electric water heater after only 11 years and the natural gas water heater after 15 years. This number is commonly referred to as the payoff date, because you would have paid for the system with the money saved from not having to purchase energy from the utility. However, we want to stress that this is a misstatement. As we said before, a solar water heater is paid off the second you install it because of what you have gained in equity.
Nevertheless, the notion of a payoff date is still a good way to think about the cost of a solar water heater. For instance, imagine yourself ten years from now. You will have taken just as many showers, washed just as many loads of clothes, essentially used the same amount of hot water, but you had a choice whether to heat this water with polluting coal or with clean energy from the sun. You would have paid the same amount over that time period. In other words, a solar water heater will not cost you a penny more. The bottom line is that over a ten year period the two systems cost essentially the same to purchase and operate. It is in this sense that the solar water heaters are free. Taking cold showers and not washing your clothes isn’t a realistic alternative.
After the payoff date, the solar water heater will produce free energy for the duration of the system. It truly is free because you have already offset the cost of installation with money saved. With scheduled maintenance, many solar water heaters will have at least a 40-year life expectancy, so over that time frame the savings from the solar water heating system will be about $190,000. That is a lot of money to save from a one-time investment of $9,000. Because of the cumulative effect of energy inflation, the savings add up quickly, totaling quite an impressive figure. Obviously, it makes economic sense to choose the solar water heater over the electric water heater.
Another way to look at the payoff date is to introduce the idea of pre-payment. Imagine that you were approached by a salesman who gave you a deal. If you pay for the next 10 years’ worth of hot water right now, you can get the following 30 years for free. This is what is being offered by a solar water heating system. Up until the pay-off date you are simply buying the hot water from a renewable resource. You are going to use hot water in any case, so why not make the responsible choice? Choose solar.
At the time of writing, a federal tax credit for solar water heaters pays for 30 percent of the cost of an installed system. Many states and utilities also offer rebates for solar. These rebates can drive down the initial installation cost of the systems and will consequently reduce the payoff time. Figure 2.2 also shows the life-cycle cost for a system that was eligible for federal and state incentives. In this case the payoff date is only six years away when compared to an electric water heater and nine years when compared to natural gas. Your eligibility for the various financial opportunities may have a significant impact when making a life-cycle analysis.
Deciding on what fuel inflation rate to use will also affect a comparison like this. If we had a crystal ball that would accurately predict future fuel prices, we would obviously have a more accurate prediction of the actual outcome of the comparison. If energy inflation rates rise at more than just the ten percent used above, the payoff time will be reduced. If the past couple of years are indicative of the future energy inflation rate and it turns out to be 20 percent, the system would be paid off in 7 years. Conversely, if the inflation rate dropped down to the historical average of 7.5 percent, it would take 10 years to pay off the system.
In addition, the life-cycle example does not include the cost of borrowing if the solar energy system or the electric or natural gas water heater has to be financed. Many of us don’t have $9,000 readily available to spend on a system that heats water. That means you are off to the bank to take out a loan. The added interest will add some time to the payoff date, but only about a year.
Figure 2.2: Life-cycle costing comparison
And remember, the price of energy shown on your monthly utility bill overlooks the real cost of burning fossil fuels. Every year it is in use, the solar water heater used in the comparison above would eliminate one to two tons of greenhouse gases for an electric water heater and one ton of greenhouse gases for a natural gas water heater. If the environment had a dollar value, what would it be?
Cash-Flow Analysis
Another way to look at the economics of solar water heaters is to look at a cash-flow analysis. This looks at the impact an investment will make on your cash flow. We all have some method of making money, and we get a certain amount of money regularly as income. Then we spend this income to get the things we need and want. These are our expenses. A sound cash flow is a balance where our expenses do not exceed our income.
A solar water heating investment is different from most investments because the value of the free energy that a solar water heater harvests reduces a bill you would otherwise pay each month. If you heat your water with fossil fuel, you have a hot water bill each month that is part of your normal cash flow. When you install a solar water heater, your hot water bill is reduced. The savings gained from the solar water heater pays for the solar investment.
Figure 2.3 gives an example of a cash-flow analysis for a solar water heater that was used to offset an electric water heater. We used the same starting costs as in the life-cycle analysis but factored in some available rebates. Assume that you need to borrow the entire $5,000 to pay for the solar water heating system at 6 percent interest and make equal monthly payments for ten years. As you can see, the monthly loan payments initially exceed what is saved from not having to purchase electricity. However, over time the two columns level out, making much more comparable figures. Eventually the monthly loan payments are less than the monthly utility bill, meaning that you will actually have more money in your pocket from month to month. You would see a small negative impact on your cash flow for the first six years, and a positive cash flow impact thereafter. After ten years, when the loan has been completely paid off, your cash flow per month is greatly increased and will continue to increase as energy prices rise.
Figure 2.3: Cash flow analysis — solar vs. electric
Figure 2.4: Cash flow analysis — solar vs. natural gas
Figure 2.4 demonstrates a comparison between solar and natural gas. The cash-flow impact is slightly greater because natural gas tends to be less expensive than electricity. Nonetheless, the additional monthly cost diminishes over time, and after the loan is paid off in ten years all the savings contribute to increasing positive cash flows. Since the system is expected to last about 40 years, you can plan on seeing many years when you will have more money to spend on a monthly basis. When you finance the system, you are essentially locking in your monthly payments. You know what you will have to pay each month and will not be affected by the continually rising cost of energy. Some view this as a retirement investment. They pay off the system now when they have the cash flow to do so, and when they retire, their utility bills and monthly expenses will be greatly reduced.
The point of this analysis is to show you that you should not get hung up on the upfront cost of a solar heating system because the investment does not significantly impact your cash flow. You could have a solar water heater today for only an additional $20 a month.
At the start of this chapter we told you that we would demonstrate how you can get a solar water heater for free. The point of the life-cycle costing and cash-flow examples is to show that no matter how you look at it, a solar water heater will not cost you any more