Solar and wind systems provide significant returns when rising rates are taken into consideration

While many people love the idea of using clean, renewable energy from the sun and wind, they find the investment significant enough to think twice about the purchase.  The installed cost of a mid-sized wind turbine or solar photovoltaic (PV) system is about $20,000, and does not provide the same visibility or utility as a new kitchen.  However, while a new kitchen provides a great new space to cook and congregate, and will bring back nearly every dollar invested if the house is sold soon after, it loses its value over time. The renewable energy systems, on the other hand, become cash cows that actually increase in value as energy prices rise.

A simple payback will show you that the money you initially invest in the system is offset by the value of the energy produced over time.  This becomes a little tricky, because we know that energy prices will rise, but can't predict actual rate increases without a crystal ball. Historical rate increases over the past 10 years or so have been about 4.5% per year, although this varies widely across the country.  Over the next 20 years, we expect rates to increase 6-9 percent per year, given supply pressures on fossil fuels and imminent carbon taxes.  Just like the miracle of compounding interest, the compounding effect of rising electric rates results in the system returning 1.5 to 3 times its initial cost.

While the life expectancy of a solar PV system is generally 40-50 years, we typically look at 30-years of operation to calculate expected returns on both solar and wind.  (Wind turbines require maintenance, and the turbine itself can be replaced with a more efficient unit at a fraction of the cost of the original installation.)  The chart below shows the value of the electricity produced over a thirty year period.

Estimated value of power produced by 2.4kW solar array*

*Assumes $0.09 p/kWh with 7.5% annual inflation on electric rates for 2.4kW solar PV system

Our February newsletter summarized the highlights of the American Recovery and Reinvestment Act of 2009.  With this legislation, the 30 percent tax credit for commercial and residential renewable energy investments was extended through 2016, and the $2000 cap was eliminated.  This tax credit effectively creates a 30% discount on all solar and wind installations, reducing your investment accordingly.  (For commercial projects, you can apply for a grant up front in lieu of the tax credit.)  Additionally, the state of Illinois offers a 30% state tax credit for solar, and is considering extending this to wind power also.  Historic tax credits of up to 25% are also widely available, depending on the area.

Finally, the recently passed Proposition C in Missouri will require that utilities produce 15% of their total demand with renewable energy.  The Public Service Commission is currently finalizing the rules, but at this point it is agreed that the investor-owned utilities (including AmerenUE, KCP&L, and possibly Empire)will  provide a taxable rebate of $2 per installed watt (up to 25kW).  In addition, they may buy Renewable Energy Credits (RECs) based on the amount of electricity produced by your system.  It is anticipated that the value of this taxable income would be similar to the rebate ($1.80-$2.20 p/watt) but this will likely be paid out over time as the energy is produced.

So the 2.4kW system described above might look like this:

* Actual figures are contingent upon the finalization of rules. Prop C rebates will go into effect January 1, 2010.

Using the assumptions above, the system will have produced a total of $4,400 in electricity in its 12th year of service, thus paying for itself.  However, in the 18 years after it's paid off, it will produce an additional $23,500 worth of power, yielding an internal rate of return of 11.7%.  Businesses will achieve even greater returns by depreciating equipment.

In spite of this return on the investment, for some people, this long of a payback is troubling because they may not intend to live in the house that long. The truth is, that, just like the kitchen, an investment in a solar or wind energy system will add to the value of the home, with a higher return than a kitchen or bathroom renovation.

While the return on your investment may not match some of the historic returns of the market, you can be sure that it will be much less volatile.  Probably more important than anything, you must place intrinsic value on producing your own clean, renewable energy.   As one of our customers put it, "No one ever expects to catch enough fish to pay for their new bass boat!"