Smart Money

Are Solar Panels a Good Investment?

Rising energy costs and a desire to leave a smaller carbon footprint have many homeowners considering solar panels. What do you need to consider before you invest in solar?

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The value of solar panels seems to ebb and flow. When energy prices are high, or there is a significant advance in solar panel technology, public interest increases. But when energy costs are quiet and not much is happening on the solar front, interest softens.

Are solar panels a good investment? The answer to that question is more involved than you might think. There are several moving parts to the solar panel question, so let’s take a look at each and how it might impact your decision to go solar.

Taking a 360 view of solar panels is important because they are a true long-term investment. Much like investing in the stock of a company, it’s not a decision that should be made on a whim.

What Are the Benefits of Solar Panels?

There are three primary benefits to solar panels:

Goodbye Electric Utility Bills!

This is probably the most compelling reason to install solar panels for many people because they’re ultimately designed to eliminate your electric bill. If your average monthly bill is $200, you’ll save $2,400 per year by pulling the plug on your electric utility.

That won’t happen immediately, as there are substantial upfront costs to installing solar panels. But once you recover that initial investment, it will be smooth sailing - financially speaking.

Learn More: Cool Ways to Save on Electricity

Lowering Your Carbon Footprint

Many people are concerned with the impact of energy consumption on the environment. After all, generating electric power by burning fossil fuels is not without an environmental cost. Fossil fuels currently account for 60% of the power generation in the U.S. Nuclear power provides 20%, which holds the potential for a deadly nuclear accident.

By shifting your power source to solar panels, you’ll eliminate your role in those not-insubstantial environmental concerns. Along with driving an electric car, getting your electric power from solar panels may be the most environmentally friendly practice you can engage in.

Declaring Your Own Energy Independence

It seems every few years there’s some sort of energy emergency or disruption that causes the cost of energy to rise dramatically. Prices may settle down after the crisis, but they never go quite as low as they were before.

If you’re getting your electricity from solar panels, you’ll view the next energy disruption more as a spectator than as a participant. Since you’ll no longer be buying electricity from an electric utility, you’ll be unaffected by the crisis.

How Much Does It Cost to Install Solar Panels?

Prices for solar panels have come down in the past decade or so, but that doesn’t mean they’re inexpensive. In fact, it can cost between $15,000 and $25,000 for an average 5kW (kilowatt) residential system. That’s why you need to consider the costs and benefits of solar panels before taking the plunge.

Fortunately, you can get help with the purchase. The IRS provides a generous tax credit for the installation of solar panels and other energy-efficient equipment.

For 2021, this credit is 26% of the cost of the system. This will provide a credit of $5,200 on a $20,000 solar panel system, reducing the effective cost to $14,800. (After 2021, the credit drops to 22% through 2024.)

You may also be able to get financing from the solar panel provider or even from your bank or credit union. Alternatively, you can also get financing through a personal loan. They’re unsecured loans that can be used for just about any purpose. You can borrow up to $40,000 and repay the loan somewhere between three and seven years. That will match up nicely with the recovery cost of your solar panel investment (see Your Use of Electricity in the next section).

Examples of personal loan lenders worth considering are Monevo, Credible, and Prosper.

Financing will spread the cost of acquiring the solar panel system over several years. And once the loan is paid, you’ll begin realizing substantial energy savings.

Factors to Consider When Deciding on Solar Panels

Since installing solar panels is a major project with a high cost, you’ll need to carefully consider all aspects of your purchase.

Your Use of Electricity

Naturally, solar panels will be a smarter move if you consume a large amount of electricity. But if your bills are minimal - under $100 per month - the savings may not justify the upfront cost.

You’ll need to perform a personal cost recovery calculation. It will look something like this:

Solar panel cost, divided by your average monthly electric bill = the number of months it will take to recover your investment

Let’s work with an example.

The solar panel system you’re looking at would cost $20,000. After the 26% IRS tax credit, the net cost will be $14,800. Your average monthly electric bill is $200. The calculation will look like this:

$14,800 divided by $200 = 74 months

if you’re living in your forever home, that’s an investment you might want to make.

But let’s say your electric bill averages only $100 per month, how will it affect your decision?

Lets take a look:

$14,800 divided by $100 = 148 months

148 months is more than 12 years. Given that a lot can happen in 12 years - you might move - you might decide against investing in solar panels.

The Abundance or Scarcity of Sunlight Where You Live

It’s a reality that sunshine is more available in some parts of the country than it is in others. For example, California, the Southwest, and the Southeast receive abundant sunshine. By contrast, less sunlight falls on the Northeast and Northwest.

But apart from geography, the physical location of your home is also a factor. If your home exists in the shadow of a mountain that blocks sunshine much of the day, you won’t get much benefit from solar panels.

The situation will be similar if you live in a dense forest, or your home is surrounded by high trees. Solar panels are, after all, located on the roof of your home. Tall trees will block sunlight and dramatically reduce the effectiveness of the panels.

The position of your home is also important. If the broad side of your home faces east or west, sunlight will be maximized. But if it faces north or south, the roof will get less exposure to sunlight.

You’ll need to evaluate all these situations in making your determination on whether or not to invest in solar panels.

How Long You Expect to Live in Your Home

This gets back to the cost recovery of solar panels. If it will take you six years to recover the cost of your investment, and you expect to be in the home for 15 or 20 years, the decision may be a no-brainer.

At the opposite end of the spectrum, if you expect to sell and move in five years, you won’t recover the cost of the panels. In that case, investing in solar panels will not make any sense.

The Aesthetics of Solar Panels

For better or worse, solar panels will impact the look of your home. They sit on your rooftop and don’t typically blend in. That means the panels look will be distinct and affect the appearance of the home.

This is a soft cost of investing in solar panels. It’s hard to judge the impact until the panels are actually installed and you can see how they look. While it may be possible to have the panels installed only on the backside of your home - avoiding their appearance from the front of the home - that might limit their energy gathering capability. That’s why you typically see homes with solar panels on both sides of the roof.

It may be difficult to do, but you may also want to consider how your neighbors will judge the aesthetics of your solar panels. Neighbors you once counted as friends may think differently of you after the panels are installed. They may not share your enthusiasm or the tangible benefits and see them primarily as an eyesore.

But that will depend on how common solar panels are in your neighborhood. If there are several homes that already have them installed, it may not be an issue. But if you’re the first on the block to take the plunge, it could become an issue.

It may not be fair to say, but neighbors tend to get emotional about anything they think may impact the value of their own homes. If they think your solar panels may hurt their property values, it could cause a change in your relationship.

For that reason, you might consider surveying your immediate neighbors to get their opinions on installing solar panels. For some, it may come as a welcome push for them to add solar panels. But for others, it could be a point of contention.

You’ll need to determine how important this factor is in your own decision.

The Impact on the Market Value of Your Home

This factor can go either way. If solar panels are common where you live, or if they become more so in the future, they could enhance the market value of your home. After all, who wouldn’t want a costly, energy-saving system built into the home and already paid for?

The situation is more complicated if solar panels are not common in your community. Prospective buyers may see them as an eyesore, or at least an oddity. That may reduce both the number of people willing to make an offer on your home, as well as the dollar amount of those offers.

There’s still another X factor in the mix. Though solar panels have become more common in recent years, they hardly existed 20 years ago. There’s no way to know if they’ll continue gaining in popularity going forward.

Technologies change, and a new and less costly electricity source could be developed in the coming years. It’s also not beyond consideration that a collapse in energy prices - which has happened in the past - could make solar panels less desirable even in areas where they’re now fairly common.

Solar Panel Replacement

Much like a furnace, solar panels have a long shelf life. They can last between 15 to 25 years and often come with a warranty.

But what happens if you’re in your home for more than 15 to 20 years, and the panels need to be replaced?

You’ll essentially be back at square one, evaluating the wisdom of the investment as if you were doing it for the first time.

But by then there may be changes in the basic considerations. For example, after 20 years in the home, you may not plan to stay for 20 more years. On the flip side, it’s entirely possible that solar panel prices will fall dramatically in the years ahead. The system that costs you $20,000 to install the first time may be no more than $5,000 to replace.

Final Thoughts

Solar panels can be a good investment, but there are specific factors that will make that true. First, make sure you’ll be living in the home long enough to recover the cost of the system and enjoy many years of free electricity afterward.

Second, do some homework on the availability of sunlight in your area and available to your specific home. Third, evaluate your electricity consumption. If your electric bills are high, the recovery on solar panels will be shorter.

And if it matters to you, also consider the impact solar panels may have on the future value of your home.

None of these considerations are easy to reliably project today, but you’ll have to have at least some loose idea to support your decision. It is, after all, a major investment. And those should never be taken lightly.

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