Doing the Math on Solar Water Heaters

The Massachusetts Clean Energy Center (MassCEC) claims that "solar hot water systems are great because they provide an easy and low cost way to create hot water in a clean and sustainable way."

On the Environmental Protection Agency's Energy Star website, we read: 

While the initial purchase price of solar water heaters is high compared to standard models, they can be cost effective. That is because the sun's energy is harnessed to reduce operating costs up to 90 percent.

To overcome this "initial purchase price" obstacle, government grants are needed so all these wonderful cost savings can be realized.  To this end, a myriad of tax credits and rebate programs has been created in federal, state, and local governments.  The Department of Energy has assembled a few of these programs in its Database of State Incentives for Renewables and Efficiency (DSIRE).

Picking at random from a page-long list for Massachusetts, we find the Commonwealth Solar Hot Water Residential Program, which gave out grants of up to $3,500, or 25% of the installation cost over the last year and a half, with $1 million budgeted for residential and $1 million for commercial locations.  The Commonwealth Solar II Rebates program offers a $4,250 rebate for residential photovoltaic installation.

A recent e-mail from a municipal agency called the Cambridge Energy Alliance (CEA), not listed with DSIRE, in association with the MassCEC, offered rebates of up to $2,000 to install a solar water heater (SWH) on my roof.

I spent the afternoon crunching a few numbers and concluded, as suspected, that solar hot water systems are not "cost effective" and do not "provide an easy and low cost way to create hot water."  The calculations are simple, but the relevant data is often obscured, as we shall see.

Three essential figures are needed:

1. The annual residential cost of heating water with natural gas.

-The EPA's EnergyStar site reports that the annual energy bill for a single family home is approximately $2,200.  Of this, 14%, or $308/year, is spent to heat water.  In the fine print, however, you read that this information was derived from a Lawrence Berkeley National Laboratory study from 2009, using an "average price of natural gas [of] $13.29 per million Btu."  The closing price on June 20, 2012 was $2.51 per MMBtu.

-A 45-page study by the National Renewable Energy Laboratory (NREL) at the Department of Energy ("Break-even Cost for Residential Solar Water Heating in the United States") bases its conclusions on natural gas prices from 2005 of $6.56 per MMBtu. This is a better approximation of today's gas prices, but when the report was released in February 2011, the price was around $4.  The authors describe "considerable fluctuation" in natural gas prices, but they don't explain why they used six-year-old data.

-New Energy Star appliances come with a yellow tag stating annual energy usage, like this one for General Electric's "most efficient gas water heater":

Notice in bullet point 2 that the price of natural gas has not been updated since 2007.  A therm equals 10 MMBtu, so the price reported here is the equivalent of $12.18 per MMBtu.

If we use Energy Star data on the GE water heater, 224 therms (22.4 MMBtu) at today's price of $2.51 per MMBtu = $56.22 per year.  Let's round this up to $100/year.

2. The cost of a solar hot water system.

The Cambridge Energy Alliance reports: "Currently, a two collector system (for households with four to five people) costs approximately $8,000 to $10,000."  The NREL study uses the figure of $7,000 after rebates and tax incentives.  Sounds about right, but although rebates may be important to the decision of a homeowner, they are irrelevant to the real cost of the product to society.  Let's stick with CEA's low estimate of $8,000.

3. The "solar fraction" (defined in the NREL study as the "percent of daily load met by the SWH system") for Massachusetts.

When the EPA mentions in the quote above that solar water heaters can "reduce operating costs up to 90 percent," it's talking about Arizona, not New England.  Massachusetts has around 2,600 hours of sunlight per year, which works out to 30% of the hours in a year.  Efficient solar panels work on days with some cloud cover, but none work at night, which means that demand for showers in the morning will be met by back-up sources powered by natural gas or coal.  The Cambridge Energy Alliance reports that "solar hot water systems ... can often provide 50 percent to 75 percent of a household or businesses [sic] total hot water needs."  "Often," perhaps, but not in Massachusetts; the NREL report points to the bottom of CEA's range, listing Massachusetts with a solar fraction of between 50% and 55%.  Let's assume the higher number.

In short, we are comparing an $8,000 investment with savings of $55 on a $100 annual gas bill.  Dividing the two numbers tells us that it would take 145 years to recoup the investment.  It gets worse, however, because you have to calculate the cost of that $8,000 capital investment.  Eight thousand dollars in 30-year treasury bonds, currently yielding 2.7%, compounded monthly for 30 years, will return $17,791, or $9,791 of interest, or $326 a year in lost capital opportunity.  Less $55 in lower gas bills means a $271 annual expense.  In other words, that "cost effectiveness" will never be realized.  You never recoup your investment.

Furthermore, NREL reports, "[i]t is assumed that operation and maintenance costs are $1,000 every 10 years to cover tank and heat exchanger fluid replacement," adding another $3,000 to an already dismal forecast.

The NREL report calculates capital expense as cost of debt, using "the average home equity loan rate of about 8%" and subtracting "the average inflation rate of about 3%," or 5%, which leads to even higher capital costs.  It reaches a similarly pessimistic conclusion despite the agency's enthusiasm for renewable energy:

A substantial increase in natural gas prices would need to occur in most of the United States to achieve break-even conditions. As an example, if natural gas prices doubled (from the 2008 baseline), only 25% of the residential energy demand would be in utilities where break-even conditions exist for a $7,000 system. Since SWH has been shown to be more competitive with electricity than natural gas, this analysis will primarily focus on systems that replace electricity.

It almost sounds like they want prices to "necessarily skyrocket" to "achieve break-even conditions."  Remember too that in 2008, gas fluctuated between $5 and $10 per MMBtu, double to quadruple today's prices -- so their scenario means an unlikely four- to eightfold increase.  And that final sentence is a bizarre admission of bias.  Consumers aren't going to compare SWH with the more expensive alternative when cheap natural gas or propane is readily available.

We are in the first years of a shale gas revolution, with forecasts of enough supply for the next century.  Prices are so low that heating water for a family of four costs around 15 cents a day.  Yet our labyrinthine government agencies pretend that nothing has changed and continue to push subsidies for unreliable expensive solar water heaters.  I'm hoping for change on November 6.

The Massachusetts Clean Energy Center (MassCEC) claims that "solar hot water systems are great because they provide an easy and low cost way to create hot water in a clean and sustainable way."

On the Environmental Protection Agency's Energy Star website, we read: 

While the initial purchase price of solar water heaters is high compared to standard models, they can be cost effective. That is because the sun's energy is harnessed to reduce operating costs up to 90 percent.

To overcome this "initial purchase price" obstacle, government grants are needed so all these wonderful cost savings can be realized.  To this end, a myriad of tax credits and rebate programs has been created in federal, state, and local governments.  The Department of Energy has assembled a few of these programs in its Database of State Incentives for Renewables and Efficiency (DSIRE).

Picking at random from a page-long list for Massachusetts, we find the Commonwealth Solar Hot Water Residential Program, which gave out grants of up to $3,500, or 25% of the installation cost over the last year and a half, with $1 million budgeted for residential and $1 million for commercial locations.  The Commonwealth Solar II Rebates program offers a $4,250 rebate for residential photovoltaic installation.

A recent e-mail from a municipal agency called the Cambridge Energy Alliance (CEA), not listed with DSIRE, in association with the MassCEC, offered rebates of up to $2,000 to install a solar water heater (SWH) on my roof.

I spent the afternoon crunching a few numbers and concluded, as suspected, that solar hot water systems are not "cost effective" and do not "provide an easy and low cost way to create hot water."  The calculations are simple, but the relevant data is often obscured, as we shall see.

Three essential figures are needed:

1. The annual residential cost of heating water with natural gas.

-The EPA's EnergyStar site reports that the annual energy bill for a single family home is approximately $2,200.  Of this, 14%, or $308/year, is spent to heat water.  In the fine print, however, you read that this information was derived from a Lawrence Berkeley National Laboratory study from 2009, using an "average price of natural gas [of] $13.29 per million Btu."  The closing price on June 20, 2012 was $2.51 per MMBtu.

-A 45-page study by the National Renewable Energy Laboratory (NREL) at the Department of Energy ("Break-even Cost for Residential Solar Water Heating in the United States") bases its conclusions on natural gas prices from 2005 of $6.56 per MMBtu. This is a better approximation of today's gas prices, but when the report was released in February 2011, the price was around $4.  The authors describe "considerable fluctuation" in natural gas prices, but they don't explain why they used six-year-old data.

-New Energy Star appliances come with a yellow tag stating annual energy usage, like this one for General Electric's "most efficient gas water heater":

Notice in bullet point 2 that the price of natural gas has not been updated since 2007.  A therm equals 10 MMBtu, so the price reported here is the equivalent of $12.18 per MMBtu.

If we use Energy Star data on the GE water heater, 224 therms (22.4 MMBtu) at today's price of $2.51 per MMBtu = $56.22 per year.  Let's round this up to $100/year.

2. The cost of a solar hot water system.

The Cambridge Energy Alliance reports: "Currently, a two collector system (for households with four to five people) costs approximately $8,000 to $10,000."  The NREL study uses the figure of $7,000 after rebates and tax incentives.  Sounds about right, but although rebates may be important to the decision of a homeowner, they are irrelevant to the real cost of the product to society.  Let's stick with CEA's low estimate of $8,000.

3. The "solar fraction" (defined in the NREL study as the "percent of daily load met by the SWH system") for Massachusetts.

When the EPA mentions in the quote above that solar water heaters can "reduce operating costs up to 90 percent," it's talking about Arizona, not New England.  Massachusetts has around 2,600 hours of sunlight per year, which works out to 30% of the hours in a year.  Efficient solar panels work on days with some cloud cover, but none work at night, which means that demand for showers in the morning will be met by back-up sources powered by natural gas or coal.  The Cambridge Energy Alliance reports that "solar hot water systems ... can often provide 50 percent to 75 percent of a household or businesses [sic] total hot water needs."  "Often," perhaps, but not in Massachusetts; the NREL report points to the bottom of CEA's range, listing Massachusetts with a solar fraction of between 50% and 55%.  Let's assume the higher number.

In short, we are comparing an $8,000 investment with savings of $55 on a $100 annual gas bill.  Dividing the two numbers tells us that it would take 145 years to recoup the investment.  It gets worse, however, because you have to calculate the cost of that $8,000 capital investment.  Eight thousand dollars in 30-year treasury bonds, currently yielding 2.7%, compounded monthly for 30 years, will return $17,791, or $9,791 of interest, or $326 a year in lost capital opportunity.  Less $55 in lower gas bills means a $271 annual expense.  In other words, that "cost effectiveness" will never be realized.  You never recoup your investment.

Furthermore, NREL reports, "[i]t is assumed that operation and maintenance costs are $1,000 every 10 years to cover tank and heat exchanger fluid replacement," adding another $3,000 to an already dismal forecast.

The NREL report calculates capital expense as cost of debt, using "the average home equity loan rate of about 8%" and subtracting "the average inflation rate of about 3%," or 5%, which leads to even higher capital costs.  It reaches a similarly pessimistic conclusion despite the agency's enthusiasm for renewable energy:

A substantial increase in natural gas prices would need to occur in most of the United States to achieve break-even conditions. As an example, if natural gas prices doubled (from the 2008 baseline), only 25% of the residential energy demand would be in utilities where break-even conditions exist for a $7,000 system. Since SWH has been shown to be more competitive with electricity than natural gas, this analysis will primarily focus on systems that replace electricity.

It almost sounds like they want prices to "necessarily skyrocket" to "achieve break-even conditions."  Remember too that in 2008, gas fluctuated between $5 and $10 per MMBtu, double to quadruple today's prices -- so their scenario means an unlikely four- to eightfold increase.  And that final sentence is a bizarre admission of bias.  Consumers aren't going to compare SWH with the more expensive alternative when cheap natural gas or propane is readily available.

We are in the first years of a shale gas revolution, with forecasts of enough supply for the next century.  Prices are so low that heating water for a family of four costs around 15 cents a day.  Yet our labyrinthine government agencies pretend that nothing has changed and continue to push subsidies for unreliable expensive solar water heaters.  I'm hoping for change on November 6.