What You Should Know About Solar Energy: Costs Are Going Down
If you’re considering whether going solar is a worthwhile financial move for your home, there are essentially two factors that you should look at: 1) the costs associated with solar power, and 2) the rates you pay for electricity from your utility. Going solar makes economic sense when solar electricity costs less than grid electricity.
As for solar, it is clear that costs are coming down. Rooftop solar panels are now more affordable and accessible than ever. This is why more and more households are having solar energy systems installed: going solar is a great way to reduce your power bills.
But what about the future cost of grid electricity? If electricity rates are going up, then of course going solar makes sense. As you’re probably aware, however, utility electricity rates fluctuate seasonally and annually. “What if utility electricity rates go down instead of up?” you might be asking yourself. Would it still be worth it for you to go solar? This article seeks to address this question and put to rest any idea that grid electricity rates could be going down.
Key takeaways: Are electricity prices trending up or down?
- Retail residential electricity rates (the amount you pay per kilowatt-hour, or ¢/kWh) have risen across the nation at a rate of about 4% on average over the last 10 years.
- This trend is unlikely to be disrupted in the future: natural gas prices are only likely to increase, and as they do electricity rates will rise; similarly, EPA restrictions on coal-fired electricity generation are also going to drive up prices.
- Some areas of the country have witnessed sharper price increases than others: For example, electricity rates in Hawaii have more than doubled over the past 10 years, while they’ve hardly changed at all in Texas.
- Electricity prices fluctuate annually, seasonally and monthly. Installing a solar energy system can help you insulate yourself against these fluctuations.
- If you purchase a solar energy system for your home, all of the solar electricity that your system produces will be ‘free’ once the system has paid itself off (which will take approximately 5-10 years, depending on where you live). If you purchase your system with a solar loan, you could start saving money from the first day that your system produces power.
- If you finance your solar energy system with a solar lease or power purchase agreement (PPA), you will pay a set rate for your solar electricity regardless of whether your utility electricity rates go up or down. This means that in some years your power bills may actually be higher with solar than without, although you will still save money in the long term.
- If you’re thinking about going solar, make sure you know all of your options before you make a decision. EnergySage can help you do this: Start by getting an instant estimate and then compare installers and financing choices on our Solar Marketplace.
How have electricity prices changed in the past 10 years?
Utility residential electricity prices have risen steadily in the last decade. According to the Energy Information Administration, residential electricity rates have increased nationally by around 30% in the last 10 years – from about 9¢ per kilowatt-hour (kWh) in 2005 to about 13¢/kWh in 2014 (an increase of about 0.4¢/year).
This may not sound like much, but these numbers add up over time: if your home uses about 500kWh of electricity per month, by the end of this 10-year period, you will have paid about $1,300 more in total (about $130 more per year) for your electricity than if rates had stayed at their 2005 levels.
Could electricity price fall in the future? Highly unlikely
“The past is no predictor of the future”, you might argue. And it’s true that just because electricity prices have been going up does not mean that they will continue to do so. However, there are a number of very good reasons why it is unlikely that residential electricity rates will fall in the future.
- Natural gas prices have fallen in recent years thanks to the ‘fracking’ boom, bolstering the prominence of natural gas in the American electricity generation mix. While gas-generated electricity is cheap now, many expect the price to rise once export terminals for liquified natural gas (LNG) are completed and America’s natural gas supply is exposed to international markets – Europe and Japan, for example, currently pay significantly more for natural gas than the US.
- The Obama administration has instructed the Environmental Protection Agency (EPA) to regulate the carbon emissions of coal-fired power plants. Although coal – one of the primary sources of our electricity – itself remains cheap and abundant, these rules will raise the cost of coal-fired electricity.
- The Energy Information Agency also predicts that electricity price is going to increase, both in the short-term (2015-2016) as well as the long-term (out to 2040).
Electricity price fluctuations over time and by location
On average, electricity prices in the US certainly seem to be on an upwards trajectory. But this is only part of the story: What the first graph in this article doesn’t show you is the nuances of how prices fluctuate over time, and how their intensity differs depending on where you live.
The graph below shows electricity pricing trends in different parts of the country over the past decade. Although an overarching upwards trend is clear, the story is not the same in every region. For example, electricity prices in the East North Central region (green line: Indiana, Illinois, Wisconsin, Ohio and Michigan) and West North Central region (orange line: Iowa, Kansas, Minnesota, Missouri, Nebraska and the Dakotas), rose the most quickly and steadily of any of the regions. Meanwhile, electricity prices in the West South Central states (light blue line: Arkansas, Louisiana, Oklahoma and Texas) have remained comparatively low, increasing gradually from late 2005 until about 2008 before dropping again. There was another slight rise that started in 2014.
The graph below illustrates electricity price trends in a handful of key solar states. You can see that prices have risen in all of these states over the 10-year period between November 2005 and November 2014. Some have risen more than others, however – average prices in Texas, for instance, have only risen slightly, while they’ve increased dramatically in Maryland and Hawaii.
Interestingly, if we look at prices over only the last 5 years (November 2009 – November 2014), we see that rates have actually fallen in some states – Connecticut, Florida, Maryland, and Texas. This highlights the variability of electricity prices in the short-term – even while there is a clear upwards trend in the longer-term.
Taking Massachusetts as an example (in the chart below), you can see that the gradual upwards trend has not been steady. Instead, prices actually fell from a peak in 2009, only to spike again later at the end of 2013. By the end of the 10-year period, residential electricity prices had increased by over 40% compared to what they had been in 2005.
If you want to understand how much electricity you use in your home each day, and how your monthly bills are impacted by electricity rate fluctuations, using a home energy monitor like the Neurio W1-HEM Home Energy Monitor or the CURB Home Energy Monitoring System is a great place to start.
What does all of this mean if you are thinking about going solar?
There are some important implications in all of this if you are thinking about going solar.
- Utility electricity rates go up and down throughout the year, but have a long-term tendency to rise. These fluctuations, which are the result of fuel costs and a number of other factors, are completely outside of your control. Going solar gives you some control over how much you pay for electricity by protecting you against rising electricity prices.
- Having a solar energy system on your roof is one effective way to reduce your power bills because the electricity generated by your solar panels is not subject to the same variations that utility electricity is. Therefore, if you go solar, your electricity costs will always be more predictable than if you stick with grid electricity. In the long term, they will almost certainly be lower with solar than with grid electricity.
- What should you expect from your electricity bills after you’ve gone solar? The answer depends on how you finance your system. For example:
- If you purchase your solar system (either with cash or a solar loan), your electricity bill will be greatly reduced or completely eliminated soon after the system is connected to the grid. This monthly savings will eventually ‘pay off’ the original cost of the system. The typical payback period for a solar system in the US is in the range of 5-12 years. Fluctuations in your utility’s electricity rates will not affect this by much, and once the system is paid off, the electricity it produces is basically ‘free’. You will have no or only very small electricity bills for the remainder of your solar system’s life (25-30 years total).
- If you choose to install your system through a solar lease or power purchase agreement (PPA), you will most likely start saving money immediately. However, when you sign up with these programs, the amount you pay for solar will be fixed for the duration of your contract (usually 20 years). You will either lock in your solar payments a flat rate (e.g. 10¢/kWh, or a set price per month) for the entire duration of the contract, or your solar rate will be subject to an ‘escalator’, which causes the rate you pay for solar to increase by a set percentage (e.g. 2.5%) every year. This means that if your electric utility’s rates go down instead of up, you may temporarily find yourself paying more for solar than you would have if you had stuck with purchasing your power from your utility. This is particularly likely if the rate the solar company promises you is only slightly lower than your current utility rate.
The graphs below (which are examples only) illustrate these points.
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