Evaluating energy alternatives

I've always evaluated solar power and other alternative energy sources in a classical engineering method, by adding up the total costs of the system, including some maintenance, an interest rate and dividing by projected power output over the life of the system. As a result you can compare $/kWh with $kWh of your power purchased from the local utility. It never looked extremely favorable, but if you're willing to save the planet for a relatively small cost, it was more or less feasible. Today I thought about something new.

The actual cost of power that you buy for your home from the utility co may include sales taxes, so be sure that those are included in the utility power cost. But that's not all. If you have to pay for that power with income you earn and have paid taxes on, that there is another big cost to add. If you pay $100/month including sales tax, of say 10% to keep the math easy, then depending on your actual income tax bracket, you probably had to earn about 30% more to be able to write that check for the $100 power bill, therefore the real cost in gross earnings to pay for $90 worth of electrical power from the utility was not $100, but a hefty $130. I have never seen any comparative cost of power that includes the income tax that an individual needs to pay before he can pay for the power. Why is that? Is it correct to compare "earned cost" that includes your tax rate. I think it is, as long as you pay taxes on your income that is used to pay that power bill. Companies power is a deductable expense, so no need to do that there, but personal power paidd for with personal income, it seems to me, must include the tax you pay on that income used to pay that power bill. That could push an alternative energy system far cheaper than utility company power. What do you think?

I think the question should be, "does it matter?" How you got the money to pay for the utility will be the same for either, or any other, case, so doesn't that make it interesting, but irrelevant? Even with a relatively high income and tax rate, it's still barely 20% of gross income, so while it might be true that there's a tax consequence, I don't think people think about anything they buy w.r.t to the taxes paid. The only time that's come up in my situation is when I had FSA contributions and I consoled myself that something expensive wasn't quite that bad because it was pretax dollars.

The bottomline is that when someone considers the $100 cost, they only care whether what they have in the bank can cover it, and the ground is leveled by the fact that what's in the bank is already post-tax, so tax is already factored.

TTFN (ta ta for now)
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Funnily enough that's exactly how I justified a solar panel system for our new house. The economics aren't all that great at first sight, but my marginal tax rate is 48.5%, so if a $7000 system can save me $400 per annum after tax (roughly, worst case scenario), I'd have to buy shares on which I pay taxes with a return of about 12%, consistently, for the next ten years. I occasionally do better than that, but CONSISTENTLY? No.

Plus the price of electricity is only going to go one way.

Cheers

Greg Locock


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I thought it was logical. The truth is that the kWh to kWh costs of alternative energy sources are typically marginal, if good at all, so a 25-48.5%(ouch) bump up is HUGE. Reducing the cost by the tax that you will no longer have to pay appears to be a very important factor in the decision, so I wondered why the home solar system sellers never show you that in their comparison charts. Least I've not seen it done that way.

Just make sure you include the income tax "cost of money" and any additional sales/VAT/excise taxes on the purchase and installation costs for the system.

You might also want to think about the tax paid for O&M costs, which is at the same level as the energy you buy. And at the price differential between the purchase of energy and the sales of energy (which will likely be going up to pay for the equipment that the utility uses to serve your home when the solar is not available).

Yes you can play with the numbers and show whatever you want to show, but are you being realistic, or forgetting something?
I like simple and easy calculations and easy to understand results.

Have you thought about the fact that some fire departments will not go on a roof with solar panels, so your house might burn down, instead just being damaged?

What about insurance costs? Roof replacements and repairs?

I just mentioned solar as an example for cost comparison, because it has been the one in vogue for years now and a lot of cost comparisons are available on the internet. Actually I'm considering a hydroelectric project. Really nice since hydro runs 24/7. Head is somewhere around 3m. Flow looks good, but I haven't got to the point where I can measure it yet. At first I thought there wasn't much flow, but then I got upstream to the canal's mouth at a small dam and discovered that the canal's gate was almost entirely closed, thereby diverting almost flow back to the river. Only a relatively small flow was actually passing into the canal. Looks like it might be a good opportunity.

A properly designed solar installation has firefighters in mind. No solar installation built with a building and electrical permit in hand will render the home any more likely to burn down, or to be ignored by firefighters when it catches fire.

This analysis is an interesting problem...

The evaluation of this varies a lot depending on the tax treatment of the various costs etc. in your locale.

Let's look at a simple example: a home mortgage. Here in Canada, mortgage interest is NOT tax deductable. So the classic thing to compare is paying down your mortgage versus putting money into an investment in a registered retirement savings plan (RRSP).

In case a, you pay off your mortgage with after tax money, therefore you should really be comparing paying off your mortgage against the after tax return of any other investment you can make. When I had a mortgage, it was 7.2% fixed for five years. The rate was fixed, so it was a 100% guaranteed (negative) return. There was no guaranteed investment of any kind I could make which gave me a return of 7.2% after tax, therefore paying down my mortgage was a total no-brainer. It stands to reason that if any such guaranteed investment did exist, the banks would rather put their money into that investment rather than loaning the money to you for the mortgage, instead of raising that money on the bond market...It therefore seems very unlikely to me that the math EVER makes sense to make other investments rather than paying off debt- to do otherwise is merely gambling when you have a chance to "earn" a high after-tax rate guaranteed. The smart money doesn't bet- it pays down debt!

How big a house you buy and hence how much mortgage you take on of course depends on what sort of bet you are making on the appreciation of real estate, net of the property taxes and other taxes due on sale of that real estate. Here we are charged no capital gains on the sale of our principal residence, so your home is a pretty sweet investment if you hold it long enough before sale.

In case b (what all the self-interested financial advisors tell you to do), you dump the money into the RRSP and get a tax refund for that money today- and maybe, if you're wise, you put THAT refund into paying down your mortgage. The money in your RRSP then grows tax free- until you withdraw it when you retire, at which time you pay taxes on BOTH the capital AND the interest, capital gains etc. So the RRSP isn't tax free, as many think- it's merely tax deferred. If you intend to be poor in your retirement, perhaps you will get a break on the marginal tax rate you pay at that time versus what you would have paid when you were earning- but I don't intend to be poor in retirement! The capital gains rate is favourable compared to the taxes we pay on income, so you might get a break there too. But all in all, the certainty of debt easily overcomes the uncertainty of return on any other type of investment over the duration of a mortgage. That is why the bank is loaning you the money- they know this math way better than you do!

Using the same analysis, most investments made to reduce the operating cost on your home are going to pay back quicker than you might think if you forget about taxes- but more importantly, they're going to do so with greater certainty than you can get from other investments which yield a similar return.

It gets even more interesting if you can get a feed-in tariff for the energy you produce.

Now in the US, what I imagine you really want is to buy a house which already has solar panels on the roof. The (presumably) extra cost of the home means a larger mortgage which can give you more mortgage interest to deduct...and a revenue stream or at least reduced operating costs to help you pay off that debt.

OMG. Guess that's why I'm not wealth and investment advisor. I was hoping it would be easier than that.

Couple of other "hidden" values - and taxes! - in considering energy savings.

My house is heated by natural gas, obviously the gas bill is larger in the short heating season down here. (October (a little) through April (which is also smaller than Jan and Feb of course).

But the hot water heater is a 365-day expense. The gas bill includes so many "extra" charges and pass-down fees and taxes and state fees that the mid-summer water heating cost is 35.00 dollars for 9.50 in gas! A mid-winter heating bill is 180.00 or 200.00.

But the opposite happens in lighting: an incandescent bulb is 85% in-efficient, so it costs more in summer by increasing both electric power for the light AND extra power for the air conditioning to re-cool the house back down.
But in winter, that extra heat cuts down on the heating needed.

Off-grid costs need to compare the thousands (tens of thousands sometimes) for the line to the served building. If already present, very, very few off-grid installations pay for themselves outright with artificial subsidies (tax breaks, rate breaks, favorable charges, etc.) . But they do pay off if the owner's good will and feel-good needs are met. Unfortunately, too many times that only comes by taxing everybody else who doesn't get to feel good.

Good point BigInch
In Canada we could invest the money saved with alternate energy into a tax deferred scheme.
There are limits on the amount that can be tax deferred but the limits are high enough to allow all the modest energy savings to be invested. Still a potential additional saving.

racookpe said:

But the opposite happens in lighting: an incandescent bulb is 85% in-efficient, so it costs more in summer by increasing both electric power for the light AND extra power for the air conditioning to re-cool the house back down.
But in winter, that extra heat cuts down on the heating needed.

Click to expand...

In central Alberta we have a fairly long heating season and we don't have A/C.
I'm going to miss the incandescent lamps.
Many years ago, I took a short energy efficiency course.
One of the case studies was a high school where hallway lighting was reduced between periods and classroom lighting rows adjacent to the windows were reduced on sunny days.
The school was in central BC where, at the time, electricity was fairly cheap, (The W A C Bennet dam had just come online) and heating oil was in common use but the energy crisis had started and the cost of heating oil was high and going higher.
I guess that I shouldn't have pointed out that given the lack of A/C and the long heating season, most of the savings from the reduction in use of cheap electricity may be offset by increased heating costs with relatively expensive oil.


Bill
--------------------
"Why not the best?"
Jimmy Carter

There are other costs associated with rooftop solar that are not apparent at first glance. If the PV is installed by a company at no cost to the consumer but with a 20yr power purchase agreement, that agreement is attached to the home's title and complicates the sale of the house; many prospective homebuyers will bypass a purchase of a home that has such an amendment to the title. So it may hurt resale value.
Secondly, the fire code related to PV is constantly evolving, in an effort to make the system safer for firefighters. If you had previously installed a PV system that no longer complies with the most recent revision of the fire code, the local firefighters might not "grandfather" your house and may refuse to mount the roof to fight a fire, and that may have implications on the coverage of your fire insurance.

"...when logic, and proportion, have fallen, sloppy dead..." Grace Slick

At one time I was keeping the house on the cool enough side where my mouse hand would get cold. I found one of those 20W incandescent lights, put it in a tin can and screwed the can to the underside of my computer desk, just below the mouse pad. Worked great. They should only have pulled those incandescent lights from warm climate markets.

You might be interested in this thread. Especially very near the end where he has to pull permits and pay a water use tax.

I have a summer home I use for 4 months a year that is off grid. The basic monthly service fee was the deciding factor with this minimal 1.5KW system. Those monthly service charges have grown dramatically the last few years. After seeing the wife's wine store points for just four summers was more than the entire PV system, I stopped thinking about it.

Thanks for the link.