Solar Energy as a Smart Part of Your Retirement Portfolio

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What would you say if someone offered you an investment opportunity with a guaranteed annual return of 13% for at least 20 years? Would you be willing to invest part of your retirement portfolio in trade for that deal? Or would you think it was too good to be true and invest your money elsewhere? What if you were told that your returns would be tax free?

You’d be smart to be skeptical and to assume the deal was too good to be true. After all, conventional wisdom tells us that if a deal sounds too good to be true, it probably is.

But there is one deal that can turn out to be just as good as it sounds: solar energy for your home. Before we go into detail, it’s important to understand that there are a lot of variables involved in how well a solar investment will work for you: your location, the type of equipment and installer you choose, and the way you finance it are all factors that will impact your net end result. Your results will also be impacted by weather, utility rates, and what you do with your solar savings.

Rather than dive head first into all of those details, let’s start with an ideal scenario. The results you end up with will depend on how much your scenario differs from this ideal.

Our ideal scenario is modeled after personal experience. Although the numbers are only representative, the underlying case is a real one.

Jack and Jill Smith own a modest two story home in Southern California, an area that enjoys a lot of sunshine all year long. Their electric bill averages about $300 per month, ranging from $225 – $425 depending on the time of year and conditions. Their utility rates increase an average of 3.5% per year and their retirement investments return on average 7% per year. They decide to install a solar energy system in their home that will replace all of the energy they pull from the electric utility grid, with additional energy to spare to account for the degradation of their solar panels as they age. They will pay cash for the system.

The winning bidder for the installation quotes the following:

  • Gross cost: $28,000
  • Cost after tax incentives and rebates: $18,000
  • All equipment (panels and inverter) warrantied for 20 years by manufacturer.
  • All maintenance labor costs warrantied for 20 years by installer.
  • System guaranteed to generate 110% of current usage in first year and maintain production in accordance with warranted panel degradation rates.

The initial net up front cost of $18,000 would be recouped strictly with annual electricity savings within five years, even without accounting for electricity price increases or return on invested savings: $300/month * 60 months = $18,000. The subsequent 15 years of electricity savings are all “profit” and backed by warranties and guarantees.

Assuming an annual increase in electricity rates of 3.5%, the total 20 year savings in electricity costs will be $101,807. Jack and Jill will reinvest these savings as they are realized, in a stock index fund. Stock index funds invested for the long term have provided historical returns of 7%. Assuming those same historical results over the 20 year life of the solar energy system warranty, the net total return is $206,896 from that original $18,000 investment.

But wait! You might correctly point out that investing that $18,000 has an opportunity cost because that money could have been invested in a different way.That’s definitely true so let’s look at that. We’ll also look at the opportunity cost of the money that would be otherwise sent to the electric company each month if Jack and Jill don’t have a solar energy system.

Let’s assume that their neighbors, Fred and Wilma, decide against a solar energy system because it is “too expensive”, and instead put their $18,000 in the same stock index fund used by Jack and Jill. This investment will produce the same 7% average annual return over the 20 year period as enjoyed by Jack and Jill. After 20 years the value of their fund would be $69,654, quite a bit less than the $206,896 result Jack and Jill will enjoy by investing instead in their solar energy system. Furthermore, Fred and Wilma are still paying for electricity which will cost them $101,807 during that 20 year period. This means that after 20 years  Jack and Jill have a net gain of $206,896 from their solar strategy, while Fred and Wilma have a net loss of ($32,153) from their non-solar strategy.

Indeed Fred and Wilma would have to have annual average returns of 13% to have a comparable return to Jack and Jill’s gain. Even worse, to account for their electricity expense, they would need annual average returns of over 15%.

The story of these neighbors goes even further than that because Jack and Jill drive an electric car fueled for free off of their solar energy system, while Fred and Wilma drive a gas guzzler and will pay ever increasing prices at the pump for the next 20 years. But we’ll leave the electric car discussion for another day.

Jack and Jill’s story is very real and very achievable, but of course there are many reasons why your solar adventure may work out differently. Your planning should be based on your own specific situation. Here are a few caveats to keep in mind:

  • Jack and Jill enjoyed Federal tax credits but these credits are being phased out beginning in 2020. Those tax credits will pay for 26% of your solar installation costs in 2020, drop to 22% in 2021, and then disappear. Most likely these reduced credits will be offset, at least to some degree, as solar panel efficiency increases each year. More efficient panels means you need fewer of them to generate the same power, hence a lower cost for parts and labor.
  • Jack and Jill enjoyed state and utility rebates that may not apply to your location. These rebates helped reduce the net cost of their system. Check for incentives offered by your state and your electric utility.
  • Your results may be better or worse than Jack and Jill depending on the utility rates in your area.
  • If you live in an area without abundant sunshine, or periods where your panels will be covered with snow, or if you have a lot of shade, this will impact your energy production, which means you will need more panels to generate the electricity you need, increasing your up front cost.
  • Jack and Jill paid cash for their system. If you obtain your system through a loan you will need to account for the loan interest when you calculate your return on investment. Further, many people obtain their solar energy systems through lease or rental agreements (usually with the incentive of zero up front cost). In this case you will lose most or all investment benefit as described for Jack and Jill’s case. Your leasing company will get the tax credits, and while you may enjoy a reduced electric bill you will also be paying a monthly fee to the leasing company. You should be very careful about engaging in this form of contract.
  • Jack and Jill intentionally chose a system that would produce a surplus of energy, however most solar installers will make bids on a much lower energy figure – perhaps 50% – 80% of your actual usage. This can greatly reduce the bid price (your up front cost) because there will be fewer solar panels and less labor, and perhaps a cheaper inverter as well. While there is nothing “wrong” with this approach, if you want to maximize your solar system as an investment vehicle then you will want a system that produces enough surplus energy to account not only for your current needs, but will account for possible increased usage (e.g. an electric car) and the aging of the solar panels. The goal is to pay nothing for electricity and instead redirect those savings to other investments. This approach also maximizes the value of tax incentives.
  • Jack and Jill chose a five star installation company that provides a 20 year labor warranty to match the 20 year manufacturer warranty, and a 20 year guarantee of energy production results. This provides a level of assurance of long term results. Many installers provide much shorter warranties, such as five years, or use inverters and other components that have shorter warranties. Also, a guarantee from the installer will be of no value if the company goes out of business. Choose your installer and your equipment carefully if you are treating this as a long term investment.
  • It’s important to make sure that your solar energy system is up and running at all times. If your system is down, it will not produce energy, which means you will end up paying a big bill to the electric company defeating the purpose of your investment. SolarView’s solar monitoring system keeps an eye on your solar energy system around the clock so you will know if there are any issues to be addressed.
  • It’s also important to keep your solar installation company honest. As part of their proposal and contract, they will have made promises, usually backed by a guarantee, of how much energy your system will produce. If production falls below a specific threshold, their guarantee should provide you with some mitigation (e.g., adding more panels). Keeping their feet to the fire will help you to meet your investment goals. Obtain monthly energy production estimates from your solar installer and enter them into SolarView’s settings. In this way SolarView will report to you, month after month, and year after year, on whether or not the system is meeting the original projections. If it falls short you will have the data needed for mitigation. SolarView even takes into consideration the degradation of your panels over time so you know if your results are normal or not.

After you’ve digested the above caveats, here is a nice bit of dessert: the savings that you enjoy for those first 20 years will not instantly stop at that point. Although you may have to replace the inverter, the solar panels should continue operating and generating savings for another five or ten years or more, adding gravy to your already bountiful investment returns.

Also, if you choose to sell your home in the middle of your 20 year investment period, the fact that the home has an installed, paid up, and warrantied solar energy system will add value to the home and make it easier to sell. Normally, you should end up getting some or all of your original investment back!

By contrast, solar energy systems that are leased or rented tend to decrease the value of your home at resale because the agreements are complicated, difficult to transfer, and difficult to remove. The simplest and most profitable approach is to purchase your solar system with cash. If you don’t have the cash on hand but can pull it from another investment such as a 401K or IRA, you are in effect diversifying your retirement portfolio into an investment with predictable, high returns. Furthermore, to the extent that those returns are in the form of savings from your electricity bill, there are no tax consequences – your reduced electricity bill is savings to you rather than income. Furthermore if those savings are invested in a non-taxable account such as a Roth IRA, the returns from those investments would also be tax free.

While it always pays to be skeptical of ideas that seem too good to be true, if you do it right like Jack and Jill then you can enjoy a long term high return on your solar investment that not only easily beats historical returns on the stock market but is guaranteed by the terms of your solar installation contract. As a bonus you will be helping the environment, helping your country to be energy independent, and doing your small part to keep money out of the pockets of unsavory regimes who make a living selling oil.

Consult with your tax or investment advisor about investment strategies and results, and about tax or penalty implications before pulling out any money from a retirement plan for solar or any other purpose. We are not tax advisors. The anecdotal experiences and ideas presented in this article are informational and not advisory. Please carefully consider consequences before engaging in any type of investment.