2013: Solar Project

What's it worth?


Homeowners making improvement decisions ask themselves, is a solar PV investment worth it? Will it pay for itself over time, and how quickly? Will it add to my homeís resale value? Should I lease or buy, and under what terms?

To finish up, I wanted to talk about valuation of a solar-equipped house from an appraiserís viewpoint, so that a homeowner considering the investment can better understand how it may (or may not) affect his home's value in the future.

Real estate valuation by an appraiser is typically based on market observations, with a heavy reliance on comparable sales -- prices that similar houses have recently sold for. Besides comparable selling prices, other factors such as location, living space, and the number of bedrooms and bathrooms are also used to value a house.

Unfortunately, residential PV is still rather new, and as a result, often there are too few comparable sales to reach viable value conclusions. In 2013, the Multiple Listing Service (MLS) reported only 163 Santa Clara County real estate transactions with PV grid-tie systems, about three percent of the 4,972 completed home sales that year. Additionally and unfortunately, MLS does not provide meaningful detailed information about these PV systems, such as size and type of lease or purchase acquisition, which can affect valuation. An industry group called Green the MLS is working to improve MLS information related to "green" features such as solar, but it won't happen soon.

In addition to the problem of how to measure market value without adequate comparables information, the real estate industry has not developed consistent standards and methods for assessing the value of PV equipped homes. Which factors matter the most: power production, installed cost, utility expense offsets? The answers depend on who you ask.

Owned-or-leased is a particularly thorny complication in valuing a house with a PV system. PV vendors provide a smorgasbord of options including lease, lease-to-own, roof-space rental, electricity buy-back, and outright purchase for cash or with financing. While homeowner-purchased PV systems typically add value to real estate, by contrast a leased or a hybrid lease-to-own system may add or even subtract value depending on the lease terms. Since some leases are not transferable, a leased system could present a liability issue for the selling homeowner if the buyer is unable to assume the lease.

As an appraiser and a PV homeowner I have conducted my own analysis, and I am convinced it can be a good investment if a system operates as promised and is backed by a good warranty. So how can a homeowner (or an appraiser) accurately value a potential or current PV system? My answer is a cash flow assessment. Similar to investment property purchased for rental income, analyzing a PV investment requires an approach that values the income stream or utility expense offset over time.

Here are some resources that I used in making my own cash flow assessment.

Andy Black, founder of OnGrid Solar, has authored numerous articles about financial payback tests; my favorite is "Economics of Solar Electric Systems for Consumers: Payback and other Financial Tests", published in July 2009.

The Appraisal Institute published its first article that I am familiar with in October 1998 by Rick Nevin and Gregory Watson, titled "Evidence of Rational Market Valuations for Home Energy Efficiency". More recently in the 2013 Fall edition the Appraisal Institute Journal published "Valuation of Solar Photovoltaic Systems Using a Discounted Cash Flow Approach" by Geoffrey Klise, Jamie Johnson and Sandra Adomatis.

A Sandia National Laboratories working group including Geoffrey Klise published a definitive report titled "How PV System Ownership Can Impact the Market Value of Residential Homes".

Sandia spreadsheet tool for a purchased PV system. Sandia spreadsheet tool for a lease-to-own PV system.

Their downloadable valuation spreadsheet tool allows anyone to easily develop a discounted cash flow valuation. The spreadsheet on the left is for a purchased system using my PV system specs. It provides a $14,596 to $16,875 value range. The spreadsheet on the right is for a 15 year leased-to-own PV system in which all the parameters are the same as the purchased system. It provides a $7,456 to $7,919 value range. The Sandia Lab project team plan to replace their spreadsheet with a web-based tool in the near future. I expect this tool will become a valuation standard due to their cross-industry workgroup membership with the Appraisal Institute.

Go Solar California analysis.

Go Solar California has various resources on their web site. Want to know how many solar PV projects or PV megawatts are produced in California? This is the place. The web site also provides a simple to use web-based valuation tool that produces a discounted cash flow analysis with different value projections and assumptions from the others presented on this page. I've included it in this discussion as an example of a 'creditable tool' that can lead to confusing conclusions based on its assumptions.

A better version of the Go Solar California solar analysis tool is the PG&E Clean Power Estimator introduced on the previous page. The PGE Clean Power Estimator provides ample options and analysis information. It even allows you to select very specific rate options. Unfortunately, it is limited to PG&E customer service areas.

The PG&E Clean Power Estimator and the Sandia Labís analysis is very similar in concept. Both produce a valuation indicator based on the utility cost offset using utility company electricity pricing for a given zip code. Furthermore, they use historical utility pricing appreciation as a predictor for future increases. Both allow the user to perform what-if analysis by changing assumptions. The PG&E Clean Power Estimator provides a broader array of graphs and tables to aid decision makers including environmental considerations.

This last page of our solar project provides various sources for solar PV information that I trust readers find of value. In closing I should mention that PVís financial advantages via net-metering were created by government action. In California, homeowners have been provided an opportunity to save money, help the environment and create jobs. A win-win-win.

However, as beneficial as the program is, there are challenges to its continued long-term success. Most recently California Assembly Bill 327 (AB327) was signed. While I will not address the politics, I recommend becoming familiar with its solar PV net-metering sections and watching our Public Utilities Commissionís actions. Their rulings can enhance value as easily as destroy it. One should also do a web search of the ALEC counter solar activities.

POST NOTE: April 23, 2014. I received an email from Sandia Labs' advising Energy Sense Finance will host the web version called 'PV Value' . Additionally the Sandia Lab's web page states the new web estimator will be available at www.pvvalue.com in the first quarter 2014. Today I found the www.pvvalue.com URL redirects you to the Sandia Lab's web site. Additionally I would recommend anyone wanting the downloadable spreadsheet to obtain a copy as soon as possible. All the spreadsheet parameters can be modified by the user in a standalone manner.