One of the things my previous analysis revealed was that the monetary potential of the solar PV system will sharply decrease once the microFIT contract ends in 20 years from now. The generated electricity value is so low that the income barely covers the expenses and the profit is a few thousand dollars over the following 20 years. That’s why I tend to totally discount this period and consider the solar system as a business with a limited lifetime of 20 years. I prefer to be conservative in my estimates. If it will be profitable for longer than that, even better! But even then, the profit is peanuts.
Of course this prediction depends on the future price of electricity. Which is open to debate, and my guess is as good as the next person’s. But I’ve always wondered if the 3% yearly increase rate used in the Switch Ontario spreadsheet is based on a real study, and whether it is too aggressive or too conservative. Mind you, they are using 2% for the inflation rate, which means the electricity will increase in price more than the rest of the things included in CPI.
Today I had the confirmation that this number was not far off. According to some news stories quoting the Energy Minister Brad Duguid, the electricity price is going to double in 20 years, which is equivalent to a 3.5% yearly increase. Now almost everybody is unhappy with that, but at least I can find something positive in it: it confirms one of the variables in the model. Call it a weird scientist satisfaction :-). And I hope this will put the emphasis on conservation, as I consider would be normal.
Certainly, given the government’s track record of spending more that the original plans, the percent can be higher. But as for now, I’ll run with it.
Let me stress from the beginning that I’m not an accountant and as such, this post is only for your entertainment and thought stimulation :-). So ask your accountant for professional help.
Normally, a sizable 13% chunk of the price we’ll pay on the microFIT solar system installation goes to the government coffers. For a $26,000 install, HST is $3,380 resulting in a final bill of $29,380. The good news is that it’s possible to get the HST money back. The bad news: you’ll have to work a little for it.
Basically, HST is an added value tax. Usually, when a manufacturer or merchant buys some goods or services, they pay HST to their suppliers. At their turn, the merchants add HST to the price of what they’re selling. Most of the time, the HST collected from the sales is greater than the HST paid for all the purchases. The difference is government’s money and it has to be remitted to them at regular intervals. If you do the math the HST to be paid to the government is 13% applied to the difference between all the sales and all the purchases, hence the European naming of the similar tax as VAT (Value Added Tax).
This works as described for a regular business, but for our microFIT solar panel installation there is something important to note. The bulk of our costs are at the beginning of the activity, while the income will come in gradually over a long period of time. What this means from the HST standpoint is that we pay a $3380 as HST at install time, and then slowly collect $363 per year in HST from our electricity sales to OPA. Because we collect less HST than we pay in the first year, we will not have to remit any HST to the government. Even better, we will get a cheque for almost all of the HST we initial paid to the solar contractor!
In practical terms, it’s almost the same as if you don’t have to pay HST for your system in the first place! If using borrowed money, you may quickly pay back a part of the loan with the money from your first HST cheque, so you end up paying just $26,000 for my above example.
This money is not totally free, however. The government requires some paperwork to see how you calculate the amount it is owed, so you’ll have to spend a little time to fill the requested forms. From what I’ve read on a forum, for a simple thing as a solar system it may take 10 minutes. But you’ll have to keep your books in order and remit the required paperwork and HST money in time, because mistakes may be costly. Or, if you like such tasks as much as a root canal, better ask your accountant to do it on your behalf and be prepared to pay the price.
If you want to get the HST money I would recommend the following steps:
- read and understand the information on the CRA GST/HST page, and especially the HST guide
- set an appointment to your accountant, because you’ll probably want some professional advice. Usually only businesses register for HST, but it’s possible for a simple person to register if they want to. Also keep in mind that you are not required to register for HST (only businesses or persons with sales larger than $30,000/quarter are), but instead you want to do it.
- decide if you want to do the HST reporting yearly or quarterly (more work to do in the future, but you get your refund cheque quicker). It may be even possible to have quarterly reports in the until you get your refund and then switch to yearly reporting. Ask your accountant!
- decide if you want to file the HST returns yourself, or ask your accountant to do it for you (he may charge you for this, so ask first!)
- register for HST on the CRA website
- inform OPA that you are registered for HST, so they know to add HST on the microFIT electricity generation invoices
Your first HST return will be the one where you will get a government refund and as a result they want to make sure you know the rules. The HST guide indicates that this also means that your first return will be audited, so keep you books in order!
In the end, by registering for HST your cashflow and ROI will improve significantly. In my opinion this overcomes the small price of regularly filing the HST return.
In my grandparents’ days, one would have to take care himself about his dwelling. But in today’s world, people usually pass some of the risks of day to day living to somebody else. That’s why we have so many types of insurance policies: home insurance, car insurance, life insurance and even pet insurance :-). Some forms of insurance are even mandatory by law (e.g. car) while others are mandatory de facto (house insurance, if you have a mortgage). So we may say that whatever your house, these days insurance is a must.
Sitting on the roof, the solar panels are at the mercy of the elements. However, they have some warranty which can be called if anything goes wrong. But adding solar panels on your roof adds some risks to the house itself:
- water leaks: obviously, a roof with some holes in it is more likely to leak than one without holes, no matter what the installers do to prevent leaks. Flashing will certainly reduce this risk, but few installers are using it because of costs and increased install time.
- hail: from my research, there seems that there are no known cases of damage to the panels because of this. However, my insurer mentioned it. And one of the solar panels manufacturers is advertising the fact that they are using thicker glass than the others. Why, if it’s no danger?
- lightning: the panels on the roof should be properly grounded, but the effect of this is rising the “ground level” to the top of your roof, making it a slightly more likely target for lightnings. In a way, your panels will somehow protect your neighbor’s houses against lightnings. But in the admittedly improbable case that the panels take a direct hit, you cannot expect that nothing will break.
- wind: again, it’s obvious that there is some wind load on the panels. It shouldn’t be a problem if they are properly installed, but there is some risk, nevertheless.
- third party damages: if by any chance one of your panels becomes wind-borne in a century-rare storm (remember the one that hit Vaughan a couple of years ago?), it may land anywhere, like on your neighbor’s Mercedes rooftop. Or worse, it may injure someone.
To mitigate these risks you normally add the panels on your home insurance. If you already have an existing insurance policy, it may be even mandatory to call your insurer and let them know about the panels, otherwise your policy may become invalid. I advise you to ask you insurer for details!
In any case, adding the panels to your policy will usually bring a premium increase. From the stories I’ve heard and read, the quotes for this increase are all over the map: some companies charge nothing, some charge based on the solar system value, others based on the perceived risk increase, and finally some even refuse to insure your house if you install them. Personally, I don’t think the companies who refuse to insure your house will continue to do it for long. Most likely, they didn’t update their procedures. Probably neither did those who add no extra premium… the panels increase the risk for the insurers, and they will be quickly to adapt. It’s seems to me that this segment of the industry is still in growth pains. This is also clear from my experience.
First take: I called my insurer and the person on the other end of the line took only 2 minutes to give me a quote. I suppose their computers were already setup for such inquiries, and I was amazed. They asked specific questions, like the number of panels and their power, and immediately quoted the increase: $130/year, probably with HST on top of it, forgot to ask. I expected a much lower amount. After all, the premium it’s around $400 for the whole house, which means 0.2% of the replacement value! Apparently, although the solar system costs $26,000, the increase in the “insurable value” of the house is $60,000. To me, this means that from their point of view the added risks are higher than for the rest of the house. I can somehow understand that the panels increase the risks more than their own value, since they can produce damages to other parts of the house.
Second take: after a while, reading some experiences other people had with different insurers, I thought to call again. Another agent, another story! This time, he had to call the underwriter for the answer. After almost a month, I got my quote: $55/year for the same panels, which calculates to around 0.2%, basically the same as for the rest of the house. Just to note, this is also the default value in the Switch Kingston spreadsheet.
What’s to take from this experience? That you cannot be sure of anything until you see it on the paper! So make sure to get something in writing. At least, they may think twice about it…
The nice people at Switch Kingston were quick to fix the two bugs I reported in their useful spreadsheet. So if you’re using it, make sure to download the last version (September 2010) and check your results. Depending on your specific case, you may get a significant difference in Cash Position after 20 years (cell X36).