Calculating the financial return on solar energy is a little like hitting an inside curve ball. To get it right we need to apply some fundamentals.
It's not about understanding how panels generate free electricity, saving you money that pays you back for your capital outlay. It starts, instead, with the critical concept of marginal tax brackets. Most people miss the point that financial decisions usually bump spendable income up a little or down a little.
Those last few dollars of gross income for most Californians are taxed at around 35 percent or higher. Yet, when people see their total combined federal and state tax bills adding up to about 20 to 25 percent of their gross income, they confuse the percent they pay in total taxes with the rate that affects financial decisions regarding those last few dollars.
Big mistake. Someone with that mindset might jump at the chance at a job across town paying $10,000 more per year thinking they'll have $7,500 or so after taxes. That additional $10,000 of income will only be $5,500 after income taxes at the highest marginal rate plus deductions for Social Security and Medicare. A more interesting job with a cheaper, shorter commute and less money might be a better career decision.
Or consider a family with small children. A second spouse who goes back to work may be pedaling backward if the small amount of after-tax pay on that additional income is not enough to pay for day care and commuting costs.
Now back to solar power. Too many people miss the point when they calculate their savings and measure how long it will take for the savings to pay back what they just spent on the system. The correct analysis involves calculating the equivalent value of their tax-free annual return on their, let's say for purposes of this column, $30,000 investment.
In a typical solar installation, the homeowner generates free electricity worth about $3,000 per year. This amounts to a 10 percent return on the investment. But remember, those are effectively extra after-tax dollars that you get to pocket. Remember, in order to increase your income by $3,000 a year, based on the example earlier, you would have to earn an additional $6,000 a year, roughly.
So the really return on your $30,000 investment in solar energy is $6,000 a year, or 20 percent.
Furthermore, that $3,000 is a guaranteed return unless you assume that electricity prices will go down over the coming years. Don't hold your breath. If anything, prices will rise. Today's $3,000, then, could be more like $4,000 or $5,000 of free cash flow to spend on other things instead of electric bills 10 years from now.
The way to think about whether to go solar is to think that the money for the panels is an investment that generates a return -- like any other investment. If you sell the house, you get at least some of the money back that you invested -- and maybe all of it -- or possibly more. If you're retired, your heirs may consider themselves to be short some $30,000 when you die, but in the meantime, you will have had a considerable boost in annual spendable income thanks to the 20 percent equivalent return value of the free energy you created -- not to mention a better world for your grandchildren. We are way behind countries like Germany where rooftop collectors on sunny days meet almost all of their country's electrical needs for a few hours of the day.
The unintended consequence of the positive economics in renewable energy is the extent to which the entrenched power industry will stand in the way of progress.
Many investor-owned utilities and the government's regulating agencies don't want to see an end to their feeding troughs. And don't underestimate the fossils running the fuel industry. All these entrenched forces will be conspiring to postpone the inevitable -- that tipping point at which everyone with a home in sunny California will be deciding to finally take advantage of one of history's most profitable guaranteed investments. The fact that this investment is not beholden to today's financial markets makes it especially sweet.
Steve Butler is CEO of Pension Dynamics. Contact him at firstname.lastname@example.org or 925-956-0505, ext. 228.