Continuing the topic from the last post, I noticed that many solar installers quote the results of a US study published in The Appraisal Journal: for every $1 reduction in annual utility bills, the value of your home increases by about $20. After some digging, I found it online. The original study is “Evidence of Rational Market Valuations for Home Energy Efficiency” (PDF) and it has a follow-up “More Evidence of Rational Market Valuations for Home Energy Efficiency” (PDF).
Now, those studies are pretty dry and I only skimmed them, so I cannot have an educated opinion. I only have a few observations:
- on the bright side, one of the premises of the study seems to be net metering; as we’ve seen, microFIT is much better, albeit for only 20 years
- the studies date to 1998/1999, so they may be outdated
- the studies are US-specific. I don’t know if their premises are applicable to Canada. I saw some references to after-tax mortgage rates and such. As some of you probably know,our southern neighbors can deduct mortgage interest from their taxes. This may or may not make a big difference.
- as the recent couple of years have proved, the US and Canadian real-estate markets can behave differently
If I understand it right, their reasoning seems to be that is that if $1,000/year is NOT spent on energy bills, that amount is available to be spent on a larger mortgage payment (presumably for the increased cost of the house due to energy-related improvements) without any effect to the cost of living. The amount of mortgage that can be supported by those $1,000 depends on mortgage rates. Thus for their 5% long-time average considered, results an improvement of $20000, or a 1:20 ratio.
The study tries to give an answer for the US market in the ’90s. Is the answer valid for 2010 or 2020’s Ontario? I don’t know. I fully agree with their position that “in a rational, competitive market, the value of energy efficiency, like the value of any other housing characteristic, should reflect its marginal value to home buyers.” However, the important question is if the market is really rational. If it is, how come US had such a real-estate bubble?
I didn’t sell my house yet, so I don’t have a first hand experience with buyers. However, when I was one of them and bought my house I didn’t ask for the utility bills. Instead, I thoroughly evaluated the neighborhood, the schools, the nearby shops and so on. But that’s only my limited experience… or maybe inexperience.
Another report, newer (2004) and directly related to the solar PV installations, can be found here. Its target market is California, where the electricity rates are way higher than in Ontario, starting at 11c/kWh and going up to 22c/kWh, thus making the solar power more attractive. Even though some parts (especially the financial ones) will certainly not apply to Ontario, I recommend it to anyone considering solar PV. In only 4 pages, the presentation touches many facets of the problem and it’s not trying to hide under the carpet the uncomfortable questions. It even has a reference to an article on the Toronto market. Here’s an interesting quote: “Toronto real estate appraiser Alan Wood finds that while homeowners are willing to invest solar, most are unwilling to purchase a more expensive home custom-built for this purpose. Wood further states that market appeal and resale value are lowered when the energy-conserving home looks noticeably different from most others”.
However, it may be one man’s opinion only, and it’s surely dated. It only shows I’m not the only one considering the issue and having the same concerns. In the end, you should decide for yourself. Don’t let me or anyone else make the decision for you! And, even if you don’t read the studies, at least forward them to your real-estate agent when you’ll sell your house. Then hope your buyer is rational 
SearchingForGreen
If you intend to live in your present house for the rest of your life, life is a little simpler. But for the rest of us, who sooner or later may need to sell and move, a new challenge awaits. What influence will have the solar panels on your attempt to sell the house?
Let’s note from the start that under microFIT terms it is possible to transfer the contract to the new homeowner. There may be some complications if the original contract is closed under a corporation name (there are some tax implications that favor this approach) but even in that case it’s probably possible.
“Energy conservation and renewable generation adds value to a home! You’ll get that value back when you’ll sell your house!”. Or at least that’s the song everybody is singing… Even my friends at OurPower seem to believe this so it has to be true, since they are not trying to sell me anything! But I think that this is an exaggeration, at least for the next 5-10 years.
First of all, how can anyone be so sure, if there is almost no precedent to back this assertion? Do you know anyone who bought a house sporting solar panels? If you do, let me know their experience, I’m really interested. Until then, the claim is just hot air.
Second: as most home sellers know, in normal situations most improvements never return their whole cost at sale time. There are even tables in home selling books and magazines detailing which improvements are worth it and which not. Their purpose is to make the house more attractive so the number of potential buyers is higher. Kitchen cabinets, hardwood flooring, new bathroom? Maybe. Solar panels? Nothing fancy about them, and some may even dislike the look of your roof!
Third: your regular buyers are not necessary technology-aware. Do you think they will want to bother with a new system just for the sake of it? Personally, I think that simply mentioning terms like “solar panels” and “inverter” will put them off. Suddenly, you mission will be to sell the house AND the solar panels. While it’s not exactly the same thing and location, there is at least a report of a person having a hard time selling his house, presumably because of the geothermal heat pump he had installed. And Fine Homebuilding Magazine has a recent article suggesting the same pattern.
Of course, things can change dramatically in a few years if the solar panels will be installed on a significant proportion of the houses. Until then, you can answer just for yourself: if tomorrow you would buy another house, what would you prefer? The regular one, or its identical twin which is $20,000 more but gives you an income stream for the next 15 or 20 years? Even better, ask that question to cousin Joe, aunt Maggie or even your spouse :-). They are likely to be less enthusiastic than you about technology, so closer to the mindset of the Average Joe, your potential house buyer.
SearchingForGreen
Sorry, the offer just expired…. In fact, to be honest, there was none :-). It was just a simple idea: what if the the kind government would fully subsidize the installation of my 3kW roof solar system, so I would get it basically for free? The condition would probably be to keep the panels on the roof for 20 years, and to sell all the electricity back to the grid for the current 12c/kWh rate.
The only things I would pay would be the ongoing insurance and meter fee. Are you curious about the result? $1772 in after-tax profit after the first inverter change, in year 12! This means $148/year! It’s still money, but would you let someone drill holes into your roof for this amount?
Now we have a sobering perspective of the solar panels technology today. They are not sustainable by themselves at such a low scale. And, unexpectedly, that’s NOT because they’re too expensive. Mass production or technological advances might eventually lower the price. Unfortunately, the real enemy is a lot harder to defeat: it’s the methods of generating cheaper electricity.
So the main culprit is the low “density” of the solar power. In a normal year, my 3kW solar panels can generate:
3kW x 1200 kWh/kW = 3600 kWh
Compare this with our yearly electricity usage of around 4200 kWh, and you can see that we cannot generate enough solar electricity for ourselves. And we are far from being the average Ontario household, which uses 1000 kWh/month!
SearchingForGreen
There are two stages in a solar system’s life. By far, the most productive one seems to be the first 20 years, when the microFIT contract is in place. The second stage starts after 20 years, when your utility will probably use net metering, and the electricity you generate will be deducted from what you’re using.
We saw in a previous post that a 3kW system returns barely 1% more than inflation during the microFIT contract. So that number alone is not enough to make me jump and spend my hard earned money. But maybe the “net metering” years hold the key?
Strictly from a technical standpoint, the panels should work longer than 20 years. I’ve read somewhere about some panels being in service for 40 years! You may need to replace the inverter every 10 to 15 years, though. Let’s consider 12 years as an average. Electronics go cheaper and cheaper every day. But if what happened in the consumer electronics industry is any indication, their quality will also decrease, so in the end you will need to replace the cheaper inverter(s) more often. All in all, it’ll probably even out, so it will be the same as replacing a current generation inverter every 12 years.
The main problem with any prediction is that we don’t have a reliable crystal ball. It’s hard to predict with any degree of accuracy what the price of electricity will be in 2030. But we can at least run some scenarios. The Switch Kingston people, who developed the spreadsheet we used to make the detailed calculations for ROI, use 3% as the annual predicted increase in electricity price. In a normal world this should be enough, because it’s 50% higher than the long-term inflation (2%). If we accept this increase rate as reasonable, the spreadsheet will show the results: in the 21st year, the solar profit before tax will be $264(cell Y28) . As some of us will probably be retired at that time and earn a lot less money than today, we may have a smaller marginal tax rate than the one considered. Even if we don’t pay tax at all, that’s only $264/year! Peanuts… The cause is obvious: the income takes a big hit because the microFIT price is suddenly replaced with the then-current rates. The panels are showing their age (their efficiency decreases by 0.5%/year) and the costs (meter fee and insurance) are slowly but steadily inching up in step with inflation.
The result is clearly shown in the Graph sheet of the spreadsheet. You can see a nice saw-tooth shape after year 20: the cash slowly accumulates, only to be spent every 12 years on a replacement inverter. The real gain is the difference between two successive peaks: $18,548 in year 36 compared to $15.949 in year 24. This means $2599 in 12 years, or $216/year before tax. But we should also consider that the calculated amounts are in future dollars. At an average inflation rate of 2%, $1 today translates to almost $1.5 in 20 years and to $2.2 in 40 years.
Some may note that the the spreadsheet uses the current price of 9.3c/kWh (cell Cash Flow:E5) as a base. A more accurate value, including all the fees that add on top of electricity price itself, should be 12c/kWh. But, unfortunately, that cell is protected and cannot be altered.
Another observation is that the 3% yearly increase in electricity rates may be too low. Ontario is known to have relatively low energy prices, partly because the price is regulated. A 2008 OCAA study considers the hidden subventions to be 35%. It’s not unreasonably to consider that once all the subventions are gone, the electricity price may increase close to the inflation rate. 2% translates to 50% in 20 years, and 3% compounds to 80%. So it may well be that the 3% includes the subvention elimination. But I agree that it may not include the effect of the FIT program on the electricity rates
Last thing to note is that in our model the insurance increases by the inflation rate. It may be possible to reduce the coverage or even remove the panels completely from the insurance policy after 20 years. They don’t value too much anyway, why should we insure them? But what if the wiring, 20+ years old by then, somehow starts a fire?
One thing we didn’t include in our model is the roof repairs. When you want to do that, you may need to call the solar installers to remove the panels and the racks, and then install them back after reshingling. Today’s quotes for this operation range between $600 and $2000. But again, maybe in 20 years any roofer will be able to do this operation for a much smaller amount.
Of course, none of the above is a sure thing. They are just (educated?) guesses. I’m not in the energy business, and I think even those who are cannot safely predict the future over such a long time. But at least for me, there’s one thing to take home: unless something catastrophic or revolutionary happens on the electricity market, a 3kW solar system cannot stand too well on its own feet. You may want them as a hedge for the unlikely energy market catastrophic jump. Myself, I’m not interested in the bet.
And an important thing to mention, before anyone asks: 10 kW system is a totally different story. That would continue making money for its owner.
SearchingForGreen