Interpreting the Results
As you review the ”Results” table, keep in mind:
- With net metering, sizing your system to get as close as possible to producing 100% of your annual electricity consumption is the most cost-effective plan. Both your PV system’s production and your energy consumption vary each year, so “close” is the best you can do. (And as appliances are replaced or added, consumption will change.)
- The negative net present value (NPV) for most options is a result of the owner’s savings investment rate, which we assumed to be 4%. In all cases, NPV is more than $0, so one would be that much “richer” today for having made the investment. In the case of 0%-down leasing, one would be that much “poorer” for making such an investment. If you don’t have the cash or can’t get a loan, then get a $0-down lease, as you will lose less money on such an investment than paying the “noninvestment” of your monthly electric bill.
- The highest NPV and/or IRR—or shortest simple payback (SP)—should not be the only factors you consider when choosing a vendor. Also make sure to consider the quality of equipment and warranties offered, and the installer’s experience and follow-up service capabilities. These factors must be qualitatively evaluated and they are not easily quantified for a NPV or IRR analysis.
- In the IRR for Vendor B, “DIV/0!” is a Microsoft Excel error code for division by zero. Excel’s IRR function requires at least one negative number (more cash out than in) during one investment year. The 0% down leasing option is cash-flow positive from the start (compare SP and NPV instead).
- Because it accounts for overall system efficiency, the metric of $/kWh/year is more useful than $/nameplate watt.
From purely a financial standpoint, our results show that a prepaid lease of a PV system might be the most financially advantageous. However, leases are a relatively new option and have not been well-tested in the marketplace. Make sure you understand all the ins and outs of a lease—such as liability, performance guarantees, and access for maintenance—before you sign. There is also some risk that the leasing company might go out of business (which doesn’t necessarily mean you end up with a free system). Leasing may be a preferred option if you cannot immediately absorb incentives in the form of tax credits (they may be carried over to future years).
The leasing company will contract another party to install the system, and will receive all of the incentives. Depending upon which state you live in, a solar leasing company may either “lease” you the PV equipment on your roof, in which you receive the benefits of its production, or sign a power purchase agreement (PPA) with you, where you contract to pay for the electricity at a set rate, usually below, or at least at the current utility retail rate. In either case, you don’t own the system or have to maintain it. At the end of the lease term, you sometimes are able to buy the system at a “salvage value” cost or it will be removed by the hardware owner.
There are two other major financial benefits to leasing or purchase beyond IRR and NPV:
- Electricity prices are locked in. You no longer are affected by utility rate increases. In fact, if rates rise, your actual NPV and IRR will improve.
- In most locations, a PV system increases the home’s resale value (probably more if you own, rather than lease, the system), possibly enough to offset most or all of your initial capital outlay for the system.
Andy Kerr spends part of his year living in the Capitol Hill neighborhood of Washington, DC, where he advocates for nature and writes about energy efficiency and renewable energy.
DC Solar United Neighborhoods (DC SUN) • dcsun.org