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Assessment Phase Overview

The Assessment Phase is where you get educated and intentional about your household energy needs, the feasibility of your projected physical site requirements and concerns, and evaluation of your investment's return on investments return on Investment expectations, and more evaluation of you given technology alternatives. 

 

This discussion is generally organized in the following order:

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   - Return on Investment (ROI) calculations for different options

   - Energy consumption analysis

   - Site-specific considerations

   - Environmental impact comparisons

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Assessment - Return on Investment
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This section is related to calculating the return on investment ("ROI") for a residential home-owner investment in a representative renewable energy solution.

 

The primary scenario is one is non-sentimental (minimizing "Climate Change) but emphasizes a general methodology (used in conventional assets acquisition processes) for percentage return of investment, payback, historical patterns of energy rate increases, etc. as compared to investing in the stock market, and comparative risks of the investment.

 

The second scenario includes "Climate Change" and CO2 reduction and should include the "Social Cost of Producing CO2" and how the second scenario issues impact.

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We'll break this down step-by-step. I'll start with the financial scenario for a solar energy facility,and then we can discuss how climate change factors might impact the decision.

Financial Analysis

To calculate the ROI for a renewable energy solution (let's assume solar panels as an example), we use the following assumptions:

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- Initial investment: $20,000

- Annual energy savings: $3,000 (adjusted up from $1,500)

- Energy rate increase: 3% per year

- System lifespan: 25 years

- Annual maintenance cost: $100

- Federal tax credit: 30% of initial investment

- Stock market average annual return: 7% (for comparison)

- Home appreciation rate: 4% per year (based on last decade's data)

- Net-metering: 10% excess energy generated

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Let's create a hypothetical example:

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Financial Calculations:

 

1. Net initial investment: $20,000 - (30% * $20,000) = $14,000

 

2. Annual energy savings:

   Year 1: $3,000 + (10% * $3,000) = $3,300

   Year 2: $3,300 * 1.03 = $3,399

   Year 3: $3,399 * 1.03 = $3,501

   

 

3. Annual cash flow (including maintenance):

   Year 1: $3,300 - $100 = $3,200

   Year 2: $3,399 - $100 = $3,299

   Year 3: $3,501 - $100 = $3,401

   

 

4. Cumulative cash flow:

   Year 1: -$14,000 + $3,200 = -$10,800

   Year 2: -$10,800 + $3,299 = -$7,501

   Year 3: -$7,501 + $3,401 = -$4,100

  

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5. Payback period: Approximately 4.5 years

 

6. Total returns over 25 years: $131,944

 

7. ROI: ($131,944 - $14,000) / $14,000 * 100 = 842.46%

 

8. Annualized ROI: 9.53%

 

Home Appreciation Impact:

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Assuming the home is sold after 5 years:

- Initial home value: $300,000 (example)

- Home value after 5 years: $300,000 * (1.04^5) = $365,124

- Additional appreciation due to solar: $20,000 (assuming full recovery of installation cost)

- Total home value: $385,124

- Net gain from solar (appreciation only): $20,000

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Comparison to Stock Market:

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$14,000 invested in the stock market at 7% annual return for 25 years:

Future Value = $14,000 * (1 + 0.07)^25 = $75,898

 

Stock market total return: 442.13%

Stock market annualized ROI: 7%

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Risk Comparison Renewable Energy vs Stock Market Investment:

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​- Pros:

 

Higher predictable returns, hedge against rising energy costs, home value appreciation, environmental benefits

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- Cons:

 

Weather-dependent, potential for equipment failure, changes in net-metering policies

 

Stock Market:

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- Pros: Historically strong long-term returns, liquidity

- Cons: Higher volatility, market risks

​​Key takeaways from the analysis:

 

1. Direct Financial Impact: The removal of the SCC doesn't affect the direct financial benefits to the homeowner. The energy savings, net-metering benefits, and home appreciation remain the same.

 

2. Payback Period: The payback period remains unchanged at approximately 4.5 years, as it was calculated based on direct financial returns.

 

3. Total Returns: The total value over 25 years decreases from $159,925.50 to $151,944, a reduction of $7,981.50. This represents the societal benefit of carbon reduction that we're no longer accounting for.

 

4. ROI: The total ROI over 25 years decreases from 1,042.32% to 985.31%, a reduction of 57.01 percentage points.

 

5. Annualized ROI: The annualized ROI decreases from 10.56% to 10.22%, a reduction of 0.34 percentage points.

 

6. Comparison to Stock Market: Even without including the SCC, the solar panel investment still significantly outperforms the stock market in this scenario (10.22% vs 7% annualized ROI).

 

7. Non-Monetary Benefits: While not quantified in this financial analysis, the environmental benefits of reduced CO2 emissions still exist, even if we're not assigning them a monetary value.

 

Conclusions:

 

1. This representative solar panel investment remains highly attractive from a financial perspective, outperforming the stock market by a significant margin in this scenario.

 

2. The strong performance emphasizes that the primary financial benefits of solar panels come from direct energy savings, net-metering, and potential home value appreciation, rather than from societal benefits of carbon reduction.

 

3. For homeowners primarily concerned with personal financial returns, this analysis shows that solar panels can be a very attractive investment even without factoring in broader environmental benefits.

 

4. However, it's worth noting that the environmental benefits still exist and may be an important factor for many homeowners, even if not assigned a specific monetary value in the ROI calculation.​​​​​

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Extra Credit Exercise: Climate Considerations in ROI

 

We are not being fully transparent without at least a summary narrative of financial justification without monetizing the social cost of CO2 reduction.

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Link to: Social Cost of CO2 (TBD)

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This is conservatively stated using US government and world wide agencies accepted processes.

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1. CO2 Emissions Reduction:

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 - Assume 1 kWh of grid electricity produces 0.92 lbs of CO2

 - Annual energy production of solar system: 15,000 kWh (adjusted for higher energy savings)

 - Annual CO2 reduction: (15,000 kWh * 0.92 lbs) / 2,204.62 lbs/metric ton = 6.26 metric tons

 

2. Annual social benefit of CO2 reduction:

   6.26 metric tons * $51/ton = $319.26

 

Updated Total ROI (25 years):

 

1. Energy savings and net-metering: $131,944

2. Home appreciation (if not sold): $20,000

3. Social benefit of CO2 reduction: $319.26 * 25 years = $7,981.50

 

Total value: $159,925.50

 

Updated ROI: ($159,925.50 - $14,000) / $14,000 * 100 = 1,042.32%

Updated Annualized ROI: 10.56%

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Key takeaways from this updated, comprehensive analysis:

 

1. Higher Energy Savings: With the adjusted energy savings, the financial case for solar panels is significantly stronger. The payback period is reduced to about 4.5 years.

 

2. Net-Metering Benefit: The 10% excess energy generated and sold back to the grid provides an additional revenue stream, further improving ROI.

 

3. Home Appreciation: The assumption that the full installation cost is recovered if the home is sold in five years adds a significant financial benefit. Even if the home isn't sold, the increased property value is a tangible asset.

 

4. Improved ROI: The total ROI over 25 years, including energy savings, net-metering, home appreciation, and climate benefits, is now 1,042.32%, with an annualized ROI of 10.56%. This significantly outperforms the stock market's 7% annualized return in our example.

 

5. Climate Impact: The larger system size also increases the climate benefit, with greater CO2 reduction and associated social cost savings.

 

6. Risk Profile: While the stock market offers liquidity, the solar investment provides more predictable returns and multiple streams of value (energy savings, property value, environmental benefits).

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In conclusion, with these updated factors, the case for investing in solar panels is even stronger. The combination of substantial energy savings, net-metering benefits, home value appreciation, and environmental impact makes it an attractive investment both financially and ethically. The higher predictability of returns and multiple value streams may make it preferable to stock market investments for many homeowners, especially those prioritizing stable returns and environmental impact.

Energy Consumption Analysis
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Current Energy Usage

 

What you'll need to get started:

 

  • Review of past 12-24 months of utility bills

  • Breakdown of energy consumption by major appliances and systems

  • Seasonal variations in energy use

  • Peak demand periods

 

You will want to check with your local utility company to get support and data in the collection of your historical consumption and cost data.  Also, your local utility provider may also be able to provide you with comparisons of your usage with the general historical usage of homes in your neighborhood (including comparable square footage of similar houses).  Also important is an understanding of rate and rate increase data that applies to your geographic location.

 

It is not unusual to find a local (city or county) department or "Energy Sustainability" program that may provide you with non-commercial (i.e. not tied to a sales process) set of support and resources.  For example, you may find a free or low cost "Energy Audit" program available, where a home visit, analysis and report can be available.

 

Be aware that several contractors and installation providers will offer you a "free" energy audit.  These can be useful, but their implicit goal is to sell you something.  

 

As a residential home owner, you are well advised to do as much of your own investigation (literally "homework") as is possible, just to understand your needs and to support your "smart money" best interests.  It is, to a certain degree, interesting and revealing, if not fun, to get a firsthand look at how your consume energy and the costs associated with your consumption habits.  For example, you may not understand and be aware of how often devices that are powered off contribute to energy usage.

 

There are several residential devices and tools available for measuring energy consumption that are suitable for non-technical homeowners. Here's an overview of their range in terms of functionality, accuracy, and cost:

Plug-in Energy Meters

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  • Functionality: Measure energy consumption of individual appliances

  • Accuracy: Generally good for single-device measurements

  • Cost: $15 - $50

  • Ease of use: Very simple, plug the device into the meter, then plug the meter into the wall

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Whole-House Energy Monitors

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Functionality:​

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  • Functionality: Measure total household energy consumption

  • Accuracy: High, as they connect directly to your electrical panel

  • Cost: $100 - $300 for basic models, up to $500 for advanced systems

  • Ease of use: May require professional installation, but usage is straightforward

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Smart Power Strips​

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  • Functionality: Measure and control energy use of multiple devices

  • Accuracy: Good for grouped devices

  • Cost: $30 - $100

  • Ease of use: Simple to set up, plug devices into the strip

Smart Energy Monitorsd​

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  • Functionality: Measure whole-house consumption, often with device-level breakdowns

  • Accuracy: High, uses machine learning to identify individual appliances

  • Cost: $200 - $500

  • Ease of use: May require professional installation, but offers user-friendly app​.

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