings equal the value of the installed renewable energy system:
Years to Breakeven = (Net cost – property value increase) / (“Pre-tax” average annual utility savings)
For this calculation, we use PRE-tax dollars for the utility savings, and we assume you have a 40% effective tax rate: Pre-tax Utility savings = Average annual utility savings / (1 – 40%);
For this calculation we also assume the Net Cost to you is “YOUR ESTIMATED NET COST” minus (-) the expected increase in property value.
NOTE: When you install solar, the value of your property will generally increase — in some cases your “on-paper” breakeven period can be immediate (a “0″ or negative number) if the cost to install solar increased your property value by the same amount, or more. [/spoiler]
[spoiler title="How do you calculate the net cost?" style="2"]Net Cost is the estimated gross (total) cost of installation minus any and all financial incentives, even those that may materialize after installation (Year 1 and later), such as performance-based incentives.
Net Cost at Installation is the estimated gross (total) cost of installation minus financial incentives that occur on or about the time of installation. It does not deduct incentives that may materialize after installation (year 1 and later), such as performance-based incentives. [/spoiler]
[spoiler title="How do you calculate MACRS Depreciation?" style="2"]
Modified Accelerated Cost Recovery System (MACRS) Depreciation Calculations:
We assume a 50% Bonus depreciation is used in year 1 (first year after installation).
Bonus Depreciation allows an extra amount to be depreciated in Year 1, and a reduced amount to be depreciated in the follow-on years (years 2-6).
In Year 1: We take Gross Cost less half (50%) of the incentives received at installation (year 0) … then multiply by 60%.This gives the total amount you can depreciate with Bonus depreciation in Year 1. The cash you save (shown in Cash Flow chart) is this amount times your effective tax rate. So, if you depreciate $10,000 and have an income tax rate of 35%, you save $3,500 on your taxes.
In Years 2 – 6: We modify the depreciation basis – it becomes half (50%) of that used in Year 1 (above). The depreciation schedule on this modified depreciation basis is then: 32%, 19.2%, 11.52%, 11.52%, 5.76% in years 2 thru 6 respectively.
Again, the cash you save (on taxes) is the depreciated amount times your effective tax rate. [/spoiler]
[spoiler title="How do you calculate my first-year utility savings?" style="2"]First-Year Utility Savings is the amount of money you may save on your utility bills, in the first year after installation of the solar energy system. It is the energy expected to be produced a solar system times the utility rate for fuel it is replacing (e.g. $/kWh for electricity or $/Therm for natural gas). We assume the minimum utility bill is $50 per year, to cover minimum utility meter and connection services.
If “Tiered” electric rates and/or time-of-use (TOU) metering applies, we provide a range of savings that you may realize:
Tiered Rates:: Often people are paying a “Tiered” rate for their electricity. This is a higher rate (higher than the “base rate”) for electricity charged when a home or building uses more that a “base” amount allocated for the building.
TOU Metering: Many utilities offer Time-of-Use (TOU) meters. This allows the price of electricity to vary by time of day (called “Peak” or “Off-Peak” periods) and by season (usually “Winter” verses “Summer” rates). If TOU metering is offered by your utility, a solar system may result in additional savings. This is because peak rates often occur during daytime peak periods. This is usually the time of day when a solar system is producing the most output, thus reducing your demand for peak-rate electricity from the utility.
If your state and utility offer “Net-Metering” if you installing a solar electric (PV) system you may be able to “sell” electricity you generate back to the utility grid. This can result in even more savings, since you may be “selling” electricity back to the utility during peak rate times, and therefore at a peak rate.
Solar Power systems offer “fixed costs” for your electricity; the cost for sunshine is constant (free) and does not rise. Utility rates, on the other hand, rise. So, the value of your savings are likely to increase as time goes on.[/spoiler]
[spoiler title="How do you calculate the increase in property value?" style="2"]We assume installing solar energy systems will increase the value of your property. In many states this increase in value is exempt from property tax.
How much your property appreciates depends upon many factors. For our calculations we have assumed the value of your property will increase by:
Solar Electric (PV): Twenty times (20x) your 1st-year utility savings.
Solar Thermal (water, pool, spa): Fifteen times (15x) your first-year utility savings.
Actual situations will vary.
Annual savings from a solar system should appreciate for the first 10-15 years for PV (about 10 years for solar thermal), in line with utility rate inflation. After that, the savings may start to diminish as the solar system nears its end of life.[/spoiler]
[spoiler title="How is Lifetime Savings from solar calculated?" style="2"]To calculate life-time savings from a solar system, we take the first-year utility savings and multiple it by the expected life of the solar system (assumed to be 25 years for PV, 15 years for solar thermal). We also assume a annual increase in utility prices (see note, below. Our initial assumption is 3.78% utility inflation). You may change the assumed utility inflation rate.
The formula is as follows:
Life_Savings = sum((annual utility savings) * (1 + Utility_Inflation)^year), as “year” goes from 1-25 (1-15 for solar thermal)
From this we calculate:
Average Annual Utility Savings = Life Savings / 25[/spoiler]
[spoiler title="How will I be billed under Net Metering?" style="2"]Your utility will continue to read your meter monthly. Under a Net Metering agreement, you will receive a monthly statement indicating the net amount of electricity you consumed or generated during that billing period.
In most states, on the anniversary of your agreement, you will be billed for the net electricity you consumed for the previous twelve months. You may request the option of monthly billing. Depending on the type of agreement you have, your meter might show a credit during some or all billing periods, even though the actual kilowatt-hours you generate and consume are equal.
Your utility is usually not required to pay you or credit your account for your excess generation each year, but it might do so. Contact your utility or ESP to discuss the option of negotiating rates for purchasing excess generation. If your current utility or ESP does not purchase excess electricity, you may contract with another company that will agree to purchase it.[/spoiler]
[spoiler title="How do you determine utility rates?" style="2"]The initial rate displayed represents a base residential service (average cost) rate plus 10%. We add 10% to the base rate to accommodate expected surcharges and taxes. If no rate is available, reasonable default values are: Electric $0.15/kWH, Natural Gas: $1.40/Therm ($0.014/ft^3), Fuel Oil: $3.65/gal., Propane $3.00/gal
The actual rates, taxes and surcharges you pay are probably different. We suggest you review a recent utility bill and change the “Assumed Electric (or Gas) Rate” as needed to better match your situation.
Please reference your utility bill or contact your utility for more details on your actual rates. Or, contact a Solar Professional to help you develop a strategy to minimize your utility bills and maximize your savings, comfort and safety.[/spoiler]
[spoiler title="How do you calculate renewable energy credit (REC) value?" style="2"]A renewable energy credit (REC), or in some states it is called an SREC (Solar Renewable Energy Certificate), is a tradeable certificate that represents all the clean energy benefits of energy generated from a solar energy (or renewable energy) system. Each time a solar energy system generates a certain level of energy, a REC (or SREC) may be issued. This can then be sold or traded separately from the power. This makes it easy for individuals and businesses to finance and invest in clean, emission free solar power. The value of a REC is usually set by a competitive, market-driven, trade and values will vary with market conditions. There may also be restrictions on when a REC will be issued, who owns it and how and when it can be traded. The values provided by this Estimator are based upon known general market conditions. Please refer to your utility, state energy office and/or public utility commission for more details.[/spoiler]
[spoiler title="What is Return on Investment (ROI)?" style="2"]Return on Investment (ROI) = (Average Utility Savings over the system life) / (Book Value of Asset)
For residential (non-business) applications we assume your utility savings are pre-income tax (this assumes you invest the savings in tax-deferred investments like an IRA, 401K, HSA, etc.). For business (commercial) applications we assume utility savings result a lower expense write-off against income tax liabilities.[/spoiler]
[spoiler title="How does the USDA Renewable Energy Systems Grant Program work?" style="2"]How much are the grants? The grants are awarded on a competitive basis and can be up to 25% of total eligible project costs. Grants are limited to $500,000 for renewable energy systems and $250,000 for energy efficiency improvements. Grant requests as low as $2,500 for renewable energy systems and $1,500 for energy efficiency improvements will be considered. At least 20% of the grant funds awarded must be for grants of $20,000 or less.
Who is eligible? The program is designed to assist farmers, ranchers and rural small businesses that are able to demonstrate financial need. All agricultural producers, including farmers and ranchers, who gain 50% or more of their gross income from the agricultural operations are eligible. Small businesses that are located in a rural area can also apply. Rural electric cooperatives may also be eligible to apply.
What types of projects are eligible? Most rural projects that reduce energy use and result in savings for the agricultural producer or small business are eligible as energy efficiency projects. These include projects such as retrofitting lighting or insulation, or purchasing or replacing equipment with more efficiency units. Eligible renewable energy projects include projects that produce energy from wind, solar, biomass, geothermal, hydro power and hydrogen-based sources. The projects can produce any form of energy including, heat, electricity, or fuel.[/spoiler]