Over the years I have been asked what the best way to finance a solar installation on your home (cash purchase, finance, or third-party ownership). Usually what I have found is all three options provide a better cost benefit then PG&E alone but vary significantly in benefits and total savings. Before we begin, lets pack our bag with a few ideas we will need on our journey through this blog.
Third party ownerships, are systems another company own’s and the homeowner pays a monthly lease fee or pays for the power the system produces (power purchase agreement (PPA)). Leases and PPA’s often cost less than PG&E and because there is no equipment owned by the customer, the monthly billing can make it easy to compare. A few downsides are they are usually more costly then financed or purchased systems, the homeowner does not receive the 30% Investment Tax Credit (ITC) and they can complicate selling a home.
Purchased and homeowner financed systems usually provide the best bang for the buck. Cashflow is usually good in the first year as the 30% ITC can usually be taken (this is not a deduction but a credit off your federal tax liability). Because of the upfront costs and finance fees, these systems can be a little harder to compare to PG&E so the method I will be using is the 25-year cost per kilo-watt hour (KWH). This will take the system cost, less the ITC, plus any finance fees, maintenance, and hardware equipment replacement costs over the 25-year comparison period and dividing it by the projected power it will produce over 25-years.
Another issue that usually comes up about financing is people are wanting to wait to get the lowest rate. Currently at the time of writing this blog interest rates for solar loans are about 8%. A few years ago, rates were ranging between 6-7%. While it is true the Fed is looking to reduce interest rates 3 times in 2024, you also need to consider what is happing on PG&E’s side. Since 2021 PG&E rates have increased by more than 46%, 13% on Jan 1, 2024, alone with another rate increase potentially schedule for March 2024. Continue reading to see why, in my opinion waiting for interest rates to come down could be a losing proposition financially.
Since PG&E has implemented Net Billing Tariff, we have been configuring savings batteries on every proposal. First let’s discuss the difference between storage savings batteries and storage back-up batteries. Savings batteries allow a customer to store power during the days instead of exporting it to PG&E, and to draw from the storage system during the evenings. Back-up batteries do everything savings batteries do but also allow homes to have back-up power when the grid is down. Back-up batteries usually cost at least 40% more since we need a transfer switch to disconnect from PG&E when the grid is down, the need for more electrical work and more storage as we need to keep a reserve for when the grid is down.
So the system design I will begin with is for typical home electrical usage of a Sonoma County home 810 KWH a month, 9,720 annually. The Solar system being proposed will produce 9,717 KWH per year and will have a back-up battery for when the grid is down (20 KWH battery). Most solar systems components come with a 25-year warranty and batteries a 15-year warranty. FRS offers a standard 10-year workmanship warranty and for purposes of this proposal, I add an estimated workmanship warranty extension to bring everything to the 25-year comparison period. Also, to make the comparison as close to a true 25-year analysis, we estimated replacing the 20 KWH batteries in year 15. In other words, I will assume a true 25-year solar cost with back-up storage options and see how they stack up to PG&E rates with no back-up. For the owner purchase and finance options I will include the following.
Solar and 20 KWH back-up costs: $53,883
30% Investment Tax Credit ($16,165)
Purchase/Finance Amount For Comparison: $37,718
Labor warranty Extension Estimate $1,641
Battery Replacement Estimate $17,275
Total 25-year cost: $56,634
Okay the bags are packed, let’s compare our options.
PG&E:
What are the cost projections over the next 25 years for PG&E power. Currently the average blended cost per kilo-watt hour (KWH) for residential customers is $0.45. I will be using a 4% escalator per year for increased costs (The last 4 years have averaged about 12%). For PG&E The costs would be as follows:
Annual Cost Per
KWH Costs KWH
First year: 9,717 $4,373 $0.45
25-year: 242,925 $182,103 $0.75
Advantages: Ease, nothing to own or do.
Disadvantages: High costs, no control over price increases and no back-up when the grid is down.
I will now compare 4 solar options with back-up storage with PG&E, third party ownership, bank financing loan, PACE assessment and straight purchase.
Third Party ownership:
The primary two ways to do third party ownership is leases and power purchase agreements (PPA’s). In both cases the customer does not own the system or get the Federal Tax Credits (FTC). The third party installs their system on your roof and charges you a monthly fee to use it. Usually with a lease the costs are the same per month. With a PPA, you purchase the power at a per KWH rate, so during the summer when you produce more power, you pay more and less in the winter when the solar produces less. It is important to note, that you will have a PG&E bill in addition to the bill from the lease or PPA company.
PPA’s allow us to easily view the first-year costs. This PPA has a $0.0313 per year escalator over the 25-year term. At the end of the PPA period, the homeowner can purchase the system at fair market value.
Annual Cost Per
KWH Costs KWH
First year cost: 9,717 $ 3,304 $0.34
25-year cost 242,925 $122,530 $0.50
Advantages: Lower costs then PG&E, back-up when the grid is down, more control over future costs.
Disadvantages: You do not get the Investment Tax Credit, there is a fair market buy-out at the end of term, more costly than other finance options, and can make selling your home more difficult..
Bank Financing:
For purposes of this blog, I will be using Redwood Credit Union who has an on-line solar calculator. Their current interest rate is 8.49% for a 20-year term. Since you own the system, in the first year you will have positive cash flow of $12,241 (The ITC of $16,165 less the yearly loan payments $3,924) and at the end of 20 years you own the system. The system for this analysis includes a 20 KWH battery for back-up. 20-year finance charges would be $40,781 + $56,634 (above) = $97,415.
Annual Cost Per
KWH Costs KWH
First year: 9,717 ($12,241)* N/A
25-year: 242,925 $97,415 $0.43
Advantages: * first year positive cash flow of $12,241, costs less than options above, you own the system after 20 years, provides back-up power when the grid is down and it will likely increase the value of your home.
Disadvantages: Can tie up financial credit and more costly than than straight purchase.
PACE Financing:
Property Accessed Clean Energy (PACE) Assessments are a means of purchasing a system and financing on your property taxes. In Sonoma County we have one of the best and longest-lived PACE organizations in the nation, Sonoma County Energy Independence Program (SCEIP). I financed my system with them back in 2014 and the process was easy. SCEIP has a financial calculator and interest rates are at 7.49%. These assessments are paid with your property taxes, and can often be easier to get then bank loans. 20-year finance charge of $37,902 + $56,634 = $94,536.
Annual Cost Per
KWH Costs KWH
First year: 9,717 ($12,384) * N/A
25-year: 242,925 $94,536 $0.39
Advantages: * first year positive cash flow of $12,384, costs less than options above, you own the system after 20 years, provides back-up power when the grid is down, Frees up financial credit (not tied to personal credit) and it will likely increase the value of your home.
Disadvantages: May complicate home sale and more costly than straight purchase.
Straight Purchase:
I often tell customers cash was king, in most cases the lowest cost option is a straight purchase of the system. One thing I do not include in this option is cost of funds, money that
could be made with these funds if solar was not purchased. At FRS as part of our proposal we include an internal rate of return (IRR) of solar purchased, which will show the equivalent of the interest rate a solar system will return for comparison. For this proposal the IRR is 11% over 25-years which can easily be compared to the financing options above.
Annual Cost Per
KWH Costs KWH
First year: 9,717 $37,718 N/A
25-year: 242,925 $56,634 $0.23
Advantages: Lower costs than options above, allows you to pre-pay your electric costs at almost 50% of today’s rates, nice for those planning to retire or fixing utility costs and back-up when the grid is down and it will likely increase the value of your home.
Disadvantages: Need to have the cash available.
Summary: While it can be difficult to compare different options when going solar, one thing is clear, cash is king. In the case above, when you purchase, you “prepay” for your 25-years of power at $0.23 per KWH less than 1/3 of the projected 25-year cost of PG&E. But even with the two owner financed options, we still see 25-year costs per KWH below todays PG&E rates and 56% of PG&E’s projections. Although the third party ownership was the least attractive option, it still was only 66% of the cost of PG&E over 25-years. And don’t forget, all the solar options in this blog offer the increased safety and security of back-up power for when the grid is down. So now is the time to take control of your utility costs, independent of which option you chose to finance your solar system.
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