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Net Zero and Profit in 2 Easy Steps

The idea of having a net zero home, one that generates as much power as it consumes, is very exciting. Some people are interested in it to help save the planet, others like the idea of never paying another power bill, or the freedom of energy independence. For a long time, net zero homes were so expensive and complicated that they were simply dreams for most people. Finally, technology has improved so much that retrofitting your old home to become net zero can be both simple and profitable. With two simple updates I was able to make my regular old house net zero. These updates cost a bit of money up front, but in the long run they will both more than pay for themselves. In this post I’ll explain how I did it, and how you can to.

The Two Keys to Net Zero

In the old days, retrofitting a home to be net zero generally required making lots of changes to the house. You’d add insulation to the ceiling, walls and floor, air seal everything, update the windows, install a new HVAC along with a ventilator (this pumps fresh air into your well sealed house so you don’t suffocate), update appliances, replace your lighting and who knows what else. This is all great stuff to do to a house, but the sheer number of tasks, along with the cost of it all has put it out of reach for most people. Luckily, nowadays you can turn most houses into net zero houses with just two changes. All you need to do is install a super efficient heat pump, and a big fat solar array then BAM, your home becomes net zero.

Step 1. Get a Big Fat Solar Array

Solar is the first key to easily converting your home to net zero and making money while doing so. A lot of people overestimate the price of solar because it used to cost a lot and they haven’t rechecked the prices recently. It turns out that the price of panels has been falling steadily for decades now. Even if you did the math on solar and found it wasn’t profitable for your home just a few years ago, it may well be so today. The price of installing solar on a home dropped over 60% from 2010 to 2017! All these price drops, along with the federal tax credit for installing solar means that if your roof gets decent sun you can now probably make money by putting panels on it. How much money depends on a lot of factors, which I delve into in my solar ROI post, but the key thing to realize is that solar panels now essentially pay for themselves and beat pretty much all “safe” investments.

WARNING: The Federal Solar Tax Credit (also called the Investment Tax Credit, or ITC) has dropped from 30% of total install cost in 2019 to 26% in 2020. It will drop again to 22% in 2021, and then be gone for residential systems in 2022. Even if solar costs keep falling as they have, a system installed in 2021 with the 22% tax credit will be cheaper than a system installed between 2022 and 2026, maybe longer. Unless you have a lot of faith that congress will extend this credit, you should install before 2021 ends!

Efficiency Improvements Vs Solar

Because solar can now pay for itself, cost concerns shouldn’t limit the size of your array. Having a higher energy demand simply allows you to make a larger profitable investment in solar. Back when solar prices were higher and people were essentially losing money for every panel they installed, it made economic sense to do lots of efficiency upgrades to keep arrays as small as possible. Now, most people are better off simply building a bigger solar array instead of making lower ROI efficiency improvements.

An efficiency improvement only makes economic sense if the same money spent on solar will generate less energy than that improvement will save. It’s surprising how often solar wins in this calculation. For example, I know many people who have installed new windows in their homes. It’s pretty common to spend thousands on this, often over $10k. If that same money were put into panels instead, they would produce far more energy than those new windows will save. There are still some efficiency improvements with high enough ROIs to be worth doing, like upgrading bulbs to LEDs, adding insulation to a very poorly insulated attic, and DIY caulking and spray foaming to seal air leaks. In general, though, the price of solar has dropped so low that simply building a larger array is now usually the most profitable choice.

Where To Put Your Array

There are some limits on the size of an array your house can support though. Here in the northern hemisphere, you want to put all your panels on the south side of your roof because the tilt of the Earth means that the sun is shining more from that direction. If your roof doesn’t have that much southern facing space, or it is shaded by trees or another building then that might limit the size of an array you can profitably install.

Of course, you can always think outside of the box and install an array somewhere other than your existing roof. Building a new shed, outbuilding, or car port with a sunny, south facing roof will cost more money, but it can give you a nice space to add more panels and increase the usability and value of your home. If your outbuilding is more than just a frame with solar panels on it then it may not be the obvious economic slam dunk of putting panels on your existing roof. But, this is because you’re adding a usable building as well as solar, so you have to factor that in.

Step 2. Get an Efficient Heat Pump

A heat pump is the one high ROI efficiency improvement that usually makes a bunch of sense to pair with a solar array. Read my Heat pump ROI post for more details.

Average Home Energy Use by $ in PA. Heating and Cooling are over 50%.
Average Home Energy Use by $ in PA. Heating and Cooling are over 50%.

From a whole house perspective, heating and cooling are usually the top energy uses. A lucky few can avoid this by living in a tropical paradise where their home’s climate can be controlled by cool ocean breezes. For the rest of us, upgrading our HVAC system to be all electric and super efficient is the next key to making our homes net zero.

Even just a few years ago this wasn’t possible for people who lived in colder climates. Heat pumps made in the 90’s and even early 2000’s just couldn’t put out enough heat when the weather got cold. But now heat pump technology has gotten so good now that they can efficiently heat homes even in cold places like upstate New York.

There are plenty of other ways to cut down the HVAC use in your home. The simplest is to just turn down the thermostat, but there’s always a limit to how far people are comfortable going with this. The other options that have been recommended for years involve air sealing, adding insulation and updating your windows. Those can all still be great choices, and if your house is in really bad shape you might need to do some or all of them. But, the amazing price and efficiency of modern heat pumps crushes most of these other options.

Upgrading to an efficient heat pump can cut the HVAC energy use of your house by more than HALF! The only way upgrading your windows will cut your home heating bills in half is if your current windows have multiple gaping holes in them. If this is true for your home, I recommend investing in some duct tape stat! Otherwise upgrading all your windows will generally cost more than buying a new efficient heat pump, so why do them first? Heat pumps have the added benefit of working as efficient air conditioners as well as heaters.

The ins and outs of how heat pumps work and why they can be well over 100% efficient are best saved for another post (or you can watch this detailed video). The key thing to know is that a good heat pump can pull over 3 Watts of heat into your house while using just one 1 Watt of electricity. Old electric resistance heat adds slightly less than 1 Watt of heat for each Watt of electricity and oil and gas furnaces are even worse. This means that a heat pump can cut the size of solar array needed to make a home net zero by a lot. The price for that heat pump is almost certainly lower than the panels it is replacing, or other traditional energy efficiency improvements like windows or insulation.

Finally, because a heat pump runs on electricity, your solar panels are able to power it. This means that you can power your own HVAC, the biggest power consumer in your home. Oil and gas furnaces rely on someone else delivering that fuel to your house. You have to pay whatever price they’re charging, and if they don’t deliver, you’re left in the cold. With a heat pump and solar combo your roof is creating the power you need to heat your home.

The one issue with this is that solar panels often create less power in the winter than a heat pump needs. Most people in the U.S. can essentially use the electric grid as a giant battery to store the extra power they generate over the summer until they need it in the winter. This is complex enough that it deserves its own post as well, so I’ll just keep to the financial side here. If you’re in a net metering state you can size your solar array so its total annual generation matches the total annual consumption of your home and pay $0 for electricity. If your state is one of the few that doesn’t yet have net metering then this guide is probably not the best way for you to go net zero right now.

Real World Numbers

House Stats:
Built: 1960s
Sqft: 2200
ACH: 0.32
Attic: R38
Walls: R3
Windows: Old

My family moved into a regular old house in central Pennsylvania over a year ago. It was built in the late 60s and while it has decent air sealing, its insulation is lacking and most of its windows are original. A deep energy retrofit would have improved all of these areas, but it would have cost more than my heat pump and solar combined and our house still would have pulled more energy from the grid than it produced.

Putting a big solar array on our roof cost $24k after tax rebate and upgrading our old oil furnace to a high efficiency heat pump cost another $15k. These two updates allowed us to generate over 11,000 kWh in 2019 while only consuming 10,000 (those extra kWhs are for an EV we’ll get some day). We made $1,382 from our solar panels and saved around $1,000 with our heat pump, so $2,382 in total. That’s over a 6% return on investment (ROI). Of course both of these amounts are not taxed so if you factor in a 15% long term capital gains tax the ROI goes up above 7%. There are plenty of stocks that returned over 7% last year, but they could all well lose money this year. Our solar panels and a heat pump on the other hand will keep returning this much money year after year unless there’s a huge drop in electricity prices, which is very unlikely.

Why Not Just Do Solar And Old Electric Heat?

We could still heat our home with electricity using those old resistive electric heaters (like the inside of a toaster). This would be far less efficient than our heat pump and probably pull and extra 6,000-9,000 kWh more. We’d need to install more solar panels costing $13k-$20k to generate this extra electricity and the resistive heaters themselves would cost over $1k to install. This means we’d be spending $14k-$21k to heat this way instead of the $15k we paid for our heat pump. The $15k we spent seems like the lower priced option, and I’ve discovered a few tricks for my heat pump that should make it even more efficient next year. Also, our roof is already full of solar panels and we don’t have an obvious place to put more.

Step 2a. Convert All Appliances to Electric

If you already have an electric hot water heater, stove, and dryer then you can skip this. If any of these are powered by gas though. the solar panels on your roof won’t be able to power them and you won’t be able to be truly net zero. Converting them to electric is the final step in making it so the energy you produce can power your entire home.

If you want to still cook with gas there has been a lot of progress on generating biogas from food scraps, but it’s still a niche technology. This post is all about making the net zero conversion easy so I’ll leave the biogas stuff for another day.

Won’t Converting From Gas Lose Me Money?

It is true that gas was pretty dang cheap in 2019. You could get a therm of gas for just over $1.00 in the U.S. last year. It takes about 29 kilowatt hours (kWh) of electricity to equal the energy content of 1 therm of natural gas. If your kWh comes from a utility, it probably costs around 11 cents, so $1 of gas has the same energy as $3.19 of electricity. If you install solar you’re probably reducing your true cost per kWh to around 7 cents (possibly less) so for you it’s only $2 for an equivalent amount of energy. A good heat pump powered by this cheap electricity beats a gas furnace because it delivers 3x more heat from the same amount of energy.

There are heat pump hot water heaters that can beat gas hot water heaters by a similar amount, but they aren’t for every home. Most draw heat from air inside your house so they need a bigger area than many homes have set aside for a hot water heater. This also means that they are taking energy your heat pump added to your home during winter (Sanden makes one that pulls heat from outside). On the flip side, in summer they give your home some free cooling, which makes a ton of sense in warmer areas.

Even regular old electric water heaters may be able to beat gas if you have low total gas usage. These units may be only 10-25% more efficient than a gas model so you might assume the lower price of gas beats them. This ignores the gas monthly fee though.

$1/therm*(1+75% fee)
= $1.75/therm
1.75/29 kWh/therm
= $0.06/kWh
= $0.075/kWh
= 1.071
1.071 - 1*100
= 7.1% more

In a previous house I paid $16/month for gas service and used around 550 therms of gas per year. This monthly fee increased my true cost per therm by 35%. Over half of that gas went to the furnace so if I had replaced that with a heat pump the monthly gas fee would have increased my true cost per therm by 75%. In this case an 80% efficient gas furnace would actually cost 7% more to run than a solar powered electric resistance unit (see math on the side if you want to check my work).

Once you get rid of the gas hot water heater, all you have left is a gas stove and dryer. These appliances will have math similar to the resistance hot water heater above, except their lower energy usage means the monthly gas fee will increase the true cost per therm for them even more. If you’ve accepted that it’s a good financial choice to convert your hot water heater then it’ll be an even better financial choice to replace your dryer and stove.

In the end, replacing these appliances gives a lower ROI than solar panels and a heat pump. Getting them done is still a financial benefit though. Doing so also eliminates combustion in your house, improving every day indoor air quality and eliminating the risk of your whole family dying of carbon monoxide poisoning. You can go fancy with a heat pump hot water heater, condensing dryer and induction stove, or you can just use the regular old resistance heat models. Either way you’ll make money and get a house that is entirely powered by the sun.

Step 3. Profit!

Hopefully this post has shown you how it can be both easy and profitable to convert your home to be net zero. Just get solar panels and a heat pump and profit. If you don’t already have electric appliances then it’s a tiny bit more complicated than just these two steps, but not by much. If, in the future, you better insulate and air seal your home, you may find your solar starts generating more power than your home uses. All you have to do to solve that is buy an electric vehicle to use the excess. This is something most everyone will be doing in the coming decade or so anyways, so it’s fine to expect it. Hope this has helped you, and if you have any questions or want to share your own story of going net zero please do so in the comments.

If College Endowments Value Profit Why Aren’t They Installing Solar?

Recently, there’s been a big push to get colleges and universities to sell their fossil fuel holdings. This divestment movement has often hit resistance from administrators who say that their endowments should be invested to produce the maximum return on investment (ROI). What if it turned out that those endowments were already not maximizing their ROI because they weren’t investing in solar panels to power their schools? University endowments are hurting both the world and their bottom lines by this inaction. Read on to find out why.

How Endowments Work

Endowments are huge piles of money that colleges and universities have managed to sock away over the years. They generally came from alumni donations, and their growth is spurred by their schools’ tax exempt statuses. These piles of money are invested in various stocks, bonds, etc. with the goal of getting good but stable returns. Some percentage of this return may go back into the endowments, but most is used to help fund the schools. The dream scenario for a school is to be 100% funded by its endowment so that it wouldn’t need to collect tuition or beg alumni or government entities for money, but the reality is that spending will always increase well before this happens.

The Crazy Huge Pot of Money

There is a crazy amount of money in school endowments. There are more than 100 U.S. schools with over $1 Billion in their endowments and the top 10 endowments total over $200B on their own. Most schools spread their investments across a myriad of stocks and bonds. More aggressive endowments like Yale even invest directly in startups.

Yale is considered one of the top endowments with over $30B in assets and average returns of over 10% annually for decades. Other endowments look in awe at Yale’s results and often try to follow their lead. Yale has innovated by really spreading their money around, as you can see in the chart on the right. Though they have less in the way of bonds and cash than many other endowments have held in the past, these assets still amount to 7% of their portfolio – over $2B – which I probably don’t have to mention is a TON of money. Cash has almost no ROI and bonds offer only around 3-4%, but both provide stability to the endowment as a whole. They won’t go up in value a bunch, but they won’t drop either. The thing is, solar panels and other provide a greater return with even less risk.

How Solar Beats Bonds

The fact that solar panels have a higher ROI than bonds is the key thing that endowment administrators are missing. I go over the math of this for a residential home in PA in my solar ROI post. The basic gist is that if the price to install a solar panel is less than the value of the energy it will produce over its lifetime then it will have a positive ROI. This seems like a low bar, but it’s reasonable considering that over $16 trillion is currently invested in bonds that guarantee they will return less than you invest in them. These bonds are invested in to reduce overall risk, but there is still a chance that they will not pay out. Solar also has risks, but they are low too.

Solar Risks

  1. The solar panels stop making electricity
  2. No one will buy the electricity they produce
  3. The price of electricity drops

Luckily these risks are all very low. Most panels are warrantied to keep producing power for 25 years or more so it is very unlikely that they’ll stop working. It is also cheap to buy insurance for the rare case of them being destroyed by something like a tornado and its price can be factored into the initial ROI calculation. School’s don’t have to worry about the risk of no one buying their power because their operations have a large power draw already. They can simply guarantee that they’ll sell the power to themselves. They can even install less than 100% of their current demand to reduce the risk that they’ll lack a market for their power further.

The biggest long term risk for solar panels is that the price of electricity drastically drops. If that happened the electricity that the panels produce will drop because a kwh of electricity will be worth less. This could drop their return below their cost so it is a real risk. That being said electricity prices have been rising for decades. Our increased understanding of the dangers of climate change is only going to raise prices further. In the end it’s far more likely that prices will continue to rise and that solar panels will produce more monetary value in the future. Buying a bond is making a bet that the issuer will still be able to pay you in the future. While it is very unlikely that a bond issuer like Germany goes bankrupt in the next 30 years, I think that is more plausible than the average cost of electricity going down over that time frame. Solar panels are a bet smart investors should be happy to make.

A Couple Caveats

The math for solar ROI also changes for large institutional size installations. For example a big institution may have negotiated a lower electricity price than regular residential customers pay. At the same time the price to install a solar panel in a large commercial array is about 1/3 less than what smaller residential customers pay. Many universities also don’t benefit from the tax breaks for solar because they don’t pay taxes. This hasn’t kept other smart entities from sharing the tax credit with a for-profit company and still reaping the benefit. When you add it all up solar is still likely cheaper than grid power for many large institutions which means it will have a positive ROI.

Where Are The Huge College Solar Arrays?

If solar is so much cheaper than grid power then why aren’t we seeing huge arrays being deployed at a bunch of schools? Well, this is starting to happen. For example, Penn State is projected to save $14M over the next 25 years by contracting to buy 25% of their electricity from a new solar farm. This is with almost no investment on Penn State’s part so the ROI is essentially infinity. If they did invest some of their endowment money to own part of the solar farm company themselves they could capture much of the profit that company is making and encourage building an even bigger array. The ROI on this would almost certainly beat the low ROI of bonds.

Over Caution = Loss

Penn State thinks they’re being “cautious” with their move into solar by still buying most of their power from the grid. But, as the huge savings from solar start materializing the school will hopefully realize that their “caution” is actually leaving tens of millions of dollars on the table by not going 100% renewable. This will continue being true until policies around renewable energy become more stringent. Schools would be smart to install their large solar arrays now while the rules are still quite favorable and bank on being grandfathered in.

The Money’s There

The cost of installing a solar array to replace 100% of a school’s electricity with renewables is far less than the value of many school endowments. In the case of Yale it is far less than just their investments in low return bonds. Remember that Yale has over $2B in cash and bonds right? Yale is in Connecticut where the total solar investment in the entire state is only around $1.7B and that’s enough to power around 90k homes.

The price to install solar has fallen so far that Yale’s $2B of cash and bonds could nearly triple the amount of installed solar in the state. Of course Yale doesn’t even have 13k students and they live in dorms that use less energy per person than regular houses. Yale would only have to move a small fraction of the money they have in cash and bonds into solar to get 100% of the school’s electricity from renewable sources. This solar would almost certainly have a higher ROI than their cash/bonds while also helping mitigate climate disruption. So what’s the problem? Are they dummies who don’t know how to maximize their returns? Are they soulless ghouls who want to spur on climate change? I’m hoping it’s neither of these.

Fear of Physical Assets

I think the real thing that is holding up investment in solar is a fear of physical assets. Finance people often want to just buy shares of companies. They want to read a prospectus rather than research the value of a hard asset. If they did do a bit of research into solar PV they’d realize that owning a solar array is barely more complicated than owning a share of stock. Yes, they’ll want to hire a good company to install it, and pay for insurance one it but once that’s done there’s next to no maintenance. They could hire people to clean snow/dust off the panels, but honestly the array will probably produce a profitable amount of power without this. So what’s really left to fear?

Why Doesn’t Yale Start a New Trend?

The administrators of Yale’s endowment have said that “what endowment investing [is] all about: perpetual institutions and their long-term health”. The scientists and economists employed by Yale understand that not transitioning to renewable generation will create long-term instability for the entire planet, which obviously includes Yale. The university already has a plan to become net zero by 2050, but that is a long time away. Every day they wait to move money from bonds to solar means more carbon emitted and more dollars lost. When will the directors of Yale’s endowment and others wake up to the fact that building renewable energy to power their schools will return more than their current “safe” investments? When will they start pushing the university to install renewable generation as fast as possible just for the economics of it? When this happens will it start a trend among other school endowments the way so many other Yale investment strategies do? Will some other school beat Yale to the punch and show the world how renewable energy lets them profit greenly? I don’t know the answers to these questions, but if you work in school endowment investment I hope you’ve got a team of people looking into this now.

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