Thursday, April 14, 2011

Solar Power, My Tax Returns and My Electric Bill

I electronically filed my tax returns and now that the threat of a government shutdown is past I am looking forward to receiving my refund from my renewable energy tax credit shortly. With my tax returns I filed form 5659 Residential Energy Credits Part II to obtain my tax credit. In summary, too purchase and install a 7.36 KW solar array consisting of 32 Sharp 230 watt solar panels, 32 Enphase micro-inverters and mounts was $57,040. For the engineering and permits I paid $1,500 for a grand total of $58,540 out of pocket. (Last winter while interviewing a solar photovoltaic purchaser I discovered that the solar market is cheaper in San Francisco than Virginia which I suppose was no surprise.) Calculating the final cost of my solar panels is complicated, but I will walk you through it.

The 7.36 KW gross are equivalent to 6.2 KW PTC. I reserved 6 KW PTC Renewable Energy Rebate from Virginia and on completion of installation, inspection by the county, and sign-off by my power company, NOVC, I filled out all my paperwork, provided copies of permits, signed off inspections, invoices, technical information, contractor information and pictures of the installation, and meter and promptly (within 4 weeks) received my renewable energy rebate of $12,000 from Virginia. This payment is not taxable income, but according to the Commonwealth of Virginia, the Federal Tax instructions for form 5659, my accountant, Scott Price, and research performed by Andy Black, the payment reduces the cost basis of the solar system that the federal tax credit is calculated on. A tax credit is more valuable than an equivalent tax deduction because a tax credit reduces taxes dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed. My 30% tax credit is calculated on $46,540 and was $13,962. Thus, from the original installation cost of $58,540 I subtract the Virginia Renewable Energy Rebate of $12,000 and the 30% tax credit of $13,962 and my total out of pocket cost for my solar system after the first year is $32,578. A rough estimate using the DOE model of my savings on electricity (I have an air heat exchanger) is $1,400 per year. That is slightly over a 4% return on my investment each year.

However, that’s not the final cost. The cost and return on a solar power system is based entirely on regulated incentives and there are more. The final incentive is the Solar Renewable Energy Credit or SREC. Each SREC is a credit for each megawatt of electricity that is produced. SRECs have value only because some states have Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power. Utilities in some states can fulfill that requirement by buying SRECs from solar installation producers. It is a way for states to ensure that the upfront cost of solar power is recovered from utility companies (and ultimately from the consumers). Some states, like New Jersey and Maryland, require their utilities to buy SRECs only from residents of their states creating a closed market where the price is very high. Some states, like Virginia, have no current RPS requirement. Other states, like Pennsylvania allow their utilities to buy their RPS from any resident within the PJM regional transmission organization (at least for now). Still other states like California do not allow the purchase of SRECs to meet RPS requirements. I am currently selling my SRECs in Pennsylvania. SRECs in Pennsylvania have ranged from $180-$300 per megawatt hour recently. So, I could earn an additional $1,800-$3,000 a year for 15 years or as long as the demand for RPS lasts which ever is less. This past year I earned $1,045.94 in SREC income for the partial year that my panels were installed. This income needs to be reported on your tax returns. You report the total dollars received in SREC payments during the calendar year on Line 21 of the 1040 form-other income.

After the tax exercise and calculating my total return I was not feeling particularly excited about my solar panels and this was compounded by having nothing but trouble with the Enphase micro converter system that is sending a constant stream of error messages. Nonetheless, several service calls to the solar company identified the problem as a network and monitoring problem. The solar panels continue to work and produce power into the grid. The customer service for the installation company is virtually non-existent for the Enphase micro converter and the customer service at Enphase was virtually useless to me though I did buy another router to boost the signal of my internet.

Two days after filing my tax returns, I received my electric bill for $55.17 (compared to the $213.53 for the same month last year). That was a quick way to regain the joy with my solar system. Though, I have more solar panels than Ed Begley, Jr., my panels in Virginia do not have quite as many sunny (and not covered with snow) days as Ed’s panels in Southern California and in truth my multiple refrigerators and freezers and my air heat exchanger consume a lot of power. Only when my heat pump is operating within its most efficient range and cycle combined with the insulation and passive solar steps I have taken are my electric bills this low, but it still felt really good.

The effectiveness of a heat pump is based on the temperature difference between the source and the sink and which cycle it is in. Heat pumps are more effective for heating than for cooling if the temperature difference is held equal. This is because the energy used to power the compressor is largely converted to useful heat when in heating mode and released into the house as extra heat. During the cooling cycle, the condenser is normally outdoors, and the compressor's dissipated work is rejected rather than put to a useful purpose. When the temperature is below 48 degrees Fahrenheit or above 90 degrees the air source heat exchanger becomes much less efficient and my electric power use soars.

The most effective type of heat pump is the geothermal heat pump. Like all heat pumps it doesn't create heat by burning fuel. Instead, in winter it collects the Earth's natural heat through a series of pipes, called a loop, installed below the surface of the ground or submersed in a pond or lake. As you may have experienced in a cave, the temperature six feet beneath ground surface is cooler in summer and warmer in winter than the ambient temperature. Using this temperature as its source the geothermal heat pump can operate within its most efficient range at all times. In winter, fluid circulates through the loop and carries the heat to the house. There, an electrically driven compressor and a heat exchanger concentrate the Earth's energy and release it inside the home at a higher temperature. I have not been able to find any calculators of cost savings I might experience by converting to a geothermal heat exchanger, only the grand claims of the manufactures. The American Recovery and Reinvestment Act of 2009 extended the tax incentives under the Energy Policy Act of 2005 (EPACT) and eliminated the limit on the credit and extended the tax credit until 2016. Like solar panels, geothermal heat exchangers are eligible for an unlimited 30% tax credit and I have four years to save up to buy a geothermal heat exchanger to replace my air heat exchanger that should be near the end of its useful life by that time.

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