Is Solar Worth The Investment?
Welcome to the Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Today, we’re discussing the viability of including solar energy in your projects. The Trump administration’s stance towards alternative energy, particularly wind and solar, has been notably adversarial – primarily because the economics of these systems appear less favorable when compared to traditional fossil fuel or power generation systems, particularly during peak demand.
However, this does not automatically render them poor investments. In fact, the suitability of such an investment depends largely on the local cost of electricity, average daily sunlight exposure, and the specific terms of your contract with the utility company. In this episode, we will provide a succinct underwriting to help discern when, and if, your investment might break even. This information will prove crucial in determining whether a solar investment aligns with your specific criteria.
Primarily, it is vital to settle on the total installation cost. What size system do you intend to install? What will the necessary equipment like solar panels, wires, inverters, labor, permits and inspection fees, tax, and life cycle maintenance cost? Once you have these figures, you’ll want to calculate the annual energy production based on system size, average daily sunlight, and system efficiency. For instance, a small 5 kilowatt system receiving 5 hours of sun a day could generate an approximate annual output of 7,300 kilowatt hours at 80% efficiency.
Afterwards, try to estimate the cost of the electricity you’re offsetting. Calculate your current electricity rate, multiply that by the energy production, and this will indicate how much you can save per year. In our example, that equates to an offset of $1,460 in electrical charges annually. To determine the payback period, take the total investment, in this case $15,000, divide it by the annual energy production to get—-that would generally reduce your total system cost down to $10,500.
If you are not planning on paying for the entire system upfront and opting to finance a portion, you will also need to include the cost of financing to accurately determine the true economic break-even point. It’s also key to pay heed to how your utility charges you for electricity, as usage during peak hours could increase your cost per kWh.
The financial model should consider the annual cycle of energy demand, which may not be uniform throughout the year, cycle cost, future rise in energy prices, and the life expectancy of the solar panels. After all factors have been taken into account, you might find that the price of larger systems comes out as more cost-effective. However, keep in mind that the payback duration of your investment is going to be much longer if you finance the project as opposed to paying for it outright.
Nonetheless, advancements in technology and reductions in cost make these systems considerably easier to rationalize than in past years. As you ponder this, have an incredible rest of your day and go make some great things happen. We’ll chat again tomorrow.
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