Most of us have noticed our utility bills increase considerably over the past decade and it’s not all attributable to greater electricity consumption (although that is also part of the problem). Homeowners are also paying more for each kWh they use. In fact, electricity rates have increased everywhere in the United States in the past decade, but the rates vary significantly from state to state. The rates also change from month to month, so we use a handy metric to compare rates across the U.S. in a consistent manner, the rolling 12-month average electricity rate.
As of August 2015, Washington has the lowest rate at 8.83 cents per kWh, whereas Hawaii has the highest at 32.55 cents per kWh. Within the contiguous U.S., Connecticut has the highest rate at 20.97 cents per kWh. The average rate across the U.S. for the same period was 12.61 cents per kWh. Find out how your state compares.
If you happen to live in one of the states with higher than average electricity rates, you might be considering a switch to solar energy. In my post last month, I discussed how to determine if solar energy makes financial sense for you. This month, I will explain some of your options.
Many homeowners will put off the decision or opt to do nothing and stick with their utility. This might be the right decision in some states or for some particular cases, but for those of you who would do better by switching to solar, it’s important not to delay too much, as the federal solar investment tax credit (ITC) is set to expire at the end of 2016.
If you’re unsure about whether you should stick with your utility, maybe you want to consider by how much your electricity rate has increased over the past decade. We call this the escalation rate. The average year over year escalation rate across the U.S. from 2005 through 2014 was 2.9 percent. If you want to compare that to the average year over year rate of inflation rate in the U.S. since 2005, it was about 1.9 percent. In many states, the escalation rate for electricity has exceeded the inflation rate over the past decade.
Kentucky may have among the lowest electricity rates in the country, with a rolling 12-month average rate of 10.02 cents per kWh, but the average year over year escalation rate since 2005, has been 4.5 percent. The states with the highest year over year escalation rate since 2005 are Hawaii at 6.7 percent and Michigan at 5.5 percent, and the states with the lowest are Louisiana with 0.7 percent and Texas with 0.9 percent.
If sticking with the status quo doesn’t appeal to you, let’s consider your solar options.
A solar lease is not unlike a car lease, in that it comes with little or no down-payment, you make regular monthly payments, and you don’t own the system. A solar lease can be very tempting if you live in a state with high electricity rates and/or a high escalation rate over the past decade, especially when there are a number of companies offering zero-down lease options and the peace of mind that comes from someone else taking on the responsibilities of maintenance for years to come.
In the case of a lease, you get to use all of the solar electricity you produce. Any excess can be returned to the grid for a credit and if you need extra, you purchase it from the utility at the normal retail electricity rate. However, as with any third-party ownership agreement, you will not be able to claim the federal investment tax credit (ITC) of 30% for solar installations.
With a solar lease, it is very important to look at the fine print and to consider your situation carefully. Are you planning on moving anytime soon? If so, ask about your options because a number of homeowners have run into difficulties when it was time to sell their home – not every prospective buyer is going to want to take over your solar lease.
Is there an option to own the panels at the end of the lease term? And what is the escalation rate – in other words, by how much will your monthly payments increase every year? With a solar lease, there is generally a fixed escalation rate for the term of the agreement, so the cost of your solar electricity will go up, but because the escalation rate is fixed, you know exactly by how much it will rise, unlike with retail electricity. For more on leases, check out Anatomy of a solar lease.
Power Purchase Agreement (PPA)
A PPA is another third-party ownership arrangement, where you do not own the panels (and cannot claim the ITC). It differs from a lease in that the electricity produced by the system is sold to you at a fixed per-kilowatt-hour rate that is typically less than the retail electricity rate from the utility. Moreover, the escalation rate for the solar electricity is fixed so you know by how much your rate will rise over the term of the agreement.
While this option may be very attractive because of the low or no upfront cost, and the fact that you are unlikely to be responsible for maintenance, it is not for everyone. Like a solar lease, it is very important to consider the fine print and your particular situation.
Solar Purchase/Solar Loan
A solar purchase generally offers you the best return on your investment (ROI) because as the system owner, you can take advantage of the generous ITC available at the federal level, in addition to any available state or municipal incentives. Moreover, your solar electricity is “free” for the lifetime of your panels (on average 25 years) with no risk of cost escalation. But it’s important to note that as the owner of the system, you will be responsible for any required maintenance, which is generally minimal most years, but will eventually include replacement of the inverter(s).
Most people, however, cannot afford an outright purchase, so another option is the solar loan, many of which come with a zero down-payment option. While you will have to pay interest on the loan, the interest rate is fixed for the duration of the loan and there is no escalation rate. Moreover, a solar loan can enable you to capture the ITC, while minimizing the initial investment required.
Again, it’s still important to look at the fine-print; in particular, if there any dealer/loan fees that must be paid at the outset. Generally, the lower the interest rate, the higher the initial fees. For more on purchasing your solar panels, check out Buying solar panels for your home.
Electricity rates will surely rise in the coming years, but we don’t know by how much. We can only look at the past to get an idea of what might transpire. However, there are many things homeowners can do today to manage their electricity bills, starting with reducing electricity consumption, especially during peak periods, implementing home energy-efficiency measures, and switching to solar energy.
Fortunately, the cost of solar has decreased significantly, by about 50 percent in the last five years, so solar energy is becoming more and more affordable. Switching to solar energy doesn’t make financial sense for everyone just yet, but it does for those who live in states with high electricity rates and/or high escalation rates.
You can use Sunmetrix Discover to figure out if solar is right for you (just enter an address or zip code to get started!). But remember, if you live in a state where solar will save you money, or where it will very shortly, you don’t want to miss out on the solar Investment Tax Credit of 30 percent which is set to expire at the end of 2016.
Simone Garneau is the co-founder of Sunmetrix, an online consumer education and customer acquisition platform for residential solar energy. The goal of Sunmetrix is to help homeowners go solar. In addition to the 200+ articles about solar energy, Sunmetrix offers homeowners two main tools: Discover and GO. Read all of Simone’s MOTHER EARTH NEWS posts here.
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