Solar Energy Panels in the Home
Solar energy seems like the ideal clean energy technology. It fits conveniently and unobtrusively on your roof, it produces most of its power during peak times, and it doesn’t require maintenance. This is in stark contrast to other technologies like Wind which is not good for the home because it requires about 30 feet elevation above the trees, it produces most of its power off-peak, and it requires maintenance. But as with most desirable things, the question is how much does Solar Power cost relative to alternatives. There are some consumers, for example movie stars, who will pay a premium for clean solar energy, but the vast majority of the market will not. So let’s look at the numbers.
On average, solar is about twice as expensive as the power you purchase from the utility. However, under certain circumstances solar makes economic sense. This is a complex topic, but please first read the previous blog entry on peak power for background. In order to get solar to pay off, you have to generally consume more energy than the average consumer. Electric power prices are tiered, so the more you use, the more expensive. For example, if you have a large house and you use a lot of air conditioning, you can get solar to pay off if your marginal cost goes above the cost to have your own solar panels. Another example is if you own an electric vehicle and elect a new smart grid feature which is time-of-day pricing, you can sell power back to the utility during peak hours when the prices are high, and charge your car at night when the prices are lower. Let’s get into some details (Note that these numbers are examples. This is a topic of considerable complexity and we are using the best information available at this time. The objective here is to provide a framework for thinking about this problem, not definitive numbers).
The average cost per KWH (Kilowatt Hour) of electric power in the US is $0.12 per KWH, $0.14 per KWH in California. Photovoltaic (PV) solar panels which generate electricity directly, currently cost around $0.24 per KWH in Central and Northern California ( approximately 80% of solar installations in the US are in California) based on the cost to install the solar panels, financing the solar panels, 20 – 25 year lifespan, and an average peak sunlight hours of 4.5 hours per day (based on a standard solar map). Cost have come down by about 50% in the past few years due to manufacturing advancements and due to a glut of products from China. The wholesale costs of a panel is about $2 per watt in volume (range is $1.70 – $2.80), but the total cost to a homeowner is around $7.50 which includes installation, an inverter to convert to power to AC, wiring, etc. Tax benefits which include a 30% Federal discount, and an approximate $0.30 per watt discount in California (this discount was closer to $1.5 for early adopters) brings the cost to just under $5 per watt. What does this mean in terms of cost to a homeowner? A typical home may consume an average of 25 – 40KWH per day, and a 4 KW (Kilowatt) unit would be approximately $5 per watt X 1000 X 4 = $20K and will generate approximately 18 KWH of energy per day (4KW x 4.5 hours per day). If you financed this over 20 years at 5% (or leased the unit from a company like Solar City) your cost would be approximately $131 per month with no money down. Of course there are other factors which affect efficiency and cost such as the direction of your roof, dust collection over time, shade on the roof, etc. You could easily lose 25% due to these factors. You also need to consider that if you have a pool, you might not be able to heat it with solar if you don’t have enough roof space. So does this pay off?
These costs come out to approximately $0.24 per KWH which is considerably more expensive than PG&E’s California rates of $0.14 per KWH so it appears to be a losing proposition. However, you can save money on the margin (i.e. for peak power, or keeping yourself out of the higher pricing tiers), thus you rarely want to power your entire home with solar (e.g. the above sizing is about half your average power). So in order to understand if you can save money on the margin, you need to look at your power consumption and the Utility’s pricing (i.e. tariffs). So let’s use an average home in San Jose, California as an example. If you are on a standard residential tariff (E1, EM, ES, ESR, ET) and you consume 40KWH per day during the summer and 25 in the winter, you’ll pay about $321 per month in electric bills during the summer and $137 in the winter. If you install a 4KW solar panel, your total costs will be approximately $262 in the summer (saving you $58 per month) and $157 in the winter (a loss of $20 per month). This takes into account the savings in your PG&E costs (taking you out of the higher pricing tiers) and the $131 per month you have to pay every month to the leasing or financing company for the solar panels. So on average, perhaps you’ll save $38 per month or $450 per year. These numbers will vary widely, but the concept here is that you can save money provided you consume a lot of power, you get a good deal on the installation costs, you live in California (vs. the North East), and the tax benefits don’t change significantly.
Let’s look at one more scenario. If you own an electric car, you’ll typically charge it at night, because you use it during the day. You can’t efficiently store solar energy, but you can sell the power back to PG&E during the day when the prices are high, and purchase the power from PG&E to charge the car when the prices are low. In order to do this, you’ll need a smart meter (which PG&E is installing in all the homes they service) and elect to go on a time-of-day pricing plan. The concept is that the prices are considerably higher during the day (for example an E7 or E9 tariff starts at $0.30 per KWH and goes up beyond $0.55 in the higher tiers) and lower at night ($0.10 – $0.35). You can save money with this scheme only if you shift a considerable amount of power off-peak (peak during the summer is 1PM – 7PM), otherwise such a tariff could actually cost you more money. So if you run these numbers, you could save money for example if you use the solar during the day to power your air conditioning, sold any excess back to PG&E, and charged your car at night. However, with the current tariffs, you would need to ensure that your peak power usage dropped to less than 20% of your total power usage in order for this to make sense. This of course depends on your power usage patterns, how often you charge your electric car, whether this car is a full electric car or a hybrid with plug-in options, etc.
So how do you make a decision if you should go with Solar considering that it will cost you around $20K or $131 per month for 20 years? One solution is to go with a leasing company like Solar City. So I called Solar City to see what the deal is. Solar city has installations all over California, about 10K in total, and they appear to be a pretty good operation. They even have a partnership with Tesla Motors (who makes electric cars). They will come to your home for a consultation, look at your bills, your roof, trees, etc. But ultimately, you need to make a 20 year commitment without really knowing for sure if you’ll save money. So you can purchase the solar panels yourself (financing them for example), or lease them from Solar City for 20 years, which includes a 20 year commitment to PG&E for a special meter and a special rate. Purchasing or leasing is not all that much different, the bottom line is that you need to make a commitment on faith that you’ll save money.
However, there are several factors to consider that will improve this situation. Smart Meter and Home Energy Management Systems technology is improving, and technologies will likely come out that will measure your actual usage over time, compare this with actual sunlight hours, adjust for the particulars of your roof, and tell you how much money you’ll save before you make a commitment. Costs have come down significantly in the past 2 years, perhaps they’ll come down further? The solar market is growing at 40% in the US, China has excess capacity, and the Obama administration has recently announced a commitment to solar energy with their Sunshot program. The Sunshot program is focused on solar power generation by utilities. The stated objective is to reduce costs by 75% (from $0.24 per KWH to $0.06 per KWH). But it’s important to note that $0.06 per KWH for a utility is considerably more expensive than a coal plant. It may appear less expensive than the average cost of $0.12 per KWH, but this $0.06 per KWH does not take into account the cost of transmission, distribution, and the utility’s operations and profit margins. So alone, this policy doesn’t appear to get us to where we need to be to stimulate this industry in volume. State initiatives may be required, for example recent California requirements for a certain percentage of the power grid to be clean will benefit from this Federal money.
Clean energy is generally more expensive than dirty energy. However, it’s important that we invest in it, for it’s critical for our future. But we must be smart about it and understand that there are ways to segment the market that are critical to the growth of alternative energy. Some customers will save money on the margin, other customers may receive government subsidies, and there might even be some customers who are willing to pay more for it (especially if they get a tax benefit). Solar is very popular in Germany. Are German’s more eco-minded? Yes and No. Firstly, the reason why solar is so popular is Germany is simply because the costs of electric power in Germany is the second highest in Europe, in the $0.25 per KWH range! This then begs the question, why are the rates so high in Germany? One of the reasons is that the government has done this on purpose to encourage clean energy. So how do we encourage a government policy that is sensible and trickles down to the average consumer? Can we argue that it stimulates the economy and will ultimately save us money in the long run. Are the savings due to reducing direct costs, or do they also include the cost of a dirty environment? This is an extremely complex, and fascinating topic, that requires us to be smart.