Welcome to my blog where I discuss money, investing, politics, and anything else import in the world. I find it surprising that most people in their 30s have very little knowledge or interest in these areas. Of course everyone is interested in money, but very few take the time or have the discipline to properly save and invest it for the future or short term. For those who at least have the interest, I'll write about my experiences and methods of investing, and hopefully give you a head start in investing.

Sunday, August 15, 2010

Profiting from Solar Energy on your Roof Part 1

It looks like it is finally possible to make some real money rather quickly by just installing solar panels on your roof. This summer has been hot and sunny to a fault, with very little rain on the east coast. We have only gotten about 3 days of rain since the beginning of June (till now middle of August). So while sitting outside sweating in my yard that has no shade, I had an idea that I should put all this sun to good use. I did a little research and it turns out where I live, NJ, is the most economical state to install solar panels. Bottom line is that the break even point is less than 4 years, and then after you can make about 26% annual return on your investment tax free for another 11 years.

There has not been some technical breakthrough, in fact this is the same solar technology used for 25 years. It is all due to tax breaks and Government programs. I wanted to share this opportunity with everyone interested in making a few dollars. We may as well take advantage of these programs and tax breaks:
  1. 30% tax credit on the cost of the solar system and installation. There used to be a cap on the maximum amount but that was lifted in 2009.
  2. Generation of Solar Renewable Energy Credits (SRECs). In New Jersey, the energy companies are forced to buy these credits back to avoid fines and penalties for not producing enough energy from renewable sources. Kind of like a mini CAP and Trade program.
  3. No sales tax on purchase.
  4. No property tax increase allowed, although the value of the house will increase.
  5. No tax on income generated from solar energy.
The big advantage in NJ is #2 above, the SRECs. A marketplace was created for buying and selling energy credits, which you earn for every 1000 kilowatt hours generated, and is what allows you to break even in under 4 years. It should also be noted that things scale linearly, so no matter how big or small the system, the break even time is the same. The price I am paying is $5 per Watt, whether I get one panel or 100. So ideally you would want to get as large of a system as possible so you can earn as much money as possible.

There is a lot of details both economical and technical about this investment, but I wanted to start with the economics, since this is really the reason to do this. The fact that this it may help the environment is a side effect (and also arguable), but there is no arguing the economics. I plan on a number of blog postings as I go through the process (nothing has been installed yet).

Here are the raw numbers. Each panel produces about 230W and I am looking to put between 30 and 38 of these panels on my back roof facing south. The system will cost between $34,500 and $43,700. Every time I mention those numbers to people, their eyes pop out. However, think of it as an investment. You'll have your money back in four years and continue to earn a return on it for another 11 at roughly 26%. After the 11 years the return will drop to around 6.5%. The reason is you can only earn SRECs in NJ or 15 years. So continuing with the numbers, let's take the larger system. In the first year you will get back immediately 30% in your next tax filing, that's $13,110 (dropping the cost basis to $30,590). In addition, that system will generate about 10 SRECs a year for roughly $6,000. It was also estimated that I would save $2,000 a year on my electrical bills. So in the first year, I have practically paid off half the cost of the system. The remaining 3 years will generate about $24,000 and pay off the remainder. After that, it will continue to generate roughly $8,0oo in income, all tax free.

So now you can see why you would want as a big a system as you have roof space. If I were to double the size of the system, I could double my income. My system should generate about $88,000 profit over the first 15 years.

What you need to get started on this is a good site for installing solar panels: an unshaded area that points southwest. This is what limits you the most. Too much shade and you will not generate as much electricity and your effective cost per Watt will skyrocket. You also need investment capital. There are a number of financing possibilities and you don't need all the money on day 1, but you do need money to make money.

I will continue to blog on this topic as I go through installation and start generating electricity to see how well reality matches my estimates. At this point I am waiting on permits for the installation to begin, but should have it in place by end of August.