This blog kicks off a series we'll be adding to over the next few months focused on building wealth by "Going Green". The YourDictionary.com site defines Going Green as making more environmentally friendly decisions such as to "reduce, reuse and recycle."
How can going green lead to building wealth?
Let's explore this question by stepping through the process we recently went through to contract the installation of a solar system on our property.
Going Solar to Build Wealth
For us, going green is becoming more a reality as we just signed a contract to install solar panels on our barn to power our home. One potential wealth killer is the price we pay for power in California where we live. We weren't totally shocked, but it was still an eye-opener when we received our first electrical bill that was over $1,000!
Technically, the bill was for a month and a half since we moved into our new home mid-August, however, the total bill for September was still over $600. We do have a large house with three A/C units, and where we live it gets really hot in the summer, so the A/C's were running constantly eating up lots of kilowatts (aka electrical power). The sad thing is we actually didn't run the A/C's as low as we'd like, knowing our bill was probably going to be really high!
In the past, solar power had been really expensive and the payback many years, but as the technology has advanced the price and payback time for solar has quickly been reduced, making it an affordable option to reduce power bills.
We knew shortly after we purchased our new home, we would be getting a solar system, but we didn't complete any homework on solar until the past month when we started to get serious. This is the first step in the process - doing your homework.
While the focus of this blog is not to get into all the technical details of the different types of solar systems available, but instead the process of selecting one, the first step was to educate ourselves on solar technology.
There are many considerations when selecting a system related to which panels to buy, inverters or micro-inverters, etc. All were capable of meeting our power needs, had similar warranties and installation times, so for us it came down to price and technology.
We opted for the latest technology (micro-inverters) produced by American companies at the best price. This decision came from evaluating four different solar companies, each of which gave different priced estimates. Comparing estimates was a matter of looking at the cost per kilowatt produced by the system. They ranged from a high of $3.20 to a low of $2.90.
Like any big decision, you need to start by seeking to understand what it is you're getting into or might get into. Whether it's solar panels or mutual funds spend the time to understand before signing, paying, etc. The more educated you are the better your decision will likely be. With an installer selected, the next option we had to consider was paying for the system.
Three Ways to Pay
As with any purchase these days, you have many options when paying for a system. They include cash, financed, or leased. Here's the numbers from our system to give you an idea of the cost differences.
This is almost always going to be the lowest total cost option regardless of what you are buying. Our system cash price was $37,000.
A second option was to finance the system. There are many options to financing such as getting a solar loan, putting it on a credit card, or doing as many who finance do by getting a home equity line of credit.
Our installer, like many, charges a little more for a financed system because of the extra work involved to complete the transaction. Our system had a financed price of $38,400.
The current home equity rate for someone with good credit is around 5.73%. This would equate to a monthly payment of $269 for a 20-year loan. The total system cost if we would finance would be $64,441 (240 payments x $269 / month).
Comparing the cash vs. financed costs, there would be a total savings of $27,441 for a cash purchased system.
The final option is leasing a solar system. Leasing a system is much like leasing a car in that you don't actually own the system - the company you purchase from owns the system, and you simply make monthly payments to them to use their system installed on your property.
The argument for leasing is that when you combine the monthly lease payment and your reduced energy bill the total of the two will be less than your current energy bill using no solar power.
Leasing is a popular option for many homeowners. Consumer Reports reported 74% of all systems installed in 2014 were leased. The typical term is 20 years.
For our system, a leased option would reduce our energy bill by 10-30% including the lease payment. If we assume 20% savings on an average bill of $450 that would bring our monthly electric cost plus lease payment to $360.
Another way of looking at leasing our system is the annual cost would be $4,320 versus without a leased system a total cost of $5,400, netting an annual energy savings of $1,080.
As you can see, regardless of what option we selected our energy bills would go down, maybe even to zero with a cash or financed system.
Pros and Cons of Each Option
There are pros and cons to each option we reviewed before making our decision. Leasing was by far the lowest initial cash out of pocket option. Most leases will require little to no money down. However, the downside to leasing is that you don't own the panels, and in most cases, it will create future problems if you plan on selling your house before the lease expires.
We have one such acquaintance who was transferred for his job and needed to sell his house and ran into trouble when potential buyers were made aware that they would have to either payoff the solar system or take over the lease. In most cases the leasing company will have a lien on your property, which always presents challenges in selling a home.
The other negative to leasing is missing out on the federal tax credit that is currently 30% of the installed cost. What this means is that when you install a system in 2019 (the credit is declining to 26% in 2020) you receive a 30% credit to your tax bill when you purchase a solar system regardless if it is financed or paid for with cash. There is no tax credit incentive for leasing.
For our system this would equal $11,100 in tax credit for a cash purchase or $11,520 for a financed system. Not a small amount of cash to consider!
If you've been reading our blog for a minute or two you can probably already determine what our decision was. Cash!
Leasing made the leased :-) sense to us. For us our goal is to have zero annual energy costs, which is hard to do with a leased system because to build a system with a zero net energy bill the system would need to be really big, and with that comes a big lease payment and even smaller savings.
Like with your personal income taxes, when designing a solar system the goal (for us) is to build one that produces the same amount of energy you use each year (sort of like paying just enough tax each year to owe nothing and get nothing in return), which means your system will be a little short of what you use in the summer and exceed producing what you use in the winter.
It's a bit of a balancing act trying not to build too large a system nor too small, however, a system as we purchased can be added to, so too small is not all that bad.
The price our energy provider pays for excess energy (too big a system) doesn't outweigh the cost of a system that is too big, so all those extra panels just end up meaning extra cost we won't ever get back.
The math is really mind blowing in comparing the three options.
$37,000 system cost
-$11,100 tax rebate
$25,900 total cost
$38,400 system cost
-$11,520 tax rebate
$52,921 total cost
$360 / month (lease + energy usage)
x 240 month lease
$86,400 total cost
Going Green and Building Wealth
We finish this blog with a brief discussion on how going green can lead to building wealth. It’s actually really simple when you start to think about how going green (or doing anything that reduces your monthly cash outflow) can lead to building wealth.
When less money leaves your pocket each month and goes into someone else’s pocket you can use it to build wealth!
Looking at our solar example, for the 25 year expected life of the system we anticipate an average annual energy savings of $5,400 ($450/month average x 12 months) that equals of total of $135,000. The actual savings is bound to be much higher since energy prices are predicted to rise at a rate of nearly 4% each year.
That’s $5,400+ dollars each year to spend, invest, give, etc., not to mention the bump in value our house will have with a paid for solar system. Some quick math shows if we invest just half the money saved each year at 7% return in 25 years it will equal over $170,000! And that’s how going green can lead to building wealth!