In addition to providing a solid return on investment relative to other investments of similar term and risk, solar electric power is a great hedge against inflation for homeowners and businesses. If you expect continued inflation (most people do), a solar electric system can lock in your price for electricity for a long time.

Most people in Florida buy solar energy systems outright or finance them using home equity or other consumer financing. What they are doing is buying a big bucket of energy up front that they can use in the future. As electricity prices rise, they don’t care because they have essentially already paid their electric bill in advance. Price fluctuations are not important because they have hedged against this risk.

To draw a parallel, let’s pretend that you could walk into your local gas station and prepay for 10,000 gallons of gasoline. This is the amount of gasoline you will use over the next 25 years if you drive 12,000 miles per year and get 30 miles per gallon (400 gallons per year). Let’s also assume that you know you will continue driving a gasoline vehicle for the next 25 years. The gas station will not go out of business — it’s as reliable as the sun rising. You can go to the gas station any time over the next 25 years and take as much gas as you want. If you use over 400 gallons in a year, you just pay for the difference at then current prices. If you use less, you can keep some gas in the “bank” for future years. To take it a step further, let’s say that you have to pay $30,000, or $3 per gallon, which is a little more than the average cost in Florida now.

If you had the money, would you do that? You’d be crazy to pass up that offer, because if gas prices in 5, 10, or 25 years from now are much higher, you will look like a genius! Imagine when your friends are paying $6.50 per gallon (the current price in major European countries) and you’re just taking prepaid fuel out of the “bank.” What if gasoline prices go to $10, $15, or $20 per gallon? It doesn’t matter — you don’t have to change your driving habits. I’ll remind you that gasoline prices have fluctuated in the U.S. in just the last 10 years from $1.60 to $4.10 per gallon, so prices are anything but stable.

Buying solar panels is like buying a huge stockpile of electricity in advance, but never having to store it.

Solar energy works in much the same way. When you install solar panels on your roof, you will reduce your electricity consumption by a predictable and steady rate. If utility electric rates increase (when is the last time they decreased), you will still be using that “gas” you bought back in 2015 at a relatively cheap rate. Year after year your solar panel investment will pay off because you hedged against rising prices. If you use more energy than you produce you will have to pay the then-market rate for the excess energy, but if you watch your consumption you will save tons of money.

The best part is that you don’t have to go all in on this bet (hedge). You can buy a small system that just offsets a part of your electric bill. To use the car analogy, you can just buy a few hundred gallons and tuck it away for the future. Of course, the larger you go, the lower the cost “per gallon” and the better your investment and hedge against inflation you will get with solar power. Solar power works the same way — we just measure the investment in kilowatt-hours like your utility bill, not gallons.

Because solar panels will continue to produce power for decades, the savings in the distant future could be staggering through compounding of year over year energy inflation. Solar panels installed today are typically under warranty for 25 years, and will continue to put out at least 80-90% of their initial power output at the end of the warranty period. If you have a longer investment horizon, solar panels are expected to perform well beyond that time-frame, with estimates exceeding 40 years. You could even pass on this amazing investment (tax free) to your children and grandchildren.

 

P.S. One of the greatest threats to electric rates in Florida is the reliance on natural gas by utility companies. We now rely on natural gas for over 70% of our electricity production in Florida!

Note: Beware of shady solar dealers who over-inflate energy inflation rates in solar energy proposals. While energy prices will likely continue to increase, the assumption of overly aggressive inflation rates can skew a financial proposal to give unrealistic expectations.

More food for thought: what if you could do the same with healthcare? You can buy fixed cost term life insurance. Why can’t you prepay for a lifetime of health insurance? Sadly we just have to keep paying more and more every year.

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