What are the disadvantages to borrowing money for energy conservation measures / solar panels?

Question

I am contemplating putting solar panels on my roof, as there is a collective buying of solar panels in my neighborhood going on. Special loans are offered by local government for solar panels or energy conservation measures at a very low rate.

Consider these realistic estimates:

• The solar panels have a payback period of 10 years.
• The loan is paid off in 10 years with an annuity.
• The monthly energy savings equal the monthly payment for the loan.
• The solar panels will last for 25 years.
• The interest rate on the loan is lower than the interest rate on a savings account.

Simple mathematics tells me that it is a good idea to borrow the money.

What are the disadvantages to borrowing, in this case?

Answer 1

If you sell the property before the ten years are up, the panels might have declined in value more than the amount you owe declined. In the original post's situation, this is a negligible risk.

Suppose (for the sake of argument) that each year's panels are 10% better than the previous year's panels. Even if the panels lasted forever, and even if the price you could sell the power for stayed the same, then the value of your panels should decline 9% per year. If the panels are financed at a 4.5% APR for 10 years, your principal should decline by 8.1% in the first year.

A second risk is that the solar panels might be ugly, or might go out of fashion. When selling a home, "curb appeal" matters. If potential buyers do not like how your home looks with the solar panels, you might not be able to get as much money for the house if you have to sell it.

A third risk is that the loan might harm your credit rating, or otherwise restrict your ability to borrow. Even though this deal does not impinge on your disposable income, a bank might think that it raises your debt-service-to-income (DTI) ratio. This could theoretically prevent you from refinancing your home, or raise the interest rates on potential loans you might want to take out.

A fourth risk is that the installation process might damage your home in a way that causes expensive damage. Water leakage and electrical fires can potentially destroy homes. You need to have the solar system competently installed.

A fifth risk is that the solar power system might make it harder to maintain or replace your roof. Will your roof need to be replaced during the life of the solar power system? If so, consider options that do not force you to throw away the solar power system prematurely.

Answer 2

Depending on the details of your solar panel setup, the monthly savings may change depending on changes in the law or utility company policy. This could change how long it will take for the solar panels to "pay for themselves". So your bullet point about the "payback period"/"break even point" is not fixed at the moment you buy the solar panels; it depends on costs you will incur over many years, and those costs could turn out to be different from what you originally thought.

At least in the US, home solar installations typically work by selling excess power back to the power company. The power company can change the amount that it pays you for that power. There is also typically a minimum charge for being connected to the grid, and the power company can raise that charge. (This article mentions one such possible change.) The power companies want to keep making money, and as more people start adding solar panels, the power companies may change their rate structure to make that less financially feasible.

You can avoid many of these issues if your solar panels are not connected to the public electricity grid, and you, for instance, store power with your own battery. However (at least in the US) this is very uncommon because it is more complex and expensive.