Summary: Government and university researchers studied 22,822 home sales in California, Connecticut, Florida, Maryland, Massachusetts, New York, North Carolina and Pennsylvania. The sales, which occurred between 1999 and 2013, included 3,951 homes with solar power systems. This allowed researchers to compare homes with solar power systems to similar homes in the same area without solar.
The price premium averaged $4,170 per kilowatt of solar power system size, and $3,110 per kilowatt for solar home sales outside California. The study report’s authors suggest that buyers and sellers appear to use net replacement cost as a proxy for solar power system value. “Net replacement cost” means a current local installed price for the same size system, less the 30% federal tax credit. This value is fair because a buyer is not eligible for the tax credit if the seller has already claimed it.
In the largest study of its kind to date, researchers from the U.S. Department of Energy’s Lawrence Berkley National Laboratory, in partnership with Sandia National Laboratories, universities and real estate appraisers, examined 1999–2013 sales data for 22,822 homes in California, Connecticut, Florida, Maryland, Massachusetts, New York, North Carolina and Pennsylvania.1 3,951 of the homes in the study had existing solar power systems owned by the sellers (i.e., not installed under a lease or power purchase agreement). This study involved far more single family home sales with solar power than any previous research.
This is an important study. More than half a million U.S. homes had solar power by the end of 2014, and the number is growing rapidly. The researchers found that home buyers were consistently willing to pay more for homes with seller-owned solar power systems. On average, buyers paid $15,000 more for a home with a 3.6 kilowatt (KW) solar power system than for a similar home without solar power. This premium works out to $4,170 per kilowatt of system size. When adjusting the results for states other than California, the average price premium dropped to $3,110 per kilowatt.
“Previous studies on PV (solar power) home premiums have been limited in size and scope,” said Ben Hoen, the lead author of the new report. “We more than doubled the number of PV home sales analyzed, examined a number of states outside of California, and captured the market during the recent housing boom, bust, and recovery.” Hoen is a scientist in the Environmental Energy Technologies Division of Berkeley Lab. The Berkely Lab team collaborated with researchers from Adomatis Appraisal Services, Real Property Analytics/Texas A&M University, University of California at San Diego, San Diego State University and Sandia National Laboratories.
Key Study Findings
The study also found that market premiums for home solar power systems are statistically similar to premiums estimated using the “income” and “cost” approaches familiar to real estate appraisers. This similarity of results to results developed through standard appraisal practices makes the study findings even more useful to real estate professionals and lenders. Other key findings:
Net replacement cost is the best proxy for value. Home buyers generally do not engage in sophisticated financial analyses of value differences between homes. The study suggests that home sellers and buyers probably—and quite reasonably—value existing solar power systems at the most readily available benchmark, which is current net replacement cost. “Net replacement cost” means a current local installed price for the same size system, less the 30% federal tax credit. Why use net replacement cost? Fairness and practicality.
Net replacement cost is fair because the seller will in most cases have already claimed the tax credit, so the buyer can’t claim it for the same system.2 And net replacement cost is practical because if the buyer can’t claim the solar tax credit on an existing home solar power system, this will make the purchase economics less favorable.
New versus existing homes. Solar power premiums were similar for new and existing homes, but with some evidence of home builders discounting the prices of solar power systems on new homes. There are several possible explanations for this. First, if the builder received a grant for the system, a solar power system for a new home should cost less for several reasons, including marketing and selling costs that are mostly allocable to the home, and not just the solar panels on the roof. The electric service panel can be selected at the outset for the solar power system that will be installed, the homeowners association application process and approval fee is avoided, and wiring between the solar panels and the electric meter can be done before the ceiling and walls are closed up.
Incidentally, the IRS has stated that the cost basis for a solar power system installed on a new home may include a reasonable allocation of the homebuilder’s construction mark-up.3 The buyer must make a reasonable allocation of the cost of a new home, to determine the portion of the home’s total cost allocable to the solar power system. If the solar power system is not separately priced as an option, the homebuilder should provide the buyer with information necessary to make this allocation.
Consistent and statistically significant results. Premiums were clear and consistent in all of the eight states studied. Probably to no one’s great surprise, the size of a solar power system is strongly related to the selling price of a home. Bigger homes tend to have bigger solar power systems. The study found a highly statistically significant 0.92% increase in home value for each KW of solar power nameplate size installed on a home, when compared with the prices of similar homes without solar power. Putting this into plain English examples, a 9 KW solar power system installed on a $250,000 home would be expected to increase the home’s value by $250,000 × 9 KW × 0.92% = $20,700, or 8.3%. A 16 KW solar power system installed on a $450,000 home would be expected to increase the home’s value by $450,000 × 16 KW × 0.92% = $66,240, or 14.7%.
Solar power system age matters. Maybe. The study found that older systems are worth less, but this finding may have more than one explanation. A home solar power system’s resale value would be expected to start declining once the system life has reached the year during which the value of estimated future electricity production is equal to net replacement cost. However, since home buyers appear to use current net replacement cost as a proxy for value, it is quite possible that the amount of decline in value for aging systems in the study was affected more by the enormous decline in solar panel prices during the 15 years studied (1999–2013) than by any other factor.
Why not value an existing solar power system on
the basis of its expected future savings?
Homeowners buy solar power systems because the likely future savings in electric utility bills avoided are much greater than the cost of installing and maintaining the system. Of course, indepedence, electric car charging, sustainability and climate change concerns also play roles, but economics is usually the biggest decision factor. However, a buyer of an existing home has the ability to buy a brand new solar power system and claim the tax credit on the new system.
A well informed buyer would be willing and able to replace the system for the gross replacement cost—the current local retail installed price—because the solar tax credit would be available. But this same buyer would only be willing to pay a seller of a home with an existing solar power system a premium of roughly the net replacement cost.
What is a home solar power system really worth?
The short answer is that the worth of a solar power system to a home buyer is an amount equal to the future utility electric costs the system will avoid during its useful life, less any anticipated maintenance costs. The longer answer is a good deal more complicated.
The upper limit of resale value. Even with increasing electric rates, at some point in a solar power system’s life, the system’s total expected electricity production will be less than the cost of replacing the system with new panels and microinverters. We use 25 years as the system service life in our financial analyses because that is the length of our solar panel and microinverter warranties, so we would expect system resale value to start a steady decline around 12 to 13 years. But this is very conservative. Why? Because solar panels placed in service over 40 years ago are still operating within their expected performance standards today (roughly half a percent of performance loss each year).
Retirement peace of mind. Because a home solar power system can be expected to continue producing electricity for 40 to 50 years or more, with microinverter replacement (about 20% of total system installed cost) at 25 years or so, a solar power system increases retirement security by reducing a major monthly expense before one’s monthly income becomes reduced. It is also a financial asset that can be passed on to one’s children.
Non-financial benefits. A home solar power system provides benefits that cannot be easily shoehorned into a spreadsheet. There is a sense of independence, knowing one is producing his or her electricity. There is a very real sense of accomplishment for environmentally conscious homeowners, who are doing something concrete about their carbon emissions.
The Appraiser’s Income Approach
Fear not, there will be no sophisticated financial analysis performed here. We just want to mention a couple of ideas that are used by real estate appraisers in valuing real estate improvements.
Present value. A dollar of income—or savings—to be received in the future is worth less than a dollar received today. Determining how much a sum to be received in the future is worth today is called present value analysis. The present value of any expected future income or savings is determined through a process called discounting. In discounting, a formula relates a discount rate to the year in which a sum is expected to be received. Assuming the same discount rate and the same sum to be received each year for several years, the present value of the same sum will be less with each passing year.
Discount rate. For a home solar power system, the discount rate should be an annual rate of return the homeowner might reasonably expect to earn on an income-producing investment with similar risk and investment management requirements. The expected electricity production for a home solar power system is based upon independently tested solar panel power output, several years of weather data, and backed by a 25 year manufacturer’s performance warranty. So during the 25 years of the manufacturer’s warranty, a home solar power system is a very low risk investment. And its returns in the form of electric bill savings are tax-free. Consequently, an AAA-rated, tax-free municipal bond would provide a good proxy for an appropriate discount rate. As this is written, the upper end of yields on AAA-rated, tax-free municipal bonds is just under 3%.
- Hoen, Ben and Wiser, Ryan, Principal Authors (2015). “Selling Into The Sun: Price Premium Analysis of a Multi-State Dataset of Solar Homes,” Lawrence Berkeley National Laboratory, 1 Cyclotron Road, MS 90R4000, Berkeley, CA 94720. January 23, 2015. Prepared for the Office of Energy Efficiency and Renewable Energy (Solar Energy Technologies Office), U.S. Department of Energy.
- While this common sense conclusion is not explicitly stated in the instructions for IRS Form 5695, the form used to claim the solar tax credit, it is consistent with IRS policy against “double dipping” and can be inferred from the following cautionary note in the Form 5695 instructions: “If you received a subsidy from a public utility for the purchase or installation of an energy conservation product and that subsidy was not included in your gross income, you must reduce your cost for the product by the amount of that subsidy before you figure your credit. This rule also applies if a third party (such as a contractor) receives the subsidy on your behalf (emphasis added).”
- See “Energy Incentives for Individuals: Questions and Answers” on the IRS website. Updated June 2016.