Let me stress from the beginning that I’m not a financial adviser and as such, this post is only for your entertainment and thought stimulation :-). I may be as well totally wrong in what I’m writing today, so ask your accountant or financial adviser for professional help. This is not financial advice!
microFIT installations are touted to be a good investment for regular Ontario people. But I think that they are not! At least not for small 3kW systems. Even for a 10 kW solar system, there are better investments with the same or lower degree of risk. I know that what I’ve just written may seem like heresy. I may even end burned by the Grand Inquisitor of the Green Church :-). But I have some numbers on my side.
In the previous post we saw that detailed calculations show a 2.97% ROI for my small 3kW solar system. That’s just 1% over the average long-term inflation rate. So much for the “double your money in 20 years” claim! And, sadly, there’s not much room to improve the ROI once the panels are on your roof: the utility account fee it’s already a nominal amount, the insurance is unlikely to drop, and the taxes are a certainty! On the other side, if you are unlucky small maintenance may be needed over 20 years, and will quickly erode the profit. So, why should I bother for such a minuscule return?
Here is where I will take aim at most of the solar contractors. After trying to fool us with superficial calculations showing higher than real ROI using the “simplified” method, they usually go on and compare those returns with the current short-term GIC rates, usually around 1%. Never mind that we are currently in a time of historical low interest rates! It doesn’t matter that the 5 year GICs are around 3% today (pre-tax, I admit!) and you get better liquidity in case you need the money! And it doesn’t matter to them either that it’s a lot easier to just go online and buy some 4.25% 10 year Ontario Saving Bonds. Yes, those are not after-tax money, but I can keep them in my never-used TFSA. Or, even better, I can apply the novel idea of prepaying my mortgage and get a 5.59% (yes, it hurts!) tax-free return. But if you knew this, you would quickly become an ex-potential-customer.
What I really don’t understand is how come nobody until now realized that small roof solar panels are such a bad investment. Or maybe they silently did and voted with their money? That could explain why the average application under microFIT is 9.19 kW. And since there are not many roofs properly oriented and large enough to install 10 kW systems, I bet most of them are ground-mounted.
Anyway, I don’t think I’m the brightest person around, by all means! So please, if you find a flaw in my math, in the Switch Kingston spreadsheet or in the assumptions, let me know in the comments. I will be forever grateful.
Misinformation is at home when looking at the financial calculations in almost any offer you will get, to such an extent that you shouldn’t trust any seller with it! One of the solar companies has a special section describing some of the tricks that can be played with numbers, but there are more. So I chose to do my own calculations, as described in a previous post.
Now I will compare the calculations for my 3kW system and then for a 10 kW system, the maximum allowable under the microFIT rules. I suspect that ROI is better for larger installations, because there are certain parts of the system which are only loosely correlated with the size: design, installation (to a certain degree), permits and even the inverter in some cases.
I will first consider the simple return calculation, corrected for a system cost of $7.8/W. You can download the simple return spreadsheet and check how it’s done. Remember, the simplified return doesn’t consider any of the operational costs (meter fee, insurance, etc) and neither the taxes. It’s an theoretical maximum return.
For the detailed return, I used the Switch Kingston spreadsheet with modified assumptions described in another post. Here are the results :
|Case||Investmentvalue [$]||After taxprofit [$]||ROI [%]||Profit/Investment ratio|
|3 kW, detailed||26842||15968||2.97||0.59|
|10 kW simple||88140||104340||5.92||1.18|
|10 kW detailed||
The first thing to notice is the obvious limitation of the simplified model. Both the 3kW and 10kW systems have the same ROI, 5.92%! However, when using the more realistic detailed model, the ROI is 8% better for the larger one. That is what we expected and it makes a lot of sense.
But what’s really important in the above table is how large is the gap between the results of the two models in the case of a small system. My 3kW panels will return only 2.95%, basically only 1% more than inflation. Even the 10kW system will be only at 3.2%. This compares as almost equal or lower than some government bonds or long-term GICs. While I readily admit that the latter are not tax-free, they can potentially become so if they’re held in a TFSA tax-free account. Solar panels can not.
Update: proving once more that you shouldn’t trust anyone with your own financial calculations, I have to confess that I somehow managed to mess the numbers on the 10kW detailed calculation in the above table. The after tax profit is $56663 (not $75359 as previously stated), so the ROI is 3.20% instead of 4.26%. The table is now updated.
The previous post left us in doubt. Is it really possible for the detailed calculation to show such a diminished return from our investment? To search for the answer, let’s look where the difference between the simplified and the detailed calculations lays. I also did the detailed calculation for a set of modified assumptions, arguably better adapted for my location (Toronto, Ontario) and for a small system:
|Cell||Description||Default value||Modified value||Notes|
|D6||System cost||$8/W||$7.8/W||this is the best offer I got; HST is on top of it!|
|D7||Utility connection fee||$1147||$400||Toronto Hydro is still cheap on this, compared to other utilities|
|D23||Inverter replacement||$2000||$1000||Electronics become cheaper and cheaper, and in 10 or 15 years the inverter may well cost only $1000.|
|D30||Income tax (marginal)||35%||31.5%||31.15% is probably a better value, being the marginal tax rate for incomes between $40,970 and $65,345|
Here are the results for the three calculations:
|Simplified model||Detailed model||Detailed model with
Some important observations after looking at the results of the simplified vs. detailed model:
- over 20 years, apparently small values add to significant amounts: the typical 0.5% decrease in output power amounts to almost $3000, a small utility fee of $5.25/months adds to $1730, and a minor $120/year for insurance adds to $2900
- maintainance, usually quickly dismissed as minor (“You’ll probably only have to replace the inverter after 15 years” is a typical statement) , eats a significant chunk of the income ($2660 is 4.1% of $55082)
- taxes are extremely important, as they consume 12.4% of the income.
- we should note that the costs will go up with the inflation, while the income is not indexed
Modifying the assumptions for a more favorable case squeezes only $3000 more in net profit. Even so, we are still far away from the results of the simplified calculation, as the profit is approximately cut in half! And don’t forget, none of the above models does consider financing. Which, obviously, will take away a big part of the already small profit!
The automatic question is if the solar investment is really profitable, considering these new results. But that’s for [another time].
In my admittedly limited experience, the financial calculations for the same roof vary wildly from one offer to the next, even if the price itself is almost the same. It looked fishy to me, so I started looking for a way to do the math myself.
In the beginning, I used a simple method that anyone can understand. Let’s consider the simplest case, when we don’t need no financing and pay everything cash. I know it’s a very unlikely situation for most of us, but bear with me for a while.
We start with the installed power calculated as described in the previous post. In my case, that’s 3 kW. Historical solar data for Southern Ontario (specifically Toronto), combined with the current efficiency of the panels and inverters are all compounded in a single number: we can get around 1160 kWh/year for every 1kW of solar panels. For reasons that will be obvious a little bit later, I chose to use a slightly increased value, 1200 kWh/kW/year. So the yearly value of the electricity my panels will generate is:
3kW x 1200 kWh/kW x $0.802 = $2887.2
For the 20 years contract, this amounts to the pretty amount of:
20 x 2,887.2 = $57,744
To achieve this, we need the panels. Generally, the solar systems are installed for around $8/W+HST. So our 3kW system will cost:
3000W x $8 X 1.13 = $27,120
The resulting net profit is:
$57,744 (the income) – $27,120 (the initial investment) = $30,624
Now we can calculate the return on investment, ROI:
ROI = profit / investment /20 years = $30,624/$27120/20 = 0.0564 = 5.64%
You can download the simple spreadsheet I’m using and play with the input data to see how it works for your system.
Return on Investment is extremely dear to all the solar contractors, since it potentially tells the “efficiency” of your investment. Some go to lengths and even to deception to assure that their offers will have a higher ROI than any other competitor. The normal ROI you can get with solar installs is around 5% when no financing is involved, maybe a little higher for larger installation. However, I’ve seen offers quoting ROI up to 14%. That’s why I would advise you to disregard it. Yes, you heard me right, TOTALLY DISREGARD IT!
Now, you will agree that this is a simplistic model, good only for a first evaluation. It doesn’t take into account a few factors:
- as the panels age, their output decreases. Generally it’s just 0.5%/year, but over 20 years it accumulates to real money
- the are some recurring costs for the system: Hydro connection fee ($5.25/month, or $63/year) and increased insurance premiums ($130/year, in my case)
- the above recurring costs are potentially affected by inflation, but the income is not indexed in any way
- the inverter life is around 10-15 years, so it will need replacement during the duration of the microFIT contract
- you will earn some “solar income”, and CRA wants its pound of flesh:(; there are income taxes to be paid
Obviously, we’ll need a sharper tool to model all these. Fortunately, the kind people from SwitchKingston have done most of the job and provided a free spreadsheet for us to use. Their comprehensive model will even take depreciation into account!
Now download the file on your computer and let’s do a test! Open the file, go to the Overview sheet and enter the installed power of your system in cell D6 (System cost). Let’s use my case, 3kW. We’ll use the default values provided for the rest of the input data:
|D6||System cost||The formula in this cell is based on $8/W or $8000/kW of installed power. It is be possible to get better prices, but for simplicity I preferred to keep the default value. If you want, go ahead and modify the formula for your case.|
|D7||Utility connection fee||$1147||This is on the high side; in Toronto it’s probably around $400, if you don’t need a building permit. Again, I kept the default just for simplicity.|
|D11||Annual performance degradation||0.5%||Typical value for most solar panel manufacturers|
|D16||Energy production||1200 kWh/kW/year||this is on the high side, but reasonable; now you can understand that we used 1200 in our simplified calculation just to be able to compare the two models|
|D20||Utility account fee||$5.25/month||This will probably be indexed over time, at least by the inflation rate|
|D21||Insurance||0.4%||This depends on the insurer. Some don’t increase their premiums at all, but personally I don’t think it will continue for long.|
|D23||Inverter replacement||$2000||This is on the high side. Electronics are cheaper and cheaper, and in 10 or 15 years the inverter will probably cost $1000. Again, I kept the default for simplicity.|
|D30||Income tax (marginal)||35%||If the solar panels are your only income, the marginal tax rate may be a lot lower lower. But if this is just a side income on top of your job income, 31.15% is probably a good value. See TaxTips.ca for your marginal rate.|
|D39||Inflation rate||2%||arguably, a reasonable long-term value; OPA uses 2.25% in their calculations|
Now go on and analyze at the results for a few minutes. The most important thing for me is in cell X36: the cash position after 20 years is $14,170 $13,024 (while writing this post, I discovered a small error in the spreadsheet; since I’m not sure if/when it will be fixed, I will leave both the wrong and corrected results here). This is the after-tax money you will get from your panels. Quite a difference from the $30,624 profit resulted from the simplified calculations, don’t you think?
Suddenly, my solar project is in jeopardy! I don’t know about you, but investing $27,000+ to get a profit of $13,024 over 20 years doesn’t seem such a good idea to me! And consider that this is the best case, with no financing needed and no shading on my panels to reduce the output.
But wait! This couldn’t be right! If this is true, why do people rush to install solar panels on their roof? And how come nobody pressed the alarm button earlier? Am I missing anything? And, most important, where did $17,600 in profit vanish between the simplified ($30,624) and the more comprehensive ($13,024) evaluations? We’ll see in the next post.