Deconstructing The Solar Sales Pitch

Competition is heating up in the solar market and the selling of solar  is getting more sophisticated and more aggressive.  Ask 5 solar companies for 5 proposals and you will get 5 different responses:

5 different  sized solar electric systems

5 different energy production numbers

5 different answers on how much money you will save

Calculating how much electricity a solar electric system is going to produce is somewhat comparable to predicting the actual mileage one will get driving a new automobile. With the car there are a number of factors; type of driving, road conditions, air temperature, average driving speed etc. The  calculation of the return of investment based on solar energy production is dependent on an even wider range of variables. Most solar proposals show the customer their R.O.I.  and their savings over a 20 year period. Over a 20 year time frame, any variation  in the calculating data will greatly effect the result.

Solar energy production comes from exposure to the sun. Though known for its constancy,  there are natural variables that come into play when capturing the power generated from the sun. Panel orientation, daily weather patterns and seasonal changes are some of the basic variables. Listed below are just the basic factors that need to considered when determining the costs, the value,  and the long term  savings of going solar.

Basic Factors:

  1. size of system (Wattage of panels X number of panels)

  2. efficiency of panels

  3. system efficiency; azimuth + pitch + shading

  4. local weather patterns

  5. cost of system

  6. incentives: + ability to take advantage of incentives

  7. financing costs

  8. additional costs

  9. the cost of local utility electricity + inflation rate

  10. what percentage of the electric bill is being eliminated

10  factors required to determine whether a solar electric system will produce a good return on investment and as mentioned, the savings generated by a solar electric system is generally  projected over a 20 year period.  In order to make such a projection, there are a number of assumptions that are calculated into the formula.  Since there is no mandatory industry standardized process for generating these numbers, one can find large variables presented from company to company. States do set guidelines for determining how much electricity a solar electric system will produce.  However they do not set rules on how to determine the return on investment. Again because of the increased competitive nature of the solar sale,  companies are looking for an edge. By tweaking certain numbers, some solar companies have made a science of  enhancing their numbers and thus their projections of the benefits of going solar.  It is your best interest to verify the information you are receiving.

Buyer Be Aware

When reviewing a proposal from a solar company, look past the colorful charts, pictures and assertions and  make your own dry spread sheet. STICK TO THE NUMBERS> Write down number of panels, their wattage, total wattage of system, estimated KWH generated  per year.

Size of system

Study the panel layout

The size of the system is generally determined by how many panels can be placed on the roof or roofs of a house. There are many elements that go into determining viability of a solar electric system, but this is the most basic. There are increasingly sophisticated computer programs that determine roof layouts. But these systems are limited in their accuracy. A vent pipe, shading from a dormer and other elements may reduce the size of a system. Local building codes, fire codes may also come into play. But beyond this, a salesperson may find it to their advantage to oversize a system.  Many customers find themselves signing a contract only to learn that size of the system they thought they were getting to be greatly reduced after the on site engineering is completed. The prospective customer should always request to view an actual layout that demonstrates where exactly the solar panels are being placed. Comparing layouts of two companies may be prudent.

Check the wattage of the panels

The number of panels is not only factor in determining actual size of system. Not all solar panels are created equal. They come in a variety of sizes and wattages. Total output of system is effected by actual wattage of panels. Make sure you get the wattage of the panels that the company is planning on using.

Efficiency of panels

The efficiency of solar panels has been increasing over the years. Efficiency is the amount of electricity the panel will produce per square foot. Some companies such as Sunpower and Sanyo have emphasized increasing efficiencies, while the majority of panel manufactures have put more effort in lowering their costs. The efficiency of a panel can make a big difference in the overall performance of a system. The chart shown is a bit outdated. Sunpower has since broken the 20% threshold, whereas most standard output panels have remained in the 14-15% range. High efficient panels have the potential  of producing  a great deal more power out of a roof. High efficiency panels are more expensive, but that additional cost is usually offset by the savings they generate by covering more of the electric bill over time. And speaking of time, solar panels do lose efficiency over time. Silicon degrades when exposed to sunlight. Industry standard calculation for this degradation rate is .5%. Sanyo panels tend to degrade a bit more. Sunpower recently claimed that they had enough empiric evidence to calculate their degradation rate at .25%. This degradation rate has impact on ROI projections. Not all solar companies include this degradation factor into their calculations.chart of panel efficiency

System Production

The overall output of the system is determined by the addition factors of azimuth, pitch and shading. In essence – how directly and over what period of time the solar panels are exposed daily to the sun. The more directly and the longer period of time, the better the production. Optimal azimuth or direction of the solar array faces is due south. This allows for the longest exposure to the sun as it tracks across the southern portion of the sky. 35 degree angle is considered optimal in terms of pitch.  If you receive two proposals showing different output numbers, if it is not because the efficiency of the panels, it is because the companies may be using different criteria in estimating output of the system. PVWATTS is the industry standard for estimating output of solar electric systems. You can go to the website yourself and use their simple calculator to double check your results.

Solar Exposure

Annual production is estimated against historical weather data for every region of the country. Estimates  can vary between locations that are as close as a couple hundred miles.  By choosing a location that receives more sun, an estimated output of a system can be favorably  impacted. Once again PVWATTS is a good resource to check to confirm estimated output overtime.

The Tree Factor

Any solar salesperson will tell you that besides the financing,  the two biggest factors preventing people from getting solar are spouses and deciduous trees.  Deciduous trees, it they are in close proximity,  will block the sun  during certain months,  and  spouses , if they are against the project, will work 24/7  to keep panels off their roof.

Shading issues are  location specific and are therefore more difficult to determine. Most states have guidelines for installers of solar to follow to ensure accuracy in calculating the effect of shading. But again any  small adjustment in the shading factor can greatly impact the projected performance of a system.  To save money many solar companies do estimates without visiting the actual site.  Some leasing and PPA companies are now attempting to complete the entire transaction via the internet and phone.  Often shading not calculated at all  into these preliminary  solar estimates. It is a good idea to ask each company how much shade they have calculated into their estimate of production.

 

Overall Cost and Incentives

The overall cost in the case of a purchase is generally straight forward. However there may be differences in the way the incentives the homeowner gets back from the goverment are calculated. Though solar has been around for years now there has been shifting arguments on tax law regarding the order in which incentives can be calculated. Are state incentive calculated before Federal or simultateously?  Is Federal calculated on the gross or net amount paid. In the case of a purchaser, the homeowner is the one responsible for retrieving tax incentives. The solar company does not generally guarantee that you will receive this full payment.  To be prudent check with your accountant. In states where there is a rebate, these rebates are subject to change. Also state rebates and tax incentive change all the time. A contract may state that you are obligated to go ahead with the project even if there is a drop in the rebate price before your project is approved. Make sure your contract is contingent on approval of rebate at the level stated in your contract. In states where there are SRECS or RECs be aware that these are market driven credits and can and will change in value. Work this range of return into your determination.

                Financing Costs

Whenever financing, be aware of the rate, and whether the payments  are fixed or  if there is an escalator. Also find out if there is a penalty for paying off a loan early, and what the penalties are for late payment. Be sure to make note of any other restrictions or liabilities connected to the loan. Make sure to read the entire agreement.

We will discuss issues specifically with leases in a later post.

              Utility Costs

The most important factor in determining the value of going solar is calculating the savings by comparing the cost of solar against the electric rates they offset. Germany for instance has far less sun than anywhere in the US. At the same time they pay twice as much for electricity, therefore the lack of sun and efficiency is offset by the high cost of electricity. The reason solar is most popular in states like California and the east coast ( and Hawaii) is because these are the areas of the country that pay the highest electric rates. The chart to the left is a couple of years old. Hawaiians are not paying close to $.50 cents and New Yorkers are paying over $.21 cents.chart of state elec. rates

 

Anyone who has tried to decipher an electric bill knows that calculating how much you are paying for that electricity is difficult to determine. Also, utilities’ rates vary through out the year. They charge more for electricity in summer than in the winter.

So solar companies need to calculate the annual average cost of a kilowatt hour of electricity to determine “the annual rate” against which they project their annual savings via solar. This calculated utility base rate can vary greatly between solar companies and their proposals depending on how recently they have adjusted their calculator and how they weight the monthly rate averages throughout the year.  Differences in this base number can have a huge impact on the projected savings of a solar electric system over time.  So always make sure projected savings are based on same starting utility rate.

Additionally, each proposal incorporates an inflation number as to how much local electric rate will go up each year for the next 20 years. Generally this calculation ranges from 3-5% per year, but proposals can vary anywhere from 0 % to 8% a year.

The U.S Dept. of Energy sets the average annual growth rate in consumer electricity prices in the U.S. between 1999 and 2009 at 3.2%. Prices do vary by geographic region. It is advised when comparing ROIs between proposals, that the customer confirms that electric rates are calculated with matching inflation rates.

Additional Costs

Most all solar electric installations are “turn key.” In the case of both purchase and lease, there are no additional direct costs. Additional costs that may need to be taken into account would be those items unique to the project. These would include items such as tree trimming or cutting to create better exposure. A new roof, or roof work such as moving of vents. Some towns require additional permits and requirements that may not be covered in the solar purchase agreement. In the case of a purchase, the solar electric system is covered by your homeowners insurance AND THIS MAYBE ALSO THE CASE WITH LEASES AND PPA  AGREEMENTS. There is no tax charged on residential solar. And most all states enforce a moratorium on reassessing property values and subsequent real estate taxes based on the purchase of a solar electric system.

             Proportion of Electric bill Eliminated

Final note.  It is important to take into account how much the solar electric system you are purchasing or leasing is going to eliminate from your electric bill. Though this amount does not strictly impact your ROI, it has a huge impact on your energy savings over time. It is a common debate when choosing between different sized systems. A smaller system with lower cost and a shorter ROI, versus a bigger system with more upfront cost and a longer return.  One may consider the smaller system the better buy. However  If you believe electric rates will continue to climb, and climb in the 3-5% range, then your best strategy and better savings is actually  to eliminate as much of your exposure to your utility and its electric rates. This is even more true with Leases and PPAs, unless your utility uses a tiered billing system, if you lock in a low rate, the bigger the system, the bigger the savings.

Generally a salesperson will want to sell you as big of a system as possible. However companies tend to feature a certain product. If they feature a panel with low efficiency, their system will be smaller than a company offering high efficiency panels. The sales rep. will therefore emphasize the lower cost and downplay the fact that the system will eliminate less of the electric bill. Also, some PPA companies have a “sweetspot;” a system size that makes them the best return. This sweetspot may be determined by incentive caps, ease and speed of installation, or by the dictates of their financial lender. So weigh the financial benefits using the whole picture, not just the cost of the solar electric system itself. Take into account also the cost of your remaining utility bill moving forward.

 

Conclusion

In making a decision on moving forward with a product you will be utilizing for 20 to 30 years, you will want to weigh other factors as well, like the reputation of the company, workmanship, customer service, quality of material used along with other considerations. But if you review these points with each proposal you receive, you should be able to verify the information presented, and be a good position to make a level playing field decision on which solar electric system proposal, from a financial standpoint is truly best for you.

And finally you have to put on these numbers into context:  you have to consider your situation. What makes the most sense for you. Clearly if you cannot take advantage of the tax credits available, or if you do not have the money to invest up front for a solar electric system, then a lease or PPA makes more sense for you. If you do have the money available then you should look at the financial return of going solar vs. other areas you could invest your money. We will examine this in another upcoming post.

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