Monday, February 26, 2007

Does going solar pay off for homeowners?

By Stephanie I. Cohen

The race is on to install solar panels in American homes thanks to generous government incentives such as California's $3.2 billion solar initiative launched in January.

Despite the minuscule amount of solar power generated today -- roughly one-thirtieth of one percent of all the electricity produced in the U.S. -- recent technological advances and a continued decline in the price of solar systems are prompting more homeowners to ask if this renewable energy source is now worth the investment.

Analysts say they are still crunching the numbers when it comes to deciding whether residential solar systems, also referred to as photovoltaic or PV, make economic sense. The answer hinges on how much and how fast solar can cut a homeowner's utility bills and how long it takes to pay off the initial investment to add solar panels to a home.

"When consumers contemplate the purchase of a [photovoltaic] system for their home, they approach it like any other financial investment and examine the set cash flows and expected return," according to a new report from CIBC World Markets on residential solar.

Like any large-scale purchase, consumers considering solar tend to initially focus on the upfront costs. Solar systems for homes begin around $25,000 but can easily go higher depending on the size of a house and the amount of power they generate, said Rhone Resch, president of the Solar Energy Industries Association.

Electricity prices matter

A key factor in figuring out how long it will take to become profitable with a switch to solar is the cost of electric rates for a home, said Jeffrey Bencik, an analyst with Jefferies & Co. Bencik said retail electricity prices can vary from a low of eight cents a kilowatt hour in some parts of the U.S. to as high as 18 cents in parts of San Diego, California.
"Depending on that you really have to do the math on a region-by-region, house-by-house basis," Bencik said.

All eyes on California

CIBC looked at the likely payback for residential solar systems installed in California, the country's largest solar market, and considered the cost of solar systems, government-sponsored incentive programs and electric rates. The returns, it said, were "less stellar" than incentives offered in other countries, even with the new incentives.

CIBC estimates that the cost to install a system in California is about $8.50 per watt. But after a $2.20 per watt state rebate and a $2,000 federal tax credit the net cost drops to $5.77 a watt. This means that buying a solar system can yield homeowners a 6% return on their investment. It would take about 16 years to pay the initial investment, though the payback period can vary depending on peak electricity rates in the region, the report's authors said in an interview. If homeowners are generating power during peak daytime demand when electricity rates are typically the highest they will save more money.

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