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Sunday, January 04, 2009

How Not To Save On Utility Bills

When I started blogging, I made several rules for myself. The first was that since the purpose of blogging is to communicate, and since even banker eyes tend to glaze over when I bring up a bunch of calculations, I would not ever do the math here.

But I have been considering how to address Tom Carter's belief that raising gas taxes would cause energy conservation (it's a total fallacy), and it cannot be done without some numbers, since he doesn't pay attention to the words.

So I decided to introduce this deviation from rule 1 with a brief and simple analysis of solar power payouts. This analysis was done from a quote for solar-generated average annual usage replacement for a house in the Middle Atlantic region. Here are some numbers:
The current monthly bill averages under $60 a month annually. A quote I got wanted $16,000 for the panels and equipment to replace the average usage and tie to the grid. I figured a low-ball installation of $500.

The result, according to the figures of the organization selling the equipment, would be to reduce the annual utility bill to $0.00. In other words, I'd spend $16,500 to save $780 annually, so it would take about the life of the equipment to break even.

But actually, I'd be costing myself money. The next "Alternative" block figures the return of taking that $16,500, investing it, and using the proceeds to pay the utility bill. At 5% return, I'd be doing better on my utility bill than with the solar power. At 3% return (3.22% is the last reported yield on 20-year Treasury bills), I'd be paying less than $25 a month for power. Plus, at the end of the 20 years, I'd still have my $16,500.

Since the solar panels won't last forever (20-25 years is the expected life), the third block looks at what would happen if I took $16,500 and used it as a 254 month (21.15 years) annuity with a residual value of about $500. This is most comparable to the alternative of investing in the solar panels. Needless to say, I would do far, far better at reducing my utility bill this way. (I have somewhat skewed this analysis in favor of the solar panels. The real cost of installation would probably be more along the lines of $1,500, because some trees would need to be cut down, and the municipality would want permits. And then the insurance company would want an additional premium to insure the thingie. Cutting down the trees would raising the summer heat levels considerably too.)

This is the basics of most financial analysis. You compare any way of investing money not just on expected returns, but against other ways of investing that money.

There are some other aspects that might not be immediately obvious.

First, an investing alternative that is more flexible has an unquantifiable benefit, because it maximizes future economic flexibility and saves money that way. The solar option is basically a fixed option. Other investments are more flexible (for example, Treasuries will continue to be marketable) and thus may produce substantial future benefits.

Second, of course this estimate of solar replacement works only if a very small percentage of total utility power supplied is replaced. As with wind power, solar power is periodic. Without the tie-in to the grid, the return would be much less, because power would have to be stored in batteries (very expensive, and causes loss of net power). Therefore, essentially the storage cost is avoided here by shifting the compensation to the utility company.

If, as a society, we tried to replace a substantial portion of utility generated electricity by site-generated solar power, the cost of utility-generated electricity would go up significantly. This is because utilities would have to pay someone to develop alternate generation capacity, and since the alternate generation capacity would not be running at full capacity, the capital costs would be higher per unit of power used on grid.

Solar power is really quite expensive. Wind power is cheaper, but even more fluctuating. It is easier to compensate for solar power flux than wind power flux, which is why some of the wind farms in Texas are paying ERCOT to take their power currently. The wind farms make their money through government subsidies. You can imagine what will happen when the government subsidies are cut.

Third, it is obvious that a wholesale investment in solar power won't pay off for most regions. No matter who does it, the net cost of solar power is not just the cost of the solar generating equipment, but the cost of developing and using (at less than maximum capacity) power sources to be used to balance the solar generation.

Thus, it would be hard to generate any net jobs with such a program. No matter how you slice it, dice it, and shift costs around, solar power is substantially more expensive per unit of power produced, and thus it will, on net, cost society money. This is a recipe for getting poorer rather than attaining economic self-sufficiency.

Fourth, you cannot offset oil imports with solar power used for home supply, because current electricity generation does not use substantial amounts of crude oil. In theory, electric cars might reduce oil usage, but first you will have to make economically viable electric cars, and right now they are not all that competitive. The cost of a Prius is about 80% more than the cost of a Hyundai Accent, and in some cases, the driver would use less gas in the Hyundai Accent with manual shift.

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