2476 Eckhart Rd.
Locally owned and operated
Farm & Ranch
By Mark Gusick
December 18, 2012
Recent talk about the upcoming fiscal cliff has caused many investors to reflect upon the real long-term threats to their own portfolios. It occurred to me that there are some striking similarities between the current rate of return on a solar investment and the rate of return one would have earned on a bond investment during the high-interest-rate era of the late 80s. Many people are dead set against bonds right now and for good reason — the fact is that bonds, or any interest-bearing vehicles for that matter (especially ones that are guaranteed like U.S. Treasury Bonds, the most secure bonds in the world), are just not paying anything. This certainly was not always the case.
In the late 80s, the investing public was typically earning 8.5–9.0% (and even more on high-risk bonds). Not surprisingly, many portfolios at that time were 100% invested in bonds. Today, the nominal interest rate is a paltry 1.0% and people are staying away, but imagine if rates were much higher. It's fair to say that if investors could, for instance, make 8.0% or 10.0% on their money, they would come back to the bond market in droves.
One can still earn such a high rate of return on such a low-risk investment. It’s called solar. Here’s how that scenario would unfold.
Consider a $15,000 investment in a hypothetical 8.0% yield, low-risk, 5-year bond vs. the same dollar amount invested in a solar purchase for a home or a business. The bond would yield $1,200 in dividends annually ($100/month). An average sized solar residential system (5 kW) would cost about $15,000 installed (after 30% Federal Tax Credit and utility rebate) and would routinely save owners around $125/month on their electric bill. Since the electricity generated from the system would be covered under warrantee, it’s fair to consider solar low risk — unless you think the sun might not rise tomorrow morning or that your utility might go bankrupt. Notice how money saved on the electric bill could be looked at as a dividend. Now, when the 5-year bond matures, investors would cash-in that bond and receive their $15,000 back.
Comparing this idea of cashing in a bond at maturity to a solar investment, let’s say the investor wants to sell his or her home after five years. A recent study from Berkeley Lab looked at 72,000 homes sold in California from 2000 to 2009 and concluded that, as far as an investment goes, solar homeowners are able to increase the resale value of their homes by more than the system’s installed cost. In other words, they get their money back. (Click here for the full report). Prior to this study, solar investments were frequently compared to home improvement investments like remodeling a kitchen or bathroom, where owners do not get their money back (also of note: the higher assessed value of a solar property is not subject to taxation per California state law). The Berkeley Lab study was a powerful finding and made it easy for investors to see the similarities between funds gained on the maturity of a bond and gains attributed to the addition of solar realized from the sale of a home.
Also, by adding solar, a homeowner is able to hedge against the decreased purchasing-power effects of future electricity rate increases. In California, the cost of electricity has risen at the rate of 6.7% per year during a 30-year period (Source CPUC Electric Rate Compendium Nov. 2001). Nationwide, electricity rates are expected to increase 12.64% on average (according to Southern California Edison’s AEE 2013 Electricity Outlook). Take our example again, looking beyond year five and factoring in future expected electricity rate increases. To be conservative, we will assume electricity costs increase by 5% per year. Let’s look at the money saved (which looks like a dividend, right?) as well as Return on Investment. Whereas the homeowner saves $1,500 in year 1, he or she saves $1,575 in year 2 because of the increased cost of future electricity, and so on. Thus, a 10% ROI in year 1 increases to an eye-popping 24.2% in year 20. The table below shows that a homeowner who adds solar today will have saved (earned) $49,597 in twenty years. By the same token, a homeowner who decides not to go solar today, will end up paying $49,597 extra for electricity in that same time period.
Forward-thinking investors tend to be good stewards of their resources while extrapolating what the future will hold. They would undoubtedly see that investing in solar is not only judicious for the investor but extremely practical. As the cost of electricity predictably rises, negatively impacting the purchasing power of future money, solar energy becomes an attractive, financially appealing investment. Those whose portfolios factor in longevity as well as diversification will wisely venture into areas that bode well for their economic futures. Solar thus serves as an intelligent and expedient choice for economically prudent individuals concerned about their financial growth.