Quote:
Originally Posted by MN Renovator
It wouldn't be 1.5x the return.
I considered this when I bought my solar system and mine doesn't beat the stock market.
If I consider a conservative average annual return for the total US stock market to be about 7%, that means the value would double every 10 years.
If I figure a lower cost solar system is $10,000(mine was slightly more) after the tax credit, ignore the delay in getting the tax credit money back, and consider the idea that the money put into the solar system is sunk until it comes back out, this is what my math looked like based on my own expected payback.
Solar installed(figuring 8 year payback, but mine is actually over 10) -$10,000
$-8750 Year 1
$-7500
$-6250
$-5000
$-3750
$-2500
$-1250
$0 Year 8
$1250
$2500 Year 10
$8750 Year 15
$10000 Year 16 (Took 16 years to double)
$15000 Year 20
$27500 Year 30
Of course, this isn't accounting for changes in electricity cost or net metering factors specific to your region or electric provider.
Stock market starting with $10,000 with 7% annual return
$10,700 Year 1
$14,025 5
$19,671 10
$27590 15
$38696 20
$76122 30
Compounding returns is powerful. You could take the returns you get from the solar system and invest those in the stock market, but even if you do that, you still need to consider that the price paid for the system is not going to be in the stock market and you've lost the opportunity cost for that initial potential principal. The idea that the original poster is about to otherwise lose the cash and is willing to DIY the install, I'd say that it's still a good move to do.
For what it's worth, the financial component of solar was a factor but I still wanted the solar and I figured it was better than spending the money on a couch, a car, or some other depreciating asset. It is fun for me to look my eGauge power graphs and see the power the system is generating and what the house is using.
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The problem with your example is that you're starting off with -$10000 in the PV panel comparison. In either situation, you would start out with a +$10000 investment. In one, you put that money into the PV panels, and the another, you put it into the market.
You could deduct that amount you spent on panels at some EOL (although they should still have some residual value/generating capacity), but starting at -$10k is assuming you're spending $10k on the panels and another $10k on something else like installation. With that said, you should still invest your annual savings from the panels in the S&P, or some other broad index.
In your 25 year example, with PV panels at a real 9+% and the S&P 500 at a real 6+%, you should have a $10k initial investment in both scenarios. Granted, the $10k PV panel investment will depreciate, while the all S&P investment will do whatever the market does, but there's no -$10k starting point in the PV panel example unless those panels run you $20k.
At 25 years, in the PV panel scenario, you'll have the value ($2000?) of your depreciated PV system, plus your 9% earnings/savings, plus the amount that your 9% in annual earnings (savings from PV system) made in the S&P, less repair costs ($2000 for inverter replacement is the only thing I can think of), and less taxes on your S&P earnings. That should be about $22500(9% annual returns from the PV panels, so $75/month) +$28300(6% earnings on reinvested PV panel savings) - $10000 (initial investment) + $2000 (marginal value of PV panels) - $2000 (inverter replacement) - $28300*your_tax_rate($4200 at 15%), so about $36500-$40800.
The straight S&P 500 example will be the value of your initial investment ($10k) plus after tax earnings on the compounded 6% rate of return. That's $32,900(6% of the initial $10000, or $50/month) - $32,900*your_tax_rate + $10,000(initial investment). That would probably be ~$38,000 to $42,900 assuming your capital gains rate is 0-15%.
You're going to see a much larger difference in the next 25 years though (~$80k more from the PV panel scenario, less taxes), since the first 25 years of higher earnings in the PV panel scenario are offset by the depreciation of the panels.
Like you said, energy rates could drop a lot, but I wouldn't bet on it b/c the costs of the utility, transmission, and distribution are in my experience much greater than the costs of generation, and if people continue to install PV panels and/or disconnect from the grid, it's likely going to be more expensive for whoever isn't self-generating and/or off the grid.
On the flip side, it's possible that you could enter the market at a low point and decide to cash out at a high point, which would put the all S&P investment solidly ahead of PV panels at 25 years. At the same time, you could also enter the market at a high point, and be far behind the PV panels at 25 years.
My sense is the returns will be similar in the near term (first 25 years), and diverge in the long term (50+ years), with the PV scenario having a lot of depreciation (I'm guessing it's 40% once installed, even if it's brand new), but ultimately providing greater returns with less volatility in the long run b/c the PV panels are, at least at the moment, going to return 3% more in untaxed earnings/savings than the market.
Edited b/c I forgot about capital gains on S&P earnings in the PV scenario.