The True Cost and Benefit of Solar Heating
By Fred Milder
One of the largest barriers to selling solar space heating or a solar combisystem is sticker shock. Sticker shock is when a potential client gets excited about adding solar thermal to their energy mix but is taken aback by the high upfront cost of the installation.
Fortunately, the seller can prevent this problem by providing sufficient financial details on the various options. With the right information, the client understands the cost/benefit of each option and can make a well-advised decision.
This article will discuss why looking at “payback” is such a poor analysis; why the fastest return on investment can be a poor choice; and why understanding the client’s time horizon on ownership is important. The numbers in this article are taken from an actual installation in New Mexico. They are for purposes of example only.
Why “payback” is so misleading
Almost universally, potential clients will ask, “So what is the payback period for this system?” The question seems like a simple way of comparing an investment in solar heating with an investment in a heat pump, some other heating system upgrade, a competing photovoltaic (PV) system, or doing nothing. It is a simple question, but one which can have very misleading answers.
Consumers rarely use a payback analysis for other purchases in the energy upgrade or energy efficiency categories. Let us look at this example: Your hot water faucet valve leaks, constantly dripping hot water and wasting both water and energy. Repairing it will cost between $10 and $65, depending on if you do it yourself.
Does anyone ever do a payback analysis before deciding to fix the faucet? When will the repair pay for itself in water and energy savings? A more expensive example: You own an old minivan and are considering getting a new one, perhaps a hybrid with excellent miles per gallon. How many of us actually analyze when the additional cost of the fuel efficient vehicle will be paid back in gas savings given our own pattern of use for the vehicle? How many of us additionally think about this question and include how many years we are likely to own the vehicle? (If you have done this calculation, most people find that a hybrid almost never pays back its investment to the first owner.) This car analogy is particularly relevant because the cost of a new minivan is of the same order as the cost of a solar heating upgrade for your home.
Four different “payback” analyses were created from actual data on the retrofit in New Mexico. Each shows a payback calculation, starting with the simplest analysis and moving to a fairly sophisticated analysis. The actual cost of the solar heating retrofit was $39,074 for the 2,086 square-foot home. It included a new, high efficiency boiler, a new DHW sidearm tank, 256 square feet of collectors, modifications to the mechanical room plumbing to a primary/secondary loop configuration and a SolarLogic SLIC controller. The backup fuel is propane.
The simplest analysis displays the projected costs of heating DHW and the home with and without the solar upgrade. The projections use the annual fuel costs at current prices. The payback, indicated by where the two cost projections cross, is 17 years. The projected savings after 20 years of operation is $9,306, for an ROI of 1 percent. Not a very compelling reason to do the upgrade.
Another payback analysis adds the federal and state incentives into the calculation. The federal tax rebate is 30 percent while the New Mexico tax rebate is 10 percent. Both rebates roll forward if the client can’t use them all in one year. The payback is now 10 years. The projected savings after 20 years of operation is $24,396, for an ROI of 2.4 percent.
The next level of sophistication adds energy cost inflation. For our analysis, we used an average annual cost increase of 10 percent. This is actually a conservative estimate. DOE numbers for the 20 years up to 2011 show an actual average increase of 20 percent per year for fuel oil and propane. The payback is now seven years. The projected savings after 20 years of operation is $115,104, for an impressive ROI of 7.1 percent.
The most sophisticated analysis adds the assumption that the upgrade is financed by a home equity loan at 4 percent with a 15-year term. The model finances the net cost after the federal and state tax rebates. In other words, the owner fronts $15,122 dollars in the first year and receives total tax rebates of that amount in the second year. The bank finances the remaining $23,952 to cover the total system price. The “payback” is now immediate. As soon as the tax rebates are received, the owner is ahead in cash in hand. The projected savings after 20 years of operation is $118,052 for an ROI of 7.2 percent.
Note that this is net savings, i.e., the monthly cost of paying back the loan for 15 years is included in the calculation. Who wouldn’t want to upgrade their heating system, lower their carbon footprint, pay nothing out of pocket, get cash back every year, and save more than $118,000 in 20 years?
Understanding the cost/benefit of various upgrades
Sellers usually present clients with heating system upgrade options. These often include replacing older mechanical room equipment, most commonly a boiler or a DHW tank, and/or combining that with solar. The next analysis is based on the same New Mexico installation example. We compare the least expensive option with the most expensive option. The least expensive option is replacing the old boiler and DHW tank with new, high efficiency equipment. The old, free-standing DHW tank is replaced with a sidearm tank (<0.50 F/hour loss) to take advantage of the high efficiency boiler (95 percent). No further plumbing changes are done and solar is not added.
The upgrade cost is $7,600. The most expensive option is as described in the previous section: solar collectors, new boiler and DHW tank, primary/secondary plumbing changeover and a SLIC control system. The upgrade cost is $39,074. Figures 2a and 2b compare the short and long term savings.
Figure 2a shows the cumulative costs of the least expensive upgrade for: the original system, the upgraded system if paid out of pocket, and the upgraded system if financed. The projections include fuel, equipment and installation, tax rebates and financing charges. The assumptions regarding financing, rebates and energy inflation are the same as in the previous section. The projected savings after 20 years of operation is $73,340 with an ROI of 12.5 percent. Figure 2b shows the similar cumulative costs of the most expensive upgrade. The projected savings (previously stated) after 20 years of operation is $118,052 with an ROI of 7.2 percent.
There are several items of note in this comparison. First, if the upgrade is financed, either system is cash-flow positive after the rebates are received (the green lines cross the red lines in year two). Second, on both of the individual graphs the long term savings are approximately the same whether or not the upgrades are paid for out of pocket (compare the end points of the blue and green lines). This is because the biggest drivers of long term savings are the amount of fuel saved, the current price of fuel and the energy inflation rate. Last, if paid out of pocket, the least expensive upgrade has the quickest payback (cross over between the blue and red lines at 3½ years), but the most expensive upgrade actually saves the most money over the long term, by almost a factor of two.
Why the owner’s time horizon can be important
That the least expensive upgrade has the quickest payback or that the most extensive upgrade has the highest savings over the long term is not surprising. What about in the intervening years? This analysis is important if the owner may sell the home in the not too distant future.
Figure 3 presents an analysis example, again based on the New Mexico installation. We compare three possible upgrades: not adding any solar but replacing both the boiler and the DHW tank with new equipment; doing the complete upgrade – adding solar and replacing mechanical room equipment; and adding solar but not replacing the old boiler or the DHW tank. All upgrades include any necessary plumbing changes in the mechanical room. The old boiler is assumed 75 percent efficient, and the old DHW is assumed 60 percent efficient with a heat loss of 1.50 F/hour.
Figure 3 shows the net cumulative savings from each upgrade when compared to the original heating and DHW system. Each system is assumed financed as previously described and the fuel savings less the loan payment are calculated as the net cash savings each year. However, in this analysis, we add in the remaining principle on the loan because we are interested in what happens if the house is sold. It is a conservative analysis in that we assume the price of the house does not change because of the better heating system. (In the real estate market prior to 2008, the value of a house went up $20 for every $1 per year saved on the fuel cost. Here, we only hope that the house sells more quickly.)
Figure 3 shows that prior to nine years after installation, the simple boiler room equipment replacement is the highest value investment. This investment provides a positive total return after just six years. After nine years, doing the complete upgrade has the highest value as well as ultimately saving the most money. The full upgrade has a positive total return after eight years. Just adding solar to the system but not replacing boiler room equipment sits in between. So why would one want to consider that option? The answer is simple. If the owner is not sure how long they will live in the house, this upgrade does better than the full upgrade for the first nine years and saves almost as much over the long term.
You owe it to your client to do the work so that the choices are clear and the numbers realistic. However, you will find that the conclusions are often similar:
1. “Payback” is a poor method of comparing heating system investments. If possible, don’t let the client lead the analysis down the wrong (payback) path. Provide an analysis detailed enough to offer good decision related information.
2. Financing an upgrade is the best choice unless the client is planning to sell the home. It has little impact on the long term savings and puts net cash in the owner’s pocket starting in the second year.
3. Simple upgrades like replacing outdated equipment provide the best value in the short term.
4. Adding solar combined with replacing outdated equipment provides the best value in the long term.
Fred Milder is a co-founder and the CEO of SolarLogic, LLC, a leading manufacturer of renewable energy combisystem controls. SolarLogic is dedicated to increasing the adoption of solar space heating with products that improve system reliability while simplifying design and installation. Milder is a PhD physicist and established inventor living in Galisteo, New Mexico, in an off-grid home with a solar heating combisystem. Special thanks to Jeff Stampfer of Eldorado Solar for the detailed system installation and equipment costs. Visit www.solarlogicllc.com.