How Much Money Can Solar Panels Save?

Building owners who look at solar invariably start with the question of how much energy the solar panels can save.   They want to know whether solar makes sense.  Even before they get to the question of how much energy the solar panels can save, or where to find the lowest cost solar panels, or when they should use solar panels, or whether they should lease or buy solar panels, they first need to determine whether there will be a sufficient offset to their current utility bills.

In this article we summarize the key metrics necessary to answer the question.

In general, solar energy savings will be a function of these key factors:

  • How much space is available for solar panels?
  • What are the specifications of the solar panels to be used?
  • What is my current utility bill by state?
  • When do I use electricity?
  • How will I finance my solar panels?
  • How quickly do we estimate utility price increases?

1. How much space is available for solar panels?

Solar panels can be erected on rooftops or on vacant land. In some states and utility territories the vacant land may not be contiguous to the meter; solar hosts can get financial or volumetric credit via remote or net metering. See How Much Will My Utility Bill Go Down with Solar?)

The amount of space available for solar panels will drive the amount of electricity that can be produced. To calculate the area available, bear in mind the following factors:

  • Only roof or land that is unobstructed can be counted. HVAC equipment, flagpoles, trees and other features of a building or landscape can cast shadows that can interfere dramatically with solar panel performance.
  • We estimate that only 70% of the unobstructed area can be counted toward the installation. Construction areas need to have setbacks for engineering and permitting purposes: Setbacks protect against the risks of wind shear and provide room for drainage.

Once the area available for installation is calculated, that area can be divided by the standard size of a solar panel to determine the maximum number of panels that can be installed. The standard size is approximately 3 x 5 feet. In the case of residential, the size is 65 inches by 39 inches. Commercial panels are frequently 77 inches by 39 inches. There are variations of course: SunPower panels, for example, are generally 61 inches by 41 inches.

For simplicity we use an approximation of 15 square feet.

2. What are the specifications of the solar panels used?

Standard size solar panels contain a finite number of solar wafers laminated between glass panels. Residential panels may contain 60 solar cells whereas commercial may contain 72 cells. SunPower cells evidently contain as many as 96 cells. The total number of watts of Direct Current varies by the vintage of the panels. Panels manufactured around 2014 produced 245-255 watts. Panels manufactured in 2015 usually produce around 305-345 watts.

Direct Current generally lose about 5% of their power in converting to Alternating Current. Accordingly, a 1 mW system DC will produce about .95 mW of AC.

3. What is my current utility bill?

The amount of avoided cost – i.e., the value of electricity produced by your solar panels that would otherwise be purchased from your local utility or a third party supplier – must be calculated.

To calculate utility savings take the total solar electricity production and multiply times the price per kW set by your utility or third party energy supplier. Remember that utility rates differ not only by state but according to your local utility which sets these rates periodically. (See How does the electric utility set its price?)

4. How Do I Use Electricity?

Does your home or business use most of its electricity during day-time, peak hours? Peak hours on most utilities are the 16 weekday hours 7 am to 11 pm (sometimes referred to as hours ending (HE) 8 am to 11 pm). In some utilities commercial customers are billed a time-of-use (TOU) rate which is higher for this peak period than for off-peak hours (the balance of the day and weekends).

When you consume electricity will accordingly drive the actual bills. If you are on TOU rates you should receive a premium for your solar electricity as that will be produced during the highest-priced daylight peak hours. A service station, for example, will use most of its electricity at night whereas an office building will consume most of its electricity during the day.

5. How Will I Finance My Solar System?

The method by which you finance your solar panels will determine your ultimate savings.

A consumer that purchases solar for cash would determine its return on investment (ROI) as the present value (PV) of its total projected savings over the lifetime of the panels divided by the cost of installation. Total annual savings will equal the product of (i) annual production (nameplate DC capacity times 95% for AC conversion times the annual degradation factor of .5%) times (ii) the utility avoided cost. To calculate the PV you would probably use a rate of interest comparable to your cost of borrowing funds at the bank. Because the purchase price could have been invested elsewhere you could reduce your ROI by the anticipated return on those alternate investments although most investors assume that investments are fungible and therefore the returns are all comparable.

A consumer that does not have cash may wish to finance the solar panels by either (i) borrowing from a bank or other source of capital or (ii) having a third party own the panels.

  • Traditional debt finance. If debt is used to build the system the returns calculated above will be reduced by the cost of capital.
  • If a third party owns the panels the returns will be equal to the difference between the utility (or third party supplier) avoided cost and the lease or PPA price paid to the third party owner.

6. What Do We Estimate for Utility Price Increases?

The final step to calculate savings is to estimate how quickly the utility price will increase over the lifetime of the solar panels (say, 20-25 years).

This seemingly innocuous assumption is critical and is often an area that solar project developers – and their clients – ignore to their peril. Alternatively, it is an assumption that is taken for granted and, in many cases we have seen, the subject of deceptive sales practices. Many solar developers, both residential and commercial, will claim that utility prices are going up at a rate of 5-6% per annum and therefore will project savings over the life of the solar panels that are very attractive.

The fact is that in much of the country the average utility price increase has been no more than 3% per annum for the past 20 years. Since 2008 utility prices on both U.S. coasts have dropped from their historic highs; in June 2008 world energy prices peaked with oil trading at $147/barrel and natural gas over $15/mmbtu. Today crude oil trades for less than $50/barrel and natural gas less than $3/mmbtu.

In our forward projection models we use an estimate utility price escalator of 2.5% per annum. We believe this is conservative and will generate a fair estimate of savings over the life of the panels.

Conclusion

The factors described above will help consumers evaluate the potential savings from a solar energy project.

Bear in mind that solar hosts must always be mindful of a number of risks that could affect their projected savings, up or down:

  • Cost of money. If interest rates increase, the cost of capital will increase for both developers and consumers.
  • Tax incentives. Investment tax credits for solar projects are now set at 30% but only through 2016; a project that will be commissioned after that date could lose the benefit of these attractive subsidies that help third party developers deliver low prices.
  • Utility pricing. If utility prices decline (which is always possible however unlikely), savings could be impacted. If they rise savings will improve.
  • Panel performance. Panel production is protected by warranties. However, those warranties are only as good as the credit of the manufacturers.
  • Technological change. Consumers who have an appetite for experimental technologies may be concerned about making a commitment to a technology today. The risk for conservative investors is mitigated by two factors: First, solar is proven whereas other technologies will take years to be proven. Second, solar panels themselves are increasing in efficiency by a mere .5% per year – they are not improving as fast as, say, memory chips in computers. (In other words, there is no Moore’s Law for PV panels.)