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The True Cost of 'Free' Solar Panels

by Rogier Fentener van Vlissingen is licensed

under a Creative Commons Attribution-ShareAlike 4.0
International License.

July 31, 2015

White Paper: The True Cost of 'Free' Solar Panels

The Investment Tax Credit (ITC) is assignable, and enables the financing of solar panels through solar lease
and solar PPA (Power Purchase Agreement), with the distinction being that the PPA bills per kWh, and has an
implied performance guarantee: no kWh, you don't pay, although the lease has a similar performance
guarantee. Below, we work out the economic and financial decisions involved, both in theory and with
practical examples, addressed to the home owner making the decision.
Our fundamental premise is that the consumer/home owner should only have one simple objective: to
maximize the value of their home with energy retrrofits. Building new homes to net-zero or near-zero
standards is well understood, and does not add a lot to construction costs if it is planned right. Retrofitting
existing homes is financial magic, because it moves energy from liabilities to assets. The third party
rooftop solar model turns this asset into a liability again, and therein lies the problem.
Another way of looking at this is that it is analytically misleading to look at lowering your electrical bill
as the objective. The property owner first needs to understand what power is used for, and to see if
there are any other, cheaper solutions. For example, A/C may not necessarily have to be electrical. The
number of thermal solutions is growing. Or, it could be taken over by heat pumps requiring 20-50% of the
amount of power, and/or more insulation and window treatments could further reduce the demand. In general
if a home owner operates without a long-term energy plan, they are likely to fall for easy sales pitches like for
'free' solar panels.
The Solar Energy Industry Association has now published its own Solar Business Code (SBC), here.
2141 Starling Avenue, Apt. 404, Bronx, NY 10462
P 718-409 0293 E
C:\Users\RogierFvV\Documents\Green Energy\DaBx DSS Inc\Business Analysis\TheTrueCostofFreeRooftopSolar_V0.950.odt

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You, the consumer, home owner

Are looking into rooftop solar
And everywhere you turn, 'free' solar panels are being touted, and with a variety of marketing claims:

Saves money on electricity maybe 10, 20, 30%

Adds value to your home

No risk, no hassle, free everything, you only pay the bill every month

What could go wrong, and what should you look out for? The 'savings' may change over time, since the
annual escalation in these contracts has been as high as 2.9%.
Note: The new Solar Business Code expressly prohibits member organizations from claiming Free solar
panels. It is deceptive on the face of it.

Two decisions: economic and financial

The Economic Decision
The economic decision is about adding value to your home, because a solar panel is a permanent investment,
and a structural change to your home's energy infrastructure. Therefore, you should look at it as an
investment, and not as a cost savings. Remember the old saying, you can't save yourself rich.
To make it simple, we will assume that your home has on average $1000/mo in energy bills, $700 in oil, and
$300 in electricity. I have seen homes like that in the NY suburbs, and the proportions are pretty 'average.'
And, for argument's sake, the SPV panels cost $25,000
Now let's assume you got those solar panels, and that it saved you, at least initially 10-30%, or $30-$90/mo
on your electrical bill, and as a result you reduced your total energy bill by 3-9%. The question is, why not go
after the $700 which is the oil bill, usually that's where the money is. If you are going to change the
infrastructure with renewable energy retrofit, you need to make a long term plan, so that you are sure one
decision does not lock you out of some important option down the road.
The most obvious alternative investments are reducing air infiltration, and various passive thermal measures,
like insulation and window treatments, followed by active thermal, like solar thermal, and next various heatexchange solutions.

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Passive thermal solutions, besides insulation, these days includes internal and external coatings that
provide insulation and vapor barrier. Some of the external coatings could add up to R-12 to your
exterior walls, and some of these coatings are not like paint, but will last 20 years. These options
directly reduce your heating/cooling bill, and typically pay for themselves quickly. Then there are
window treatments and/or windows with heat gain/heat shed properties, and the best of these reduce
your BTU loss from windows summer and winter, and directly lower your bills. Some of these
options are valuable regardless of how you use energy. It may be oil for heat in winter, but electricity
for A/C in summer.

More substantial solutions include solar thermal, see for example, and generally
here. Generally, is a great site for general information about different technology
options you may have.

Heat pump water heaters heat water with 60% less electricity compared to normal water heaters, see
here, and, as noted on the same site, geothermal systems can possibly provide all your heating,
cooling and hot water, they use electricity but they give you 400% more back than they use, because
they use free heat from the earth's crust. Finally there are air-source heat pumps that are about 250%
efficient, and good in moderate weather, and you'd only use your boiler on the coldest days.

In short, solutions and options galore. Your job is to decide which one makes more sense. Hot water can be as
much as 15-25% of your heating budget and in some cases it is worse than that. In short, just replacing a hot
water heater with a heat-pump model (if you have the right conditions), might take a 12% bite out of your
energy budget. Such a water heater is a $2,500 decision (plus or minus), giving you a 12% reduction, not
an $25,000 decision (SPV), which gave you a 3-9% reduction (maybe). And that water heater pays for
itself in savings in a few short years.
The most important thing is to understand the engineering inter-dependencies, and how they impact your
options. For example, if you commit to SPV now, because your A/C is electric, you are locking yourself out
of the option to switch to Solar Thermal, which may be a lot cheaper in the long run, or you may be undersizing your panels if later you should go to geothermal HVAC & DHW, so you should take a good look at
both the mechanical and economic life-cycles of all your energy equipment, and every assumption should be
questioned. Heating is not limited to oil, gas, or electric. It can be thermal and largely free. The same applies
to cooling and hot water. Removing all fossil fuel combustion from the property eliminates a lot of indoor airpollution, allowing you to have a tighter home.

The economic model

The simple way to think of the financial model is that the day you sign that 30-year mortgage, you also
committed to paying the energy bills for the property, and 30 years of that might represent $360,000 in energy

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bills over 30 years (assuming that the discount rate is the same as the inflation rate, and energy prices are
increasing at the rate of inflation), so, if you can retrofit for less than that, you're ahead. Assume for the
moment that you can finance it all, you can retrofit a fairly large property to net-zero standards for a lot less
less than $360K. And net-zero means no energy bills!!! The question is what solutions give you the maximum
Net Present Value for your property. To figure that out, you need to think through the alternatives, based on
reliable quotes.
Hint: solar thermal, heat-pumps, and various passive solutions will add far more value than solar panels,
which today are 15-20% efficient, and newer panels coming on the market increasingly, are in the low 20%
range. To the extent that there is another project that would create more value for you, if you choose solar PV
anyway, you are incurring the opportunity cost of the projects you are locking yourself out of doing. By
locking yourself out of a project, we mean that you are no longer able to do those projects either physically,
because the solar panels prevent you from doing the alternative, e.g. solar thermal, or financially, because you
can't spend the same money twice. An example would be that heat pump water heater, it might be a great idea,
or it might not, if you really should have done solar thermal or geothermal.

The finance decision

The famous saying from corporate finance is that attractive financing can never make a bad project good, but
only make a good project better. Sales people often apply this in reverse when they purposely lead with the
financing. They sell the payments, not the car, or, in this case, the solar panel. The bottom line is, maximizing
the value of your property is the only valid decision criterion, and ownership is better than leasing, even if
you need to finance it.

Home equity
Typically this is one of the best ways, because interest is deductible and these are permanent modifications of
the home.

Energy Mortgages
There are programs with FHA, VA, Freddie Mac, and Fannie Mae backing, but generally these deal with
small improvements, not major capital retrofits. These options are getting better, however.

PACE Financing
PACE financing may be a good option, if available. With PACE your payments are collected with your
property taxes, and the whole retrofit is transferred with the property if you sell.

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Solar loans
These are a good option, and you can even get 100% financing with zero down payment. Not all solar loan
options are created equal the SolarCity MyPower program is a lot more expensive because it tries to stretch
the payments over 30 years, and they reportedly offer some of the highest installed costs, see here:

Solar lease/PPA
This is easily the most expensive option. NREL (National Renewable Energy Labs) concluded that consumers
are paying 19-47% more with these finance solutions compared to traditional forms of financing. In other
words, this is usually the most expensive solution, though the sales people are well trained to focus you on
the fact that you are supposed to save money on your electrical bills, and then people forget that you could
save a lot more if you did your homework.

Consumer Protection: caveat emptor

The truth is, there isn't any meaningful consumer protection in this area. Consumers are on their own.
The government mostly endorses various technologies (Energy Star, and various state programs), but there's
no-one there to tell you which one is better for your home. You need to do your own homework.
Complaints have been made to FTC and CFPB and various state attorneys general, by consumers and
numerous politicians from either party, see this report in Forbes, Rooftop Solar Shines Light on Bad
Business Practices, The FTC blog here is not much use, but it may suggest that you need to be on guard,
except it does not say what it is you need to look out for. Hopefully this note can be of help.
The new SBC (Solar Business Code) pays lip service to consumer protection. Not only were most members of
the organization in violation of many of its terms on the day it was issued, the gist of the document is to make
sure that when a vendor lies to you, he must cite reliable sources for any facts they quote. It does nothing
about the principal lie in the industry, namely that it is about lowering your monthly electrical bills. It is not.
It is about selling you a twenty-year lease.

Summary of Specific Risks

You thought you were going solar, but you're not
The leasing companies sell off the SRECS (Solar Renewable Energy Credits), so with these leased solar
panels on your roof, you are not going solar. You are merely renting your roof to an energy company, and
using the equivalent of regular power, just like everybody else. If you were a business, you could not claim

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that you are using green or solar energy, see FTC 16 CFR Part 260.15. Therefore there is a truth-inadvertising issue if these companies sell you on 'going green.' Arguably, you are helping society go a bit
greener. Again, this abuse is being addressed in the new SBC, but there are all sorts of subtle and notssubtle
ways that the industry continues to imply that you are going green, or going solar, when the truth is that
you are renting out your roof to them, and they sell the solar energy credits to someone else, who can claim
themthey are going solar, not you who has the panels on your home.

Expensive finance
As noted above, the NREL study establishes in general terms that leasing and PPAs are a more expensive
option, so you should look into your financing options for your retrofits.

Escalation meets low energy costs

From various reports it appears that with our current low energy costs, some people may be under water with
their solar leases or PPAs, which go up by up to 2.9% per year regardless.

Taking a discount on your property when you sell

When you sell and you have leased solar panels on your house, they are a separate liability. Fannie
Mae/Freddie Mac specifically instruct appraisers that leased panels cannot be included in the appraisal, and
that's logical. But the remaining lease must be assumed by the new buyer, or you're on the hook for paying the
whole thing off.
In short, you will be in a position where the home inspector for your new buyer will explain to them that your
panels are a few years old, and they lose some fraction of their productivity every year, besides there will be
newer, cheaper alternatives around, maybe even some of the things you overlooked. You have therefore given
the new buyer a negotiating point, and a recent study from Arizona State University suggests sellers take 38% discounts on leased solar panels for that reason. That number is likely to go up with newer generations of
technology and various alternatives coming in the market.
To emphasize the point even more, (the following is quoted from the SolarCity 10Q for 2Q2015):
In June 2014, the company along with Sunrun inc., or Sunrun, filed a lawsuit in Superior Court
of Arizona against the Arizona Dept. of Revenue, or DOR, challenging DOR's interpretation of
Arizona state law to impose property taxes on solar energy systems that are leased by customers.
The Company and Sunrun filed a motion for summary judgment with the Superior Court, and the
DOR responded by filing its own motion. On June 1, 2015, the Superior Court issued an order
rejecting the interpretation of the Arizona state law under which DOR had sought to tax leased

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solar systems. In that same order, the Superior Court held that a separate Arizona statute, which
provides that such systems are deemed to have no value for the purpose of calculating property
tax, violated certain provisions of the Arizona state constitution. SolarCity and Sunrun have
asked the Superior Court to award them costs and attorney's fees as the prevailing parties in the
litigation. The Superior Court has not yet formally entered judgment or acted on the motion for
costs and fees. The Company will continue to vigorously pursue its claims.
In other words, even SolarCity itself is defending the position that leased panels are not an asset of the
property. Likewise, the early adopters who bolted 30, 40, and 50 solar panels to a leaky house, will be the butt
of jokes when it comes time to sell, if someone on the same street can get by with 10 panels, because their
house is very energy efficient. Those jobs are good sales for the solar companies, but will be disastrous for
the owners. It is like advertising that your house is inefficient, or you must be growing pot in your basement.
Just about the only good reason to have a lot of panels would be if you had a heat pump and eliminated most
of your oil bill.
Rationally, when you buy a house, you know that you are also buying 30 years of energy bills. At the same
time you need to assess what if? After all, you might have to sell before 30 years, so how much value does
your retrofit add to your property? For this, we are starting to see ratings, such as the HERS rating and the
GRESB rating, and/or you should speak to real estate pros. The number one thing is to document your results,
and keep track of your home's performance. As awareness of energy increases, buyers will be more
responsive. Professional investors learned in the 2008 melt-down that net-zero buildings were one of the best
assets to own. They kept their value.

Some final notes about residential energy

The most important thing to realize is the fungibility of energy:

Because today you are cooking with gas, you don't always have to cook with gas

Today you heat with oil, you don't always have to heat with oil, it could be with other fuels or with
thermal solutions, active and passive. Passive homes can be heated with a hairdryer.

There is only a small subset of energy demand in a home that has to be electrical, and those are
certain appliances.

You want to approach your energy based on sources and uses, and understand exactly what can or
cannot change. When boilers, A/Cs, water heaters and refrigerators or freezers break, you must repair
or replace, and that may be an opportunity to switch, but you are better off looking at the economic

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end of life as well, for that is determined by the availability of more cost-effective alternatives.

Based on the above, rooftop solar is likely a decision with a negative NPV for most buyers, especially if it is
done with a lease or PPA. The small savings do not compensate for the risks and cost that are likely later.
Overpaying for the financing, incurring a discount on your property when you sell, and the opportunity cost
of other projects you are locking yourself out of, make this a bad decision for most home owners, and you
want to examine every alternative before you commit to rooftop solar in any form. The only thing that matters
to you should be the greatest possible value add to your property from energy retrofits.
For society as a whole, it is also clear that utility scale solar is the only sensible way to implement solar, as
per a recent article in Forbes, by James Conca, here.


- Domestic Hot Water


- Global Real Estate Sustainability Benchmark


- Home Energy Rating System

HVAC - Heating Ventilation and Air Conditioning


- Net Present Value


- Power Purchase Agreement


- Solar Business Code by the Solar Energy Industry Association


- Solar PhotoVoltaic, panels that generate electricity


- Solar Thermal, panels that generate heat

(this could be high heat, so-called process heat,
or low heat that can be used directly).

SBC, the Solar Business Code by SEIA:

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