With rising electricity costs, more and more homeowners are looking to solar energy as a way to reduce their energy bills, while helping the environment. In a number of states, the cost of electricity from solar panels is already the same or less expensive than electricity from the local utility (which we refer to as grid parity). For a look at how your state stacks up against the rest, you can check out our interactive grid parity map for residential solar. With the cost of installing solar panels decreasing (about 50% in the past 5 years) and with retail electricity rates increasing, the number of states at grid parity will grow.
A look at rising electricity rates
Most of us, at one time or another, have received a notice of a rate increase from our utility, or seen our electricity bills go up, but what does the picture really look like across the U.S., or in your particular state? We’ve taken a look at how electricity rates have evolved over the past decade. The average retail electricity rate across the U.S. was 12.51 cents per kWh in 2014. In 2005, the average 12-month rate for the U.S. was 9.42 cents per kWh, representing a 33% increase. It’s not surprising that many homeowners are looking for ways to reduce their electricity consumption, through energy efficiency measures and/or solar energy.
Currently, the state with the lowest electricity rates is Washington, with a rolling 12-month average of 8.83 cents per kWh, as of August 2015, and the state with the highest rates is Hawaii with a rolling 12-month average of 32.55 cents per kWh. If we only look at the contiguous U.S., the state with the highest electricity rates is Connecticut with a rolling 12-month average of 20.97 cents per kWh.
What is interesting is to see how electricity rates have risen in each state over the past decade, because it might give us an idea of where rates are heading (although, it is important to note that the escalation rate is not a predictor of the future; in this case, it is only a measure of what has happened in the past).
So how do the states compare when it comes to the past decade of retail electricity from the utility? The states with the fives highest year over year escalation rates were: Hawaii (6.11%), Michigan (5.54%), Maryland (5.09%), Kentucky (4.52%), and Idaho (4.46%). It’s interesting to note that while West Virginia has among the lowest electricity rates in the U.S., with a 12-month rolling average of 9.79 cents per kWh as of August 2015, it actually had a high average escalation rate over the past decade of 4.15% year over year. Louisiana, on the other hand, had the lowest average escalation rate over the past decade, with 0.66% increases year over year. If we consider how the average retail electricity rate across the U.S. has changed over the past decade, it had an average year over year escalation rate of 2.88%
To see how your state compares, visit our interactive map for electricity rates in the U.S.
The escalation rate is useful because it also gives us a means of comparing our options: sticking with the utility; going with a solar lease; going with a Power Purchase Agreement (PPA); or going with a solar purchase.
Solar lease: monthly fixed payments
A solar lease gives you access to solar electricity through fixed monthly payments. A third party entity (a solar lease company) installs and owns the solar panels. You get to use the electricity generated by the system. You still keep the utility connection: if you need more power than what the solar panels generate, you simply tap into the grid (and pay for the extra electricity you consume). If you have excess production, you pump it back into the grid and earn credits (this is also called “net metering”).
Leases often come with a zero-down payment option making it an attractive choice, but it’s important to take note of the escalation rate built into the contract, as your monthly payments are likely to increase from year to year, and by how much is critical to determining whether a lease is the best option for you. It’s also important to understand that, with a solar lease, because you don’t own the system, you are not able to claim federal investment tax credit (ITC) of 30% for solar installations. For more information on leases, check out Anatomy of a solar lease.
Solar PPA: fixed cost per kWh
A solar power purchasing agreement (PPA) is very similar to a solar lease: again, a third party entity installs and owns the solar panels. You have the right to purchase solar electricity produced by these panels at a fixed price per kWh (at a cost less than what you would pay your utility). You still keep your utility connection and use it as a reserve to make up for low solar energy days, as well as to earn utility credits when you have excess solar electricity.
But again, to determine whether a PPA is your best option, you need to know what the escalation rate is, because your price per kWh is likely to increase over time. As with the solar lease option, because of the third-party ownership, you are not able to claim federal investment tax credit (ITC) of 30% for solar installations.
Solar purchase: fixed cost – forever
Solar ownership is the ultimate prepaid option. You can either pay for your panels outright or you can opt for a solar loan. With an outright purchase, you have a high upfront cost, but once you pay off your installation bill, you enjoy years of electricity without any other significant costs. From a financial perspective, it’s as close as it gets to a fixed income investment (such as buying a bond).
However, the high up-front cost of an outright purchase puts this option out of reach for most homeowners. Solar loans, on the other hand, often come with zero-down option, and therefore are becoming increasingly popular, as they allow the homeowner to retain ownership and thereby claim the generous federal investment tax credit (ITC) of 30%. For more information on purchasing your solar panels, check out Buying solar panels for your home.
The number of homeowners opting to go solar is growing everyday. Not only do those homeowners appreciate the peace of mind that comes with producing their own clean electricity, but they have the confidence of knowing exactly what their electricity is going to cost them for the next 20-25 years. Retail electricity rates will surely continue to rise in most of the country, but by how much is anyone’s guess – we can look at the past decade as an indication, but the only way to really know what your electricity is going to cost, is to lock in now. Solar electricity offers you that option. How you go solar is up to you!
The Sunmetrix Buy or Lease Calculator is a great way to compare the lease and purchase/loan options. Just enter the specifics of each agreement in the calculator (or use the default numbers to get a vague idea) and see how your return on investment (ROI) compares.