Background
Residential Renewable Energy Tax Credit of 30% was extended for solar electric system placed into service by 12/31/2019. In 2016, solar electric system cost per watt is reduced to $3.3 to $3.5 in Florida (before tax credit) and is expected to fall further in 2017. However, average electricity cost in Florida is 12.3 cents per kWh in 2016 and is expected to increase by an average of 3% a year (FPL asked state to approve electricity rate increase by 23.7% by 2019). At this juncture, does it make financial sense to go solar? Below is a real case to illustrate its financial impact.
Case
A client entered a purchase agreement with SolarCity for an installation of a 10KW solar panel system for a contract price of $33,000 (cost/watt =$3.3) and obtained a ZERO dollar down payment 10-year loan with a low APR of 2.99%. Based on the location and solar condition of his house (NREL Solar PVWatts Calculator), the annual solar panel system output is forecasted to be 14,450 kWh per year, equivalent to an energy value of $1,779 at 2016 Florida electricity price. The gross return of the system is $1,779/$33,000 = 5.4% before tax credit or $1,779/$23,100 = 7.7% after tax credit. Below is the result of a more detailed cash flow analysis and Return on Investment (ROI) analysis.
The above calculation assumes the 30% tax credit ($9,900) will be obtained immediately as it offsets the client’s current year tax liability. The net solar energy value of $1,550 in year 1 is based on a conservative solar production and additional homeowner insurance cost on the system. Thereafter, the energy value will increase 3% a year and minus 1% reduction in system efficiency. The cost of capital is assumed to be 3% as the client secured a 2.99% loan for 10 year. The solar system payment will be $3,833 a year for 10-year with an increasing portion on capital investment and decreasing portion on interest payment. $3,000 capital expenditure is assumed at Year 16 to allow for the replacement of the inverter in the solar system.
Discussion
From a tax planning perspective, the advantage of this project is to obtain a positive cash flow at year 0, i.e. offset the tax liability up to $9,900. Effectively, the net cash outflow from Year 1 to 5 is only to payback the tax liability which would be incurred if not for this project. In other words, by going solar the client buy 4 to 5 years’ time to pay the tax liability. From a Return on Investment (ROI) viewpoint, the Net Present Value (NPV) of this project is at $10,438 if the system can last for 25 years, at which the solar panel warranty ends. If we use 20 years as system life (which is the system warranty from SolarCity), the NPV of this project is at $3,564. This project appears to be financially sound for a system lifespan between 20 and 25 years.
For questions on the Residential Renewable Energy Tax Credit, please contact Mr. Lau at [email protected]
