Solar Water Heating--Revised & Expanded Edition. Bob Ramlow

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Figure 2.1: US residential gas price trends

Figure 2.1 graphs the price of natural gas over that time period. You can see the effects of the oil embargo in the late ’70s and early ’80s and how the surplus led to a rate decrease. You can also see what has been happening lately — the sharpest rate increases since the oil embargo, with inflation rates that surpass those of that era. Over the past five years natural gas has increased at an average rate of 10 percent, and this is just the start.

      When calculating energy savings, you can’t just use the cost of energy during the first year for each additional year because we know that the cost is rising at such a sharp rate. The lowest energy inflation rate that should be used is the historical average of about 7.5 percent for natural gas and oil and 5.5 percent for electricity. However, using this rate does not take into account the fact that dwindling supplies and increased demand will have a strong impact on rate increases. Conversely, using an inflation rate in the 20 percent range, as we have seen in the last couple of years, may result in unrealistic estimates. We made that mistake before, during the oil embargo. Nevertheless, it is best to err on the side of caution and try to be conservative in your estimates without being unrealistic. When estimating life-cycle costs, we use 10 percent as the energy inflation rate for natural gas and fuel oil, and 7 percent for electricity. We believe that this is the lowest it will realistically be over the next 30 years. Most likely we will see the next 30-year average in the 15- to 20-percent range.

In Figure 2.2 you can see an example of life-cycle costing. This example compares both an electric water heater and a natural gas water heater to a solar water heater. All three systems are producing exactly the same amount of hot water. But solar water heaters have no operating costs. You do not have a monthly bill to pay because the solar resource is free. Like any other piece of mechanical equipment, they do require some maintenance, but this amounts to only about $2 per month.

      As you can see in the table, viewing the systems in the long term makes for a more fair comparison. The cost of the solar water heater is equal to the operating cost of the 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.