Good Day Sunshine: Investigating Solar Installation and Home Resale Premiums

Our sun is a fusion reactor and solar photovoltaic (PV) technology converts its power toward our residential and commercial energy needs through a zero emission process. According to the International Energy Agency, PV was the fastest growing global renewable energy technology between 2000 and 2011 and could meet up to one-third of worldwide energy demand by 2060. In the United States, residential PV installation is growing, especially in states like California, where a Renewable Portfolio Standard and optimal solar exposure make residential PV an ideal candidate for reaching renewable goals. It is generally accepted that homes with photovoltaic (PV) systems already installed receive a boost to their sales price, but inconsistencies with how these premiums are appraised impede PV expansion by incorrectly assessing how the technology is valued.

In “Exploring California PV Home Premiums,” Ben Hoen et al. from the Environmental Energy Technologies Division of Lawrence Berkeley National Laboratory compare California PV home sales prices to non-PV sales prices in order to explore how traditional valuation techniques compare to estimated premiums and investigate how these premiums change with respect to the size and age of the PV systems. Their findings show that larger PV systems tend to earn larger premiums over smaller systems, and older PV systems earn smaller premiums over newer ones. Additionally, both the income and cost approaches, which are standard methodologies in appraising, tend to underestimate the observed premiums.

The study focuses on a dataset of PV and non-PV homes sold in California between 2000 and 2009. A matching technique ensures that only PV and non-PV homes similar with respect to detailed home, geographic, and market characteristics are compared. Subtracting the average sales price of the non-PV homes from the average sales price of the PV homes derives an average PV home premium of $24,705.

Income and cost approaches are standard valuation techniques in real estate appraisal and Hoen et al. test their predictions against the calculated PV home premiums. The income approach values a property based on the income produced over time, while the cost approach determines the value of a property by how much it would cost to replace. The replacement cost estimates were calculated using existing data on net installation costs, while the energy savings estimates (income produced) were calculated through a complicated algorithm that takes PV features such as output, degradation, and lifespan into account, as well as market features such as electricity rates and time of sale discount rates.

The study reports a strong correlation between the PV premium and the income and cost estimates, but each estimate only accounts for 42 to 60 percent of the calculated premium. Homebuyers are paying more than either appraisal method predicts. The authors speculate an added “green premium” may exist outside of strict income or cost calculations, similar to the willingness of some to pay more for “green” products. There could also be unaccounted costs, such as the time and stress put into buying a new PV system or underestimates in energy savings from high consumption households.

Lastly, the PV premiums were tested for sensitivities to system age and size (kilowatt capacity). The study shows that PV premiums are strongly correlated with size, estimating that each additional 1-kW garners a $5,911-higher premium. Age exhibits a weak correlation, reducing the premium by $2,411 for each year since installation. Premiums are estimated to diminish (nine percent per year) more rapidly than what the income (0.05 percent per year) or cost (five percent per year) approaches predict, so systems older than six years earn considerably smaller premiums than would be expected, indicating an unjustified weight placed by homebuyers on perceived age of the technology.

This study represents a substantive investigation into the value California home buyers place on existing PV systems, but further research could be done to gauge preferences outside of California, determine whether valuations have changed since 2009, research premiums on increasingly popular leased PV systems, or reconcile the disparity between cost and income predictions and observed premiums. Despite these opportunities for clarification, this study lays the groundwork for assessing the value of home solar systems and allowing real estate appraisers to catch up with rapidly emerging green technologies.

Feature Photo: cc/(Trebosc)