ROOFCORP is here to answer all your financial questions about solar energy. We’ve compiled some frequently asked questions for your convenience.
How do you calculate payback time?
“Years to break-even” occurs when the total utility savings equal the value of the installed renewable energy system. The calculation is as follows: Years to Break-even = (Net cost – Property Value Increase) / (“Pre-Tax” Average Annual Utility Savings).
For this calculation, we assume the following:
- We use pre-tax dollars for the utility savings, and assume a 40% effective tax rate. Pre-Tax Utility Savings = Average Annual Utility Savings / (1 – 40%)
- To calculate net cost, take your estimated net cost and subtract the expected increase in property value.
NOTE: Installing a solar power system generally increases a property’s value. In some cases, your “on-paper” break-even period can be immediate (a “0″ or negative number) if the cost to install a solar power system increased your property value by the same amount, or more.
How do you calculate net cost?
Net cost is the estimated gross (total) cost of installation minus any and all financial incentives, even those that may materialize after installation (year one and later), such as performance-based incentives.
Net cost at installation is a slightly different calculation. Take the estimated gross cost of installation and subtract the financial incentives that occur on or about the time of installation. Do not deduct incentives that may materialize after installation (year one and later), such as performance-based incentives.
How do you calculate MACRS depreciation?
Formerly known as Modified Accelerated Cost Recovery System, MACRS depreciation is calculated as follows:
- We assume a 50% bonus depreciation in the first year after installation. Bonus depreciations allow an extra amount to be depreciated in year one, and a reduced amount to be depreciated in years two through six.
- In year one: We take the gross cost less half (50%) of the incentives received at installation and then multiply it by 60% to arrive at the total amount you can depreciate with bonus depreciation in year one. The cash you save is this amount multiplied by your effective tax rate. So, if you depreciate $10,000 and have an income tax rate of 35%, your tax savings equals $3,500.
- In year two through six: We lower the depreciation basis by half (50%) of that used in year one. The depreciation schedule on this modified depreciation basis is then: 32%, 19.2%, 11.52%, 11.52%, 5.76% in years two through six respectively. Again, the cash you save on taxes is the depreciated amount times your effective tax rate.
How do you calculate my first-year utility savings?
Your first-year utility savings is the amount of money you may save on your utility bills during the first year after installation of the solar energy system. It is calculated as the energy expected to be produced by a solar energy system multiplied by 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 or time-of-use (TOU) metering applies, potential savings can vary.
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 than 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” vs. “summer” rates). If TOU metering is offered by your utility, a solar energy system may generate additional savings. This is because peak rates often occur during daytime hours when a solar energy system produces the most output, thus reducing your demand for peak-rate electricity from the utility.
If your state and utility offer “net-metering,” you may be able to “sell” the electricity generated by your solar energy system 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 peak rates.
Solar power systems offer “fixed costs” for your electricity because the cost for sunshine is constant (free) and does not rise. Utility rates, on the other hand, rise. So, the savings are likely to increase as time passes.
How do you calculate the increase in property value?
We assume installing a solar energy system will increase the value of your property. In many states this added value is exempt from property taxes.
How much your property value appreciates depends upon many factors. For our calculations, we assume your property value will increase by 20 times your first-year utility savings from a solar electric, or PV system, and 15 times your first-year utility savings for a solar thermal system (water, pool, spa).
The actual situations will vary. But annual savings from a solar power system should appreciate for the first 10 to 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 energy system nears its end of life.
How is lifetime savings calculated?
To calculate lifetime savings from a solar power system, we take the first-year utility savings and multiply it by the expected life of the system (assumed to be 25 years for PV systems and 15 years for solar thermal). We also assume an annual increase in utility prices (our initial assumption is 3.78% inflation). You may change the assumed utility inflation rate.
The formula is as follows:
Lifetime Savings = Sum (Annual Utility Savings) x (1 + Utility Inflation)^Year), as “Year” goes from 1 to 25 (1 to 15 for solar thermal).
From here proceed to the next calculation: Average Annual Utility Savings = Life Savings / 25.
How will I be billed under net metering?
Your utility will continue to read your meter monthly. Under a net metering agreement, you 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 consumed during the previous 12 months. You may request the option of monthly billing. Depending on the type of agreement, your meter might show a credit during some or all billing periods, even though the actual kilowatt-hours you generate and consume are equal.
A utility company 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 electricity service provider to discuss the option of negotiating rates for purchasing excess electricity generation. If your current utility or electricity service provider does not purchase excess electricity, you may contract with another company that will agree to purchase it.
How do you determine utility rates?
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 then reasonable default values are: $0.15/kWH for electricity; $1.40/Therm ($0.014/ft^3) for natural gas; $3.65/gallon for fuel oil, $3.00/gallon for propane.
The actual rates, taxes and surcharges you pay are probably different. We suggest you review a recent utility bill and change the default values stated above 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.
How do you calculate renewable energy credit (REC) value?
A renewable energy credit (also called a solar renewable energy certificate in some states) is a tradable certificate that represents all the clean energy benefits of energy generated from a renewable energy system. Each time a solar energy system generates a certain level of energy, a REC 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 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. Please refer to your utility, state energy office or public utility commission for more details.
What is a return on investment (ROI)?
Return on Investment (ROI) = (Average Utility Savings over the system life) / (Book Value of Asset)
For residential applications, we assume your utility savings are pre-income tax (this presumes you invest the savings in tax-deferred investments like an IRA, 401K, HSA, etc.). For business or commercial applications, we assume utility savings result a lower expense write-off against income tax liabilities.
How does the USDA Renewable Energy Systems Grant Program work?
- 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 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: Retrofitting lighting or insulation; purchasing or replacing equipment with more efficiency units; and renewable energy projects that produce energy from wind, solar, biomass, geothermal, hydro power and hydrogen-based sources.
Still have questions? Contact ROOFCORP today to speak with one of our solar experts.