Earn What You Spend

One of the more common barriers to entry to building out alternative energy sources - both locally and at scale - is the financing.  In nearly every instance, alternative energy require a significant capital outlay that, when amortized over a long period of time, will actually save money.  Most alternative energy solutions, then, face two primary risks in achieving profitability: the length of time you will benefit from the energy savings and the availability of the initial capital investment. 

The basic equation works like this.  You want to install solar panels on your desert home’s roof … but it costs $50,000 for the installation.  Your annual electricity bill, given the hot climate, comes out to $5,000.  Assuming the panels pay for all of your energy needs, you’re looking at ten years to have saved in energy costs the equivalent of your initial investment.  

So if you have a ten year time horizon, and $50,000 on hand, you should install the solar panels, right?  Not exactly - we haven’t taken into account the alternative scenario.  Say you take that initial investment of $50,000, invest it over the next ten years in relatively safe bonds earning an average of 4% a year in interest, and make monthly withdrawals from this account to pay the electricity bill.  At the end of ten years you still have $14,194 remaining in the account. In fact, it would take 13 years to draw this account to zero.  

So in Option A, we sink $50,000 into solar panels and after ten years we’ll have saved the equivalent of the initial investment; after that, we have free electricity.  In Option B we invest this lump sum and make monthly withdrawals to pay the electricity bills - this will pay for electricity for 13 years.  

13 years, then, is the timeline we need to look at in order to make a decision since both Option A and Option B will provide us with ‘free’ electricity for this long. After 13 years, though, Option A begins to look better: our electricity bill in year 14 under Option A is still zero, but in Option B we’ve depleted our funds and are back to paying the monthly bills out of pocket. 

That is the crux of the problem in promoting alternative energy: 13 years is a long time.  The average amount of time we live in our homes is around 6-8 years from what I’ve read (if you have any data on this, please send my way!).  Given the liquidity of the investments, then, Option B is the clear winner for virtually everyone planning to stay in their home fewer than 13 years.  How do we overcome the challenges of a large initial investment and a timeframe most of us can’t take advantage of? 

Some municipalities are addressing this head on: 

A new municipal financing program that [lends money and allows the homeowner] to pay it back with interest over 20 years as part of [their] property taxes. 

The goal behind municipal financing is to eliminate perhaps the largest disincentive to installing solar power systems: the enormous initial cost. Although private financing is available through solar companies, homeowners often balk because they worry that they will not stay in the house long enough to have the investment — which runs about $48,000 for an average home and tens of thousands of dollars more for a larger home in a hot climate — pay off.

So by financing the initial investment, you take care of the first barrier - the massive capital outlay.  But what about the fact that you need to stay in your house longer than the norm in order for the investment to make financial sense?  Here is where the financing gets creative: 

cities like Palm Desert lobbied to change state laws so that solar power systems could be financed like gas lines or water lines, covered by a loan from the city and secured by property taxes. The advantage of this system over private borrowing is that any local homeowners are eligible (not just those with good credit), and the obligation to pay the loan attaches to the house and would pass to any future buyers.

A single program, then, addresses the two barriers for the solar panels simultaneously: it finances the initial investment and, more importantly, by attaching the loan to the house rather than the individual, it extends the investment timeframe indefinitely.  In our case study, Option A was the clear winner after thirteen years.  That’s the beauty of this solution: if you count the years not by the amount of time you live in the house, but rather the amount of time the house stands, you eliminate one of the biggest risks in investing in this form of energy.  

And when you eliminate the two most significant risks in investing in alternative energy, things start to happen.  According to Cisco DeVries, who developed this system:  “I’ve never been part of something like this where the power of an idea has grabbed so many people so quickly. It is viral.”