Tuesday, January 1, 2019

How to use New Jersey’s 10-Year SREC program and the federal 30% solar tax credit to purchase a solar array in 2019 for less than you now pay for electricity

A new solar array can be paid for in less than 10 years by:

1.  taking out a 15-year home equity or solar loan

2.  applying your 30% federal solar tax credit towards your loan balance when you receive it in 2020

Below we look at two examples using 15-year home equity and solar loans.

A.  Paying with a 15-year home equity loan:

With the 2018 passage of the NJ Renewable Energy bill S2314/A3723, new solar projects can receive SREC’s for 10 years.  As an example, let’s say you install a 6.8 kW solar system for $20,000 in January 2019. You borrow the $20K with a 15-year home equity loan at 4.5% with monthly payments of $153.00.  Let’s assume your electricity usage is similar to mine, and you paid $1124.21 for electrical costs in the previous year (ave. monthly rate = $93.68).  Let’s also assume that in the first year you paid 14 HEL payments because you have to borrow the $$ before the solar installation.  Therefore the first year, you pay a total of $2142 in HEL payments. Let’s also assume that the solar array doesn’t quite cover all your electricity costs and you pay $200 to your electrical provider for the year.  Let’s say you receive 8 SREC’s the first year with an average sale price of $205 for a total of $1640.  For your first and most expensive year, you have spent $2342 - $1640 = $702, which is $422 less than the $1124 you spent for electricity without the solar array.

So far, so good, but your ability to sell SREC’s will end after 10 years.  What to do?  Let’s assume you file your 2019 taxes in March 2020 and receive your federal 30% solar credit of $6000 in May 2020.  If you then pay an extra $6000, along with your normal $153 HEL payment in May 2020 and continue to make monthly $153 payments on your HEL, you will pay off your loan after 9 years and 8 months.  If it’s hard to let go of that $6000, it can help to remember that you only have it because you elected to go solar in 2019.  Note:  the federal solar tax credit decreases to 26% in 2020, to 22% in 2021, then it’s gone.

In year 9, you will have 12 HEL payments of $153 for a total of $1236.  Let’s assume you pay $250 to your electrical provider that year and that you sell 8 SREC’s for an average price of $125.  In year 9, you pay approximately $1486 - $1000 = $486.  So even during the years you are paying off the HEL, you are paying less than what you paid before for electricity.  Plus you have the satisfaction of knowing that you are helping the environment and providing a more energy-secure future for your kids and grandkids.  Your solar panels are designed to last at least 25 years, so after the loan payoff, you still have 15 or more years of saving approximately $1000/yr in your annual cost of electricity.  Over time, the savings add up.

B.  Paying with a 15-year solar loan:

If taking out a home equity loan is not an option for you, you can still finance a solar array with a solar loan, assuming you have a decent credit score.  Let’s assume you take out a 15-year solar loan with a 6.5% interest rate.  Your monthly payments will be $174.22. Assuming an annual electricity cost of $1124 pre-solar array and that in the first year you will pay 14 monthly loan payments because you have to borrow the $$ before the solar installation, you will pay a total of $2439.08 in loan payments.  Let’s also assume that the solar array doesn’t quite cover all your electricity costs and you pay $200 to your electrical provider for the year.  Let’s further assume you receive 8 SREC’s the first year with an average sale price of $205 for a total of $1640.  For your first and most expensive year, you have spent $2639 - $1640 = $999, which is $125 less than the $1124 you spent for electricity without the solar array.  Not much perhaps, but not bad for getting started the first year.  The financial advantage will increase the next year when you are only making 12 loan payments per year.

If you file your 2019 taxes in March 2020 and receive your federal 30% solar credit of $6000 in May 2020, which you then use to pay down your solar loan, and continue to make monthly payments of $174.22, you will pay off your loan after 9 years and 4 months.  

In year 2, you will have 12 loan payments of $174.22 for a total of $2090.64.  Let’s assume you pay $205 to your electrical provider that year and that you sell 8 SREC’s for an average price of $195.  In year 2, you pay approximately $2296 - $1560 = $736.  If you ignore price increases, you save$1124 - $736 = $388 in electricity costs for that year.  Thereafter, the savings will gradually decrease as the value of the SRECs decreases over time.  Note that for simplicity, we are ignoring the $6000 tax credit that is used to pay down part of the loan during this year.

Using a cost-of-living calculator and assuming that the 2009 to 2018 increase will be similar to the 2019 to 2028 increase, the annual cost of electricity will increase from $1124 to $1316 over 9 years.  In year 9, you will again have 12 loan payments of $174.22 for a total of $2090.64. Let’s assume you pay $250 to your electrical provider that year and that you sell 8 SREC’s for an average price of $125. In year 9, you pay approximately $2341 - $1000 = $1331. So in year 9, you pay $15 more than what we’re predicting that amount of electricity would cost without solar.

In year 10, you will only have 4 loan payments to make, so you will come out ahead financially.  After that, the solar array is paid for and you still have 15 or more years of saving approximately $1000/yr in your annual cost of electricity.