Offsetting large electricity bills: When solar shines

People often write us asking, “When does it make sense to buy a solar PV system?” We always write back, saying “There’s no one straightforward answer.”

There are at least a dozen factors that will determine whether PV panels are a worthwhile investment for your home: the angle and orientation of your roof; the amount of electricity you use each month; the price and efficiency of the PV cells; how much incentive your state government provides in terms of tax breaks and rebates; the interest rate at which you finance upfront costs; and how much you value non-fiscal benefits, like reducing your carbon footprint and supporting demand for new innovative technologies.

This list, and the lack of a straightforward answer, can be discouraging. It need not be. This week, I follow up on a previous post to provide a very rough rule of thumb: solar makes sense for people with LARGE ELECTRIC BILLS. I consider a brief case: a PG&E customer in California that pays over $2,200 a year for electricity in a tiered pricing scheme.

As many residents in California probably know, it’s common for utilities to charge big users of electricity at a higher rate than they charge small users. PG&E, for example, establishes a baseline level for residential electricity usage. Customers who use above and beyond this baseline are charged more per kWh. The pricing scheme for PG&E’s E-1 Residential Schedule [PDF], which is broken into five tiers, looked like this in early 2008:

Tier 1 (baseline and below): 11.5 cents/kWh

Tier 2 (101 to 130% above baseline): 13 cents/kWh

Tier 3 (131 to 200% above baseline): 23 cents/kWh

Tier 4 (201 to 300% above baseline): 32 cents/kWh

Tier 5 (above 300% above baseline): 36 cents/kWh

Note that your “baseline” quantity will vary depending on which of the 10 service territories you live in. It will also depend on whether you use electric heat as your primary source to heat your home (PG&E grants a higher baseline for residents that heat their home primarily with electricity.) The baseline quantity also varies by season.

Now, the beauty of a solar-energy system is that it can eliminate upper-tier charges. It can take you from this:

To this:

Our PG&E customer goes from spending 36 cents per kWh to spending 13 cents per kWh, a savings of 63 percent. When determining the appropriate size of your PV system, it’s important to keep the tiers in mind. If you can afford it, and your roof is big enough, it makes absolute sense to pick a system that will consistently bring you out of the Tier 4 and 5 range and into Tier 2 and Tier 1 territory. This is entirely feasible, especially if you combine your PV panels with investments in modest improvements like compact flurouscent lightbulbs and energy-efficient appliances.

The above example assumes that the PG&E customer would stay on an E-1 Schedule. This means that, within each tier, the per kWh price is the same regardless of the time of day. In other words, the price of a kWh is the same at 10 am as it is at 1pm and at 6 pm. This is nice because you always know about how much you’ll be paying for your electricity.

For residents that install grid-tied solar panels, however, there’s a better pricing option. First, you’d have to get a net-metering agreement, which lets you “sell back” to the utility any excess electricity generated by your system. Second, you should switch to a Time of Use Schedule (either PG&E’s E-6[PDF] or PG&E’s E-7 [PDF]). Under these tariff schedules, the price of electricity fluctuates depending on the time of day (and the time of year). When demand is high (during so-called “peak hours”), the price of electricity goes up. Peak hours are typically from noon to 6 pm, as this is the time of day when demand is the highest. When demand is low (during “off-peak” hours), the price goes down. The same relationship between price and demand exists throughout the year. In the summer, when all of California switches on their air conditioners, the price of a kWh is higher than in winter, when demand abates.

The important point here is this: not only do solar panels help you avoid upper-tier charges. With a Time of Use (TOU) schedule, you’ll be able to buy electricity when prices are relatively low (”off-peak”) and “sell” electricity when prices are relatively high (”peak”). This approach works well for residents. Most people are at the workplace during peak hours. As a result, their homes draw very little power when electricity prices are highest. Furthermore, given that the sun shines the brightest during peak hours, there’s no better time to be producing power and selling it back into the grid.

In sum, there is a slew of factors to assess when shopping for a PV system. If you’re just getting started, square one is your monthly electric bill. General rules of thumb are far from perfect. But, in simplest terms, the larger your electricity bill the better solar panels will look as an investment. As I’ve tried to show here, solar makes the most sense when it offsets large electricity bills by: (1) reducing exposure to high-tier charges, and/or (2) enabling you to sell electricity back to your utility at a relatively high rate.