The economics of Solar – is it worth it?

Welcome to Finance and Fury.

This episode is all about putting solar on your property – I’ve been thinking about this more and more – done some research and run some numbers – so want to share that in today’s episode – looking at the economics and viability of solar energy at large, along with the cost benefits analysis when it comes to putting this on your home –and trying to view it from an investment perspective

Australia is the world leader when it comes to small-scale solar – having the most dwellings per capita with a solar system – which has been driven by generous government subsidies along with our climate – Australia for the most part is rather sunny – why solar in Germany hasn’t been as effective  

1. The latest Roy Morgan research – as at the latest data in June 2022 – over 3.2 million Australian households (32.3% of all households) now own a Solar Energy System – this is up from only 1.32 million (14%) in the year to June 2018 – more than doubled in four years
   44. highest in South Australia (44.5%) and Western Australia (43.0%), followed by Queensland (37.9%)
   45. rates are significantly lower in Tasmania (30.2%), Victoria (27.7%) and New South Wales (26.6%) owning Solar Energy Systems
       1. NSW still has the most households in the country with Solar, but lowest uptake as a percentage or population
   46. Beyond the climates – A primary reason as to why states like NSW and VIC have the lowest uptake in solar is due to higher density living – many people either rent or own an apartment or townhouse – for which solar is normally not an option – people living in flats, units, apartments, semi-detached terraces and town houses in New South Wales (28.8%) and Victoria (24.7%) than in Western Australia (18.5%) or South Australia (17.3%).
2. Growth of the market at large – largely driven by lowering costs and incentives –
   1. Lowering costs – One reason why solar has increased is due to the price of solar energy units has fallen dramatically over time
      1. Back in the 70s, it cost $76 per watt of production but by the 90s this had to vastly declined to $8, then has slowly declined from there – being around $0.3 today
         1. This is in part due to the conversion efficiency of panels having improved by as much as 0.5% each year for the last 10 years
      2. But it is mostly due to the production costs declining thanks to manufacturing innovation mostly driven by Chinese panel producers.
   2. The other side of the equation is incentives
      1. One is the Government subsidies and rebates – likely has incentivised many people to install solar
         1. Each state has different incentives – like NSW with battery loans – I won’t be going through each state individually and covering the benefits and eligibility – too much to cover
      2. But what will be the main focus is the savings in electricity along with the feed-in tariffs –
         1. A feed-in tariff (FIT) is what you can earn back on your electricity bill when your solar system generates more energy than your household uses – Any leftover energy gets “fed back” into the electricity grid and you get paid by your energy provider
         2. Feed-in tariffs differ from state-to-state and what you can earn back will depend on your rate, the plan you’re on and how much energy you’re feeding back

• Some people have locked in higher rates – but it averages between 10c per kilowatt hour to 2c per kilowatt hour – so this will have a variation in returns – the average may be around 5c per kilowatt

If you can save in electricity and get money back – solar sounds like a great idea – but it creates some problems with the grid, increasing the economic challenges to the grid and therefore, also increases the chances that feed-in tariffs may not be around for too much longer

1. the ever-increasing amounts of solar on roofs is presenting technical challenges for the grid
   1. Think about how solar power works – when the sun shines, power is produced – and this is during the day time when many people may not be home or using power – so in the times when the power being produced by solar is greatest, it is not being used by the average household
   2. So, the feed-in output from solar is now so great at certain times that it is not being used – so the minimum levels of demand for power from the grid were reaching critical lows
   3. In these situations – coal and gas plants have to switch off to avoid overloading the grid – as more power is being added back to the grid than is being extracted
2. the rise of solar was causing economic headaches as regulators and companies tried to cope with the surging levels of output from the systems.
   1. There is now so much solar power being generated in the middle of the day that the electricity that producers can provide in this time period is virtually worthless
   2. The story changes at night for those without a battery in their property – they now start relying on power from the grid – paying a premium in prices compared to the tariff they receive back

Looking at the individual economics – To understand if solar energy is going to save you money or not, the most important thing to determine is the cashflow and opportunity cost.

1. economics of solar have gotten much better since its inception – this has been through an increase in electricity prices and a decrease in the cost of a solar system
2. Let’s look at an example – say you install a 6kW solar system – around 16 panels – Your returns will depend on lots of things including how much electricity you consume
   1. But a 6kW PV system should generate around 24 kilowatt-hours of electricity a day
   2. Some quotes I generated through providers range between $6,000 to $9,000 depending on the quality of the panels – let’s say it is on the lower side, say $7k
3. Look at the Opportunity cost – Either fund through finance or cash at the bank
   1. If you have $7,000 in the bank right now it is probably earning about 3% to 4% interest or around $245 in interest income – this will get taxed but it is still a positive income
   2. Alternatively, if you add $7,000 to your mortgage you are probably paying about 5% to 6% of interest of $385 each year
   3. Either way you have an opportunity cost of between $245 and $385 per annum for a $7k solar system – but you are now down $7k – meaning additional principal repayments are required, or if you invested the funds, no capital growth
4. The long-term viability of solar has to do with future expected price of energy estimated over the life of the unit – this is a hard part
   1. What affects price – supply and demand – looking at energy price increases over the last 70 years – Energy prices were slightly declining from 1950 to 1970 – under the golden age of economics where government policies were minimal and money had some form of backing through the Brenton woods system
   2. But from 1972 prices started to rise – but they rose in line with inflation for the better part of 30 years – which was a total increase of around 300% over this 30-year time period – but from 2007, to now, prices have risen more than 300%
   3. Up until 2007, retail electricity prices increased at about the same rate as inflation. But from mid-2007 onwards, electricity prices have risen quite rapidly
   4. One contributor to the increasing prices over the past six years has been network costs. Network costs represent between 45% and 55% of a typical electricity bill on average
      1. But the closure of power stations such as Hazelwood and Liddell are one of the contributing factors as to why the price of energy has risen so dramatically in the last ten years – why were these power plants shut?
      2. The Commonwealth and the states agreed in December 2007, at a Council of Australian Governments (COAG) meeting, to work together from 2008 into a single national scheme working towards environmental issues – their findings were that their green energy targets would drive up energy prices and would do nothing to cut greenhouse gas emissions – but to reduce CO2 emissions, cheap coal plants have been shut in favour of green energy solutions

• South Australia achieved its target of 20% of renewable supply by 2014 three years ahead of schedule (i.e. in 2011). In 2008 it set a new target of 33% by 2020 – but this is the state with the highest energy prices – not indicating that correlation is causation – but it is likely a large contributor that the more solar or wind energy is implemented, the higher electricity prices will become

1. There was a spike in energy prices when the carbon pricing scheme was introduced in under the Clean Energy Act 2011 – There was only one brief reprieve in 2014 after the carbon tax was repealed, but that hip pocket relief was short-lived as prices soon started to climb again

1. In recent years, much of the increase in prices has been attributed to the need to invest in the network component because of previous underinvestment in maintaining the network or to increase capacity – important to remember the impact of policies to address environmental issues.
   1. Smaller electricity price increases are the result of recent changes to the regulation of transmission and distribution networks and competition in electricity wholesale markets due to low demand growth due to solar power during the day.
2. Moving forward – it is likely that energy prices will increase over time – Whilst Australia is probably the best country on earth to adopt nuclear power, being the largest producers of uranium, with very limited exposure to natural disasters, like earthquakes or tsunamis, with plenty of space for safe storage for depleted rods – we are not implementing this as a green energy policy – over the next decade, we could have some of the cheapest energy on earth – but we are on track to still be one of the most expensive

Putting the numbers together –

6. Cashflow is the first major component of this – how much can you save in energy along with generate in income
   25. This will be based on your daily use of energy and the energy cost for average daily uses – I will use my own data here and some averages – but we are charged 25.8c/kWh – prices vary between states and providers – Adelaide have some of the highest – Canberra some of the lowest
       7. average usage each day varies – as a household of three, our usage is 7.27 kWh per day – cost of electricity a day is $1.87 – we don’t use much electricity when compared to the averaged provided by our power provider
          1. Comparison between other households – two-person household at 13kWh to four people at 20kWH – changes if you have aircon on all day or not
       8. But on top of this, we pay a supplier charge – average of around $1.18 per day – so a total average cost of around $3 a day at these rates.
   26. Daily savings from solar and feed-in tariff rebate – Save $1.87 per day in cashflow – but will still be paying the supplier charge of $1.18 per day
       2. Say a 6kw system can generate 24kwh per day – how much would you make? Say you use 10kwh per day, then you are saving $2.58 per day and generating $0.7 in feed-in tariffs, assuming you are getting back 5c per kWh
          1. This is a benefit of $1,198 p.a. – close to $1,200 p.a.
          2. Remember that you are still paying the supplier charge of $1.18 per day
       3. The more you use in energy, the more solar is worthwhile – this is due to the differential between the prices charged versus the feed-in tariff – if you are paying $0.26kwh, but only getting back $0.05kwh –

• But the times and usage can differ – as you might be paying for energy in the night-time when solar is not generating – different story if you have a battery – but assuming you don’t
  1. Say you use 50% during the day and 50% at night – and 10kwh per day, you will save $1.29 and get back and generate $0.95 in feed-in tariffs – but then pay $1.29 in electricity at night
  2. So you are still saving money, but your gross cashflow benefit is $346.75 p.a. down from $1,200 p.a.  

1. These figures are based on the assumption that energy prices remain the same – but what if they continue to increase at 10% p.a. or even 5% p.a. your benefit starts to grow even more over time

7. This starts to impact your Years to break even – assuming a $7k unit
   5. Take the base example – that you use no power at night – and your panels cover everything – YTBE are 5.8
      20. But the second example of 50/50 between night and day, YTBE is now 20.
   6. Lifetime of solar panels – Lifespan of the panels – 20 to 30 years – so assuming that energy prices increase over time
      5. 5% increase rate – Break even happens in about 5.5 years and with a 10% increase rate occurs in just 5 years
   7. When including opportunity costs – say $7k against a loan, saving interest rate of 6% p.a. = $420 p.a. break even occurs in around 7.5 years
8. Different factors that will change these figures
   1. Increases in energy prices at different rates to assumptions – if prices decline for example
   2. Reduction or removal of feed in tariffs – which is possible if the grid starts to get overloaded –
      1. Trend of bigger units to generate some additional money back – but more people doing this decreases the feed-in tariffs

In summary – Solar can potentially save you money – if you use a lot of electricity during the day

Intangible – power in black out