Considering PV? … Consider Residual Value!

February 1, 2011 § 3 Comments

So what do I mean by residual value?  It’s the increase in the market value of your residential or commercial property once you have installed a distributive generation PV system.  It cannot be ignored!

I will contend over and over that an investment in a PV system is an attractive economic investment for a residential or commercial property owner.  Whatever your metric, whatever your catch phrase, PV is an economic investment now, and ‘grid parity’ is a fete di compli in many U.S. markets. 

One of the tools of those with an adversarial view of PV is to argue that PV is simply too expensive, it’s a technology and a dream for another time, but not now.  Since there is no convention for analyzing PV economics, it is easy for the naysayers to pick and choose variables for their analyses.

Payback seems to be the most prominent . . . it takes too long for an investment in PV to payout!  Payout is the wrong measure, and we will discuss these metrics one at a time.  But, whatever the metric, a frequent mistake is to omit the incremental residual value of the PV system that becomes part of your residential or commercial property.  This increase in value is immediate.

When you make an investment in a long-term capital asset that reduces the operating expenses of your home or business, the unmistakable result is that your property has more value than a like property without a PV system.  This is not a remarkable concept, yet residual value is rarely included in determining the economic return for a PV system. 

Consider a house.  If you have lowered your expenses by $500 a year, you have $500 a year more to spend on purchasing a house; and if you have an 80% LTV mortgage at a 5% rate, then you have increased the value of the house by $8,000 ($500*.80/.05).  Twenty times the first year savings is the most common metric for determining the increased value associated with a residential PV system.  Critics contend there is not enough ‘market’ data to be conclusive.

This relationship will stay in place for a long while, because your savings increase in time with higher utility bills.  Your PV system most likely will have a 25 year warranty for 80% of its rated power output.  A high quality system will perform better and last much longer. (see our high quality pv solar components here)

For a business, it’s simply a no brainer.  Businesses and commercial real estate most often are valued at a multiple of NOI (net operating income).  If your NOI is higher, because your operating expenses are $500 per year lower; and you are selling your business at an 18 PE multiple, then you have enhanced the value of your business by $9,000 ($500*18).  This is real basic and real easy!

Finally . . . in many jurisdictions, the investment in a distributive PV system is not included in the taxable value of your property.  This is important. 

I just paid my property taxes in Dallas, Texas, and my combined tax rate for 2010 was 2.21%.  An investment in PV lowers the operating costs of my house, but it does not increase my property taxes.  Alternatively, a $30,000 home improvement increases my annual taxes by $663 ($30,000*2.21%) for the rest of time – and even more with inevitable tax rate increases 

Remember, residual value is an important effect of any capital investment.  PV is no different.  Its function is to generate electricity on the load side of your electric meter and to save you money.  That’s real value!

PV . . . it’s economic today.  It’s a grass-roots movement in distributive generation.  It’s time.

Chet Boortz, CEO

SES 21 USA

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§ 3 Responses to Considering PV? … Consider Residual Value!

  • […] This post was mentioned on Twitter by Tor Valenza, Solar Fred. Solar Fred said: Considering PV? … Consider Residual Value! « ses21usa http://ow.ly/3OjRi Good info here for #solar payback […]

  • Stefan says:

    Here’s a comment that was posted on Facebook concerning this topic.

    It’s challenging to write for consumer and business audiences at the same time; something I would not recommend in marketing writing around solar, where buyer concerns are so different. Also… “distributive” generation? Let me go on the record being skeptical about the often-used 1:20 metric. I’ll have more on that one in a week or so.

  • Chet says:

    The 20:1 ratio is an often cited metric initially proffered by Rick Nevin on a study of market valuations for home energy efficiency and reported in the Appraisal Journal in October 1998. The study was funded by the EPA. In actuality, the number will be more or less. The ratio has been a topic of discussion ever since. Market data will provide a clearer picture with a larger data base in multiple regions and a stabilized housing market.

    The rational has to do with capitalizing the energy savings and extrapolating that value to a higher market price. Also, PV is an avoided costs which increase its after tax value, it’s a valuable hedge against energy inflation, and in most jurisdictions, PV is exempt from property tax assessments. All of this is good! For business installations, it’s simply a PE ratio, and the E is higher because energy expenses are lower.

    Some exceptions, if you have used cheap PV components, have a poor installation, or a really ugly installation, you can forget any increase in value. Also, if you have fallen victim to a 15 year residential leasing program, you have likely reduced the market value of your home.

    Chet.

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