Solar Offers a Better Return on Investment Than Stocks
As the price of grid electricity is going up, that of home-generated solar power is going down. The Solar Energy Industries Association maintains that the cost of solar panel installation has fallen by over 70 percent since 2010 and continues to decline.
However, assessing the overall cost of installing a solar panel also includes calculating the returns that investment brings to you in the long haul. One way to put solar investment in perspective is to compare it with investing in stocks.
The results of such a juxtaposition might surprise you. Let’s delve into the findings of a study comparing the return of solar investment with those from the stock market.
Comparing Solar Investment with Stock Market Investment
N.C. Clean Energy Technology Center at NC State University contrasted returns from 25 years of Standard & Poor’s 500 stock index with the projected returns from a home-based solar system.
The study titled Going Solar in America: Ranking Solar’s Value to Consumers in America’s Largest Cities revealed in the results that in 46 out of 50 cities, solar came out ahead. And, in 20 of those cities, paying for the system in cash upfront was also a better investment than in the stock market.
When the reducing costs of solar panel installation are complemented with the rising costs of grid electricity, the financial case for solar gets even stronger. Even so particularly for people living in areas with higher than average electricity rates, including California and Northeast.
The study used a metric called the Net Present Value as its basis for analysis. NPV defines the future value of cash flows from an investment in present-day dollars. This is a very important feature because the money you get in the future has worth less than the cash in hand today (a principle popularly known as the time value of money).
The research was conducted by calculating the Net Present Value of a 5 kW solar installation in the 50 largest cities in the US and comparing that with the 25-year return from the chosen stock index.
The authors of the study chose the S&P 500 stock index because it is one of the most well-known and diversified representations of the US equities market.
Further, for each city, the NPV of solar installation was calculated in two cases:
- Under a fully-financed system with a loan for the full cost with an interest rate of 5 percent.
- For a complete upfront cash purchase.
Since financing distributes the cost of a purchase over time and allows people to keep more of their income in short-term (while also taking advantage of federal subsidies), the financed systems hit higher NPVs and outstood investments indexed to the stock in many areas of the country.
In 92 percent of the cities, a financed solar system outperformed the market, whereas a system paid for upfront outdid the stock market in 40 percent of the cities.
This makes a notable conclusion: different financing options can leave a big impact on the value you receive from your solar installation.
While the study was carried with a number of assumptions, including that the current favorable policies such as net metering (which allows customers in most states to receive a bill credit against the power they send back to the grid) will continue, it inarguably provides an illustration of the fact that investing in solar panels can be a great idea for most areas in the US.
This value does not include the potential increase the value of your asset (home) after installing a solar panel. A typical PV system can notch up the value of your house by USD 15,000.
Purchasing a solar system in the US also entitles you to a federal income tax credit, which amounts to 30 percent of the price you pay for the system. That’s a massive discount after one year, and you could also look at it from a return on investment perspective.
Taking a solar loan is like starting a business that is sure to succeed. Solar panels start saving you electricity costs right after you install them. And, in some cities, the savings are bigger than the loan payments, so that you pay a little and save a little.
N.C. Clean Energy Technology Center ranked cities by the overall benefits, discovering that New York, Boston, Albuquerque, and New Mexico top the list.
This index is based on three sets of metrics:
- The first year savings from solar panel installation.
- The relative value of an investment as opposed to the S&P 500 stock index.
- The overall levelized cost of solar compared with grid electricity.
‘A’ states are the states with NPV between $5k and $17k. These states have a solar policy in place to give a boost to residents who wish to install solar panels.
‘B’ states are those with NPV between $2k to $5k. These states are lifted by high electricity prices, lots of sunlight, and/or good solar policy.
‘C’ states are those with NPV between $100 to $2k. People in these states need to depend on the 30 percent federal solar tax credit and low loan rates for good NPV.
‘F’ states are those where the poor solar policies wipe out the benefits of the 30 percent federal tax credit.
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