Savings from solar panels can be quite significant, adding up to about $30,000 over 20 years.  But is solar a good investment?  

We looked at how an investment in home solar panels in Illinois might compare to an investment in the stock market.  We found that an investment in solar is likely to return significantly more than one in the stock market.  A homeowner choosing to “go solar” ends up with $17,000 more after 20 years than one who invests in stocks.

Is Solar a Good Investment?

(Expected value of $10,000 initial investment over 20 years, solar vs. stocks, for an Illinois resident)

Is solar a good investment (compares returns of solar and stocks)

Keep reading to see the details of our calculations.

Save money on your utility bill

Saving money on your utility bill is the most straightforward reason to go solar.  By going solar, you consume less energy from your utility.  As a result, you pay your utility less.

If you are a Chicago-area homeowner with a fairly standard 8-kilowatt rooftop solar system, we estimate you’ll save between $1,200 and $2,000 each year on your utility bills.  Over 20 years, those home solar savings add up to about $31,000.  Subtracting the initial cost of going solar ($10,000, after incentives and tax credits), you end up with about $21,000 in cash savings.

That’s $21,000 to spend on other improvements to your home, vacations, etc.

Solar is a good investment

It also turns out solar is a good investment.  Let’s compare a $10,000 investment in solar to a $10,000 investment in the stock market.  Since most people expect solar systems to last a minimum of 20 years, we will look at a 20 year period.

Investing in stocks only

Let’s start with the stock market.  Assume you invest $10,000 in a mutual fund that tracks the S&P 500, a widely-used index of large-company stocks.  Assume further that the fund has very low management fees (0.04%) and that you reinvest dividends (less taxes) back into the fund.  Finally, assume the annual pre-tax returns from the S&P 500 going forward are the same as they have been, on average, since 1960—about 10%.  (The results don’t change significantly if you look at other long periods.)

At the end of year 20, after paying federal and state taxes, you’d walk away with about $54,000 in cash (refer back to the graph above).

Investing in solar

Now let’s consider solar as an investment.  Assume you invest the same amount—$10,000—in a rooftop solar system.  (This $10,000 investment is the net cost of solar after two incentive payments you’ll receive, one federal and one Illinois.)

Remember that this solar system produces about $31,000 in total utility bill savings over 20 years, or between $1,200 and $2,000 per year.  Rather than just spend these home solar savings, suppose you invest them in the same mutual fund we described above.  At the end of year 20, you sell the fund and pay taxes on any capital gain.  In this case, you walk away with about $71,000 in cash.  That’s about $17,000 more than in the “stocks only” approach.

In order for a stocks-only approach to come out ahead, the stock market would have to average returns of at least 14% per year for 20 straight years.  That’s only happened twice since 1927 (if you invested in the stock market in 1978 or 1979)!

Solar is a good investment compared with a tax-deferred investment in stocks

We also considered a scenario in which your stock investment is in a tax-deferred account like an IRA or a 401(k).  Solar still comes out $15,000 ahead:

Is Solar a Good Investment Relative to Tax-Deferred Stocks?

(Expected value of $10,000 initial investment over 20 years, solar vs. stocks, for an Illinois resident)

Is solar a good investment (compares returns of solar and tax-deferred stocks)

Solar makes sense for most income levels

In our analysis, we’ve assumed the homeowner is a joint filer with household income of $125,000.  We did the same analysis for taxpayers between $80,000 and $1,000,000 per year, with the applicable tax rates, and solar comes out ahead for all income levels.

When solar might not make sense

Although solar is a great investment in many cases, there are a few cases in which a potential investor should think twice:

First, homeowners with joint income below $80,000 may not have enough federal income tax liability to fully take advantage of the tax credit for solar.

Second, you should consider whether you might need the cash for something else in the short run.  If you have an emergency in two years and need money, you can easily convert stocks to cash.  But you can’t easily sell your solar system to someone else once it’s on your roof.

Finally, solar doesn’t make sense if your roof is heavily shaded or in poor condition.  Nor does it make sense if your energy consumption is very low (if your typical bill is less than $75).  In that case, home solar savings would be smaller than we’ve modeled.

 

Certasun is not acting in a fiduciary capacity. Readers should seek their own, independent advice in relation to any financial, legal, tax, accounting or regulatory issues.

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