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Solar Power's Great, but Is It Worth It?

Jeffrey Strain

With energy prices at all time highs, should you be looking to solar power to help your pocketbook?

When it comes to politics, there aren't many issues where more than 90% of Republicans, Independents and Democrats can agree -- but that's exactly how things stand when it comes to developing solar power.

According to a recently released SCHOTT Solar Barometer report, 91% of Republicans, 98% of Independents and 97% of Democrats believe it's in the vital interest of the U.S. to develop solar power.

Companies such as BP(BP Quote), First Solar(FSLR Quote), Trina Solar(TSL Quote), Canadian Solar(CSIQ Quote) and LDK Solar(LDK Quote) are working to propel alternative energy even further, but there's a household angle, too.

With energy costs taking more and more out of paychecks, many people are asking whether it makes financial sense to invest in a solar power system for their home to lower their electric bill.

The answer depends on a number of factors.

Start-up costs: The biggest deterrent for most homeowners is the initial cost involved when installing solar power. It can range anywhere from $10,000 to $100,000 or more to install a solar power system depending on the size of the house and how much power you hope to generate.

Due to the large initial costs, solar power needs to be viewed as a long-term investment where it will take years to recover the costs involved.

Incentives: The incentives offered by your local utility and state can make a big difference as to whether or not installing a solar power system will make financial sense.

States and utilities that offer generous help make it much more likely that installing a solar system will pay for itself over time. They will vary greatly, but can be tens of thousands of dollars in some areas.

The federal government currently offers a $2,000 tax credit for solar-power systems.

You can check what offers are available in your area at sites such as solarelectricpower.org or dsireusa.org.

What you pay for energy: Another major factor in determining if solar power makes financial sense depends on the rate you pay per kilowatt hour for the energy you use. The cost per kilowatt hour varies widely across the U.S., but the more you pay, the more likely that switching to solar power will make financial sense.

Connected or not: When you set up a solar system, it will either be a standalone system or a system connected to the power grid.

If it's a standalone system, then you must make do with the power that the solar power system provides. If it's a connected system, you'll be able to draw backup power when needed from the utility company.

Better yet, if you produce more power than you need, in many cases you can sell the excess to the power company and actually earn money.

Where do you live: While your location doesn't necessarily dictate whether solar power will be financially beneficial, there are general trends.

Southwestern states, where the sun is out often and shines brightly, usually will give a better financial return than states where the sunlight is less intense and it's often rainy.

Will you be moving: What your plans are for the house where you will be installing the solar power system can have a huge effect on whether it makes financial sense.

If you will be moving in a few years, you won't be able to recover the initial costs of the system. If you aren't planning to move at all, then you must calculate any return based solely on the reduced charges. If you are planning to move after a number of years, not only will the solar power system decrease your electricity bill, it will also increase the value of your house.

Will you need a loan: Due to the high up-front costs, many people have to take out a loan of some type (cheap loans are another perk that many utilities offer for installing solar power systems). The cost of the interest on the loan also needs to be calculated as to whether it makes financial sense.

You can find loan rates and more at BankingMyWay.com.

Environmental impact: While the positive environmental impact is not a financial calculation, many people choose solar power for this reason.

If you look at adopting solar power as a "good cause" that will help the environment, you may want to add that into the calculation of whether the return on investment is worthwhile.

For example, a 5% compounded interest return over 20 years may not be the highest return for your money, but may be considered a great return when coupled with the positive environmental implications.

Post-tax return on investment: When making the calculations, remember that the return on the investment for a solar power system is after tax. That can mean that a lower return of 5% would be comparable to a 7% to 8% pretax return. It's also a much safer investment than many others, since return is dependent on electricity rates rather than a fluctuating stock market.

Reduced energy use: While it can be difficult to calculate when looking at whether a solar power system makes financial sense, the "gained knowledge factor" will likely come into play.

Households that can see how much power they generate, as well as how much they use, tend to be more aware their energy consumption. This often results in them lowering the amount of energy they use compared to when they didn't have a solar power system.

For those interested in determining whether solar power might be right for you, a good initial step is to use an online solar power estimator. This will give you some basic numbers of how much you can expect to pay for a system and how much you will be able to reduce your electric bill.

Even if it doesn't make financial sense to go solar today, keep checking each year. If energy prices stay high, a combination of better incentives, technological improvements and installation cost reduction should bring solar energy prices down fairly quickly in the years to come.