💸 Economics of Home Solar

14 min

Fundamentally, there are two ways that you can save money in your home. You can either consume less or buy cheaper electricity. Aside from solar, other home upgrades focus on consuming less energy. This could be changing windows, adding increased insulation, or upgrading a heating or cooling system. These upgrades can add additional home comfort, improve air quality, and help conserve electricity or gas consumption. However you will still need to buy a certain amount of electricity every month from your local electric utility company.

Solar is a viable alternative, whether paid upfront or over time. At an effective price per kilowatt-hour solar power allows you to pay less than what you would pay your local utility company.

The question many ask is “How much can I save?” and How much does it cost?”

To answer these questions, we must first understand how much you are currently using, what rate per kilowatt hour the you are paying, how much solar power could be produced on your property, how the utility company interacts with solar power on a daily, monthly, and yearly basis and what other financial incentives may be available.

Let’s start with the electric bill.

How to Read an Electric Bill

Electric Bill

You might not give your electricity bill much thought — except perhaps to lament how high it is — but electricity bills actually provide a lot of valuable information to determine if solar is right for you.

Having a deeper understanding of the information contained in electricity bills can offer insights into whether installing solar makes sense, as well as whether switching to another billing plan may increase savings.

Let’s take a look at the terms, sections, and calculations in an electricity bill and how these change when they install solar.

Electric Bill Rate Plans

Rate Plans

An electricity bill is a charge for the electricity a home or business consumes. This consumption is measured in units called kilowatt-hours (kWh) and customers are charged a per-kWh rate. These rates differ across utilities and are calculated differently depending on your“rate plan.” Rate plans specify the rules for how bills are calculated and utilities typically offer multiple plans.

Common rate plans include fixed rates, time of use (TOU) rates, and tiered rates. Fixed rate plans charge the same amount for every kWh consumed, while with TOU rates and tiered rates the price per kWh changes depending on the time of day (peak vs. off-peak) or the total amount of energy consumed, respectively. There are also demand rate plans which charge you primarily on the maximum amount of appliances being run simultaneously.

Your rate plan will determine what’s displayed in the different sections of your bill and it also impacts how much you pay. Depending on your energy consumption patterns you may pay more or less for the same amount of energy under different plans.

Utility Bill Sections

An electricity bill is broken down into several different sections, and while the names and contents of each section often differ depending on the utility here are some of the most common sections:

Account Summary

The Account Summary generally appears on the front and center of the bill. This section provides an overview of the account status, including the previous account balance, any payments made on the previous balance, and the new amount owed for the current billing period. If you get electricity and gas from the same utility the Account Summary will include charges for both of these services.

Bill Details

This section shows the number of kWh they consumed during the billing period and the rate they pay per kWh. What’s shown in this section and how it’s formatted will change depending on the utility and rate plan.

Electricity Charges Breakdown

The per-kWh rate shown in the “Bill Details” section is made up of many smaller charges. In addition to covering the cost of the energy consumed, some of these charges are used to maintain and upgrade the electric grid and to fund other state-sponsored energy initiatives. The names and amounts of these electricity charges vary by utility but generally include a generation, transmission, and distribution charge.

Generation Charge: Supports the cost of producing the electricity used.

Transmission Charge: Supports the cost of transmitting electricity from power plants over high-voltage lines and towers to the distribution system.

Distribution Charge: Supports the cost of the lower-voltage system of power lines, poles, substations, and transformers that connects to homes and businesses. In the bill above, you can see this in the “Current Charges for Electricity” section, which is broken down into “Supply” and “Delivery.” A base customer service charge or delivery fee that does not change will also be present in this section. This amount would be charged even if the homeowner used zero (0) kilowatt-hours

Usage Profile

Many utilities provide a monthly usage profile showing the homeowner's total consumption each month over the past year. This gives a good visual representation of how much energy homeowners consume throughout the year and sometimes even compares the current year's consumption to that of years past.

Net Metering

Net Metering

Once we understand the bill, we can understand how the utility company interacts with the solar energy produced on a house. In the majority of solar areas there is an incentive program called Net Energy Metering (NEM) or Net Metering. Net metering is an electric billing tool that uses the electric grid to store excess energy produced by a solar panel system. Under net metering energy solar panels produce and don't get used in the home is credited back to the homeowner. On a cloudy or rainy day when your panel's aren't producing enough energy for the use of the home the utility grid will supply your home energy and count that energy against the credits you've banked over time. As a solar customer you will only be billed for your “net” energy usage.

This policy is typically enforced by a state government but administered through local utility companies. Net metering takes the complexity of solar power production and home energy demand and makes it a lot more simple!

Typically all we need to do is identify what is the total annual kWh a homeowner uses and match that with the annual expected energy their solar panels will produce.

Consumption vs Production chart

As you can see from the graph - the solar production doesn’t perfectly match when the homeowner needs electricity. That’s OK with net metering as the excess (April, May, June, July, August) cover the deficiencies during the rest of the year.

Net Metering in Winter vs Summer

How does Net Metering work?

Say you install a net metered solar panel system. When your solar panels are producing more electricity than they are using at any point during the day the excess electricity is sent back to the grid which runs your electric meter in reverse. When you use more electricity than your solar panels are producing, either at night or on cloudy days, you pull electricity back from the grid which runs your meter forwards. At the end of the month or year you are billed the net of what you put onto the grid and what you took off the grid hence “net metering”.

With a correctly sized solar energy system, you can produce enough electricity to match your home's electricity use for the entire year. The amount of electricity your solar panels produce will vary throughout the year. Solar will produce more in sunnier summer months and less when the sun is lower in the sky and sets earlier in the winter. Net metering helps you to account for these seasonal differences in solar production by crediting you for the excess electricity your panels produce so that you can use it at a later date.

Why does net metering exist?

Net metering is designed for two primary purposes: first to encourage the greater adoption of solar throughout the country and second because utilities–and the electricity grid as a whole–can benefit from the influx of low- to no-cost solar energy onto the grid. Solar energy can help balance the cost of purchasing electricity from other resources, especially during summer months when electricity is often the most expensive on the hottest–and sunniest!–days of the year.

How do electricity bills work with net metering?

In general, most homes will produce excess electricity in the summer months and will use more electricity from the grid in the winter. These variations in production are fairly predictable so a utility company won’t send you a monthly check when you produce more than you need but instead you will build up extra credits on your utility account during the summer months so that you can draw from them at night and during the winter months when you need them. With the right design a system can generate enough power to match the total home electricity use for a year even if they produce much more than you need in some months and much less in others.

When your solar power system generates more electricity than you use over the course of a month you will receive a credit based on the net number of kilowatt-hours they gave back to the grid. If you produce less electricity than you use in a given month you must buy electricity from your utility to make up the difference. In these instances you would pay for the electricity you use minus any excess electricity your solar panels generated.

Use net metering to save by going solar

Net metering is the best solar policy since it allows you to store every unit of energy you produce with solar to be used at a later date from the grid. In fact as a result of net metering you can save tens of thousands of dollars over the lifetime of your solar panel system by offsetting your need for electricity from the grid.

While net metering is not the only way that utilities compensate homeowners for going solar it is by far the most common and effective solar policy.

Incentives

To make solar installation more financially competitive versus doing nothing and continuing to get power from fossil fuel driven utilities federal, state, local and utility incentives have been created to foster the adoption of clean energy.

There are several ways in which the incentives are structured which we cover below. Any incentive typically stimulates customers to look into and adopt solar (and/or home batteries) because application of the incentives lowers the overall cost of the system regardless if the system is purchased outright with cash, financed with a loan, or leased from a third-party that receives the incentive.

A lot of homeowners decide to go solar specifically because of the available incentives.

Let us help you navigate the incentives and benefits available to you and your home:

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Solar Investment Tax Credit

Cost-Based Incentives

Cost-based incentives allow people or companies who invest in a solar system to apply a tax credit towards their income tax. The incentive is determined by the cost of the system and is independent of its performance.

The important cost-based incentive driving solar adoption today is the United States Federal Solar Investment Tax Credit (“Solar ITC”). This incentive is a function of the total system cost or loan amount for a homeowner. You would claim this incentive through your personal tax returns. You can also learn more on the ITC here.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax you would otherwise owe. For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. The federal tax credit is sometimes referred to as an Investment Tax Credit or “ITC” even though it is different from the ITC offered to businesses that own solar systems.

Other cost-based incentives are typically regional or state tax credits which work in a similar way and vary by market. One of the most comprehensive websites with state and local incentives is DSIRE.

System Size-Based Incentives

Many utilities and state governments have system size-based incentives. These incentives are calculated based on the kW DC or AC Capacity of the system. The idea is the more the solar generation capacity is connected to the grid the larger the incentive. Sometimes these incentives have minimum performance factors in order to ensure that homeowners receiving these incentives aren’t getting money for panels that don’t work very well due to shade or orientation.

Where cost-based incentives are almost always provided to you after your installation is complete, system size-based incentives can sometimes be paid before or after installation.

When an incentive is claimed and paid to a homeowner (or solar financing company) before they are installed the incentive is typically routed directly to an installer and the installer reduces the contract price of the system accordingly. We call these incentives, “Discount Incentives“ as they discount the cost of the system and may reduce any cost-based incentives.

When an incentive is secured but not paid to a homeowner (or solar financing company) until after they are installed, we call this a “Rebate Incentive“. Homeowners typically receive this rebate check in the mail (or direct deposit).

System size-based rebates are typically presented on a dollar per watt basis ($/W). For example, if a utility offered a $1.00/W rebate with a 10,000 W or 10 kW system, the homeowner would get a $10,000 rebate. This could be over 30% of the cost of the system!

Similarly, battery system-size rebates are typically presented on a dollar per kilowatt-hour basis ($/kWh) so if a utility offered a 0.30$/Wh rebate on a 10000 Wh or 10 kWh capacity battery system, the homeowner would get $3,000.

EnergyPal's platform will automatically calculate size based incentives so you can be sure the quotes you get are accurate and meaningful.

Performance-Based Incentives

Performance-based incentives (PBIs) deliver payments based on the monthly energy production of a solar system or the power discharge events of a battery. You can make the most of any performance-based incentives in your area by installing an efficient system and maintaining it so it keeps producing as much as possible.

Performance based incentives are usually paid to you on an ongoing basis for 5-25 years. The performance-based incentive can be delivered to you over varying timelines from monthly, quarterly, bi-annually, or yearly.

Sometimes solar companies will exchange an upfront sum to you in exchange for the performance based incentive rights over time. This can be very advantageous for you if you want to minimize upfront costs or loan amounts.

Property Tax Exemptions

When solar is installed, homeowners typically improve their property value. This increase in value can come in two formats: Market Value and Appraised Value. Appraised value would be the value a bank would give and is the value that property taxes are based off of. Market value could be much higher than the appraised value.

In many markets solar will increase the appraised value (assuming the homeowner owns the system) on their home. Typically this increase would also increase the annual property tax the homeowner would owe but most states have specific exemptions for property tax increases due to solar. This means a home’s appraised value may go up but their property taxes would not go up.

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