Will A Solar System Save You Money In The Long Run?

By Finn Peacock

Chartered Electrical Engineer, Ex-CSIRO & Founder of SolarQuotes

At the time of writing (May 2017), there are over 1.5 million solar PV installations in Australia. The vast majority of these installations are residential.

You wouldn’t get to that many installations if solar didn’t provide real, tangible benefits for those who installed it (the main benefit being a reduction in your electricity bills).

But – it can sometimes be a little hard for the average Aussie to wrap their head around a) exactly how installing solar PV can save them money, and b) determining how long it will take to see a return on an investment in solar.

To illustrate the answers to a) and b), I’ve come up with the following example below. Please note that these are simple, rounded numbers to provide a clear example.

(Before we get started, it is important that you understand the difference between a kW and a kWh – this article explains in detail.)

Say your household uses 3,000 kWh of electricity per quarter. If you don’t have solar, this means that you’re paying around 31c per kWh for every kWh.

Assumption 1

3,000 kWh x 31c per kWh = A $930 quarterly bill for the non-solar owner (before fixed service charges and GST).

This is quite a doozy of an electricity bill!

You’ve spoken to some friends that have installed solar who have referred you to their installer, or maybe you’ve gotten quotes for solar online, and you’ve honed in on a quote for a 5kW system for around $8,000 (which is a fair price for a 5kW system using high-end equipment).

Assumption 2

The salesman has assured you that this system will make a significant dent in your electricity bills – but of course he’s going to say that. How can you realistically figure out if that $8,000 investment is worth it?

Let’s bring solar into the equation

If you generate electricity with a solar system and don’t feed it back into the grid (because you’ve used it to power something in your home), the electricity is ‘free’, or 0c per kWh.

The sun isn’t out 24 hours a day, though – so this means that you can only get your ‘free’ electricity from around 8am – 6pm.

Still, let’s make the assumption that 40% of your electricity consumption is between the hours of 8am-6pm (when the sun is up and your system is generating electricity).

Assumption 3

40% of 3,000 kWh = 1,200 kWh of self consumed solar.

This means that you’ve only had to buy 1,800 kWh from the grid at a price of 31c per kWh.

So the solar owner has only used $556 (31c/kWh x 1,800kWh = $556) of grid electricity.

When you export excess solar energy that isn’t used in your home, you’re paid what’s called a “feed in tariff” by your electricity provider. It is typically anywhere between 6-12c per kWh exported. In this example, we’ll use an 8c feed in tariff.

Assumption 4

So, we credit the 8c per kWh for the excess solar energy that you’ve exported. If this is a 5kW system, you’d probably have exported about 700kWh of your solar generation. You would be credited $56 (8c x 700kWh).

$556 (bill with solar) – $56 (credit from exports) = $500 (net quarterly bill with solar).

Your new bill is therefore going to be $500 (before fixed service charges and GST).

You are actually saving $430 per quarter ($930 – $500 = $430), or over $1,600 per year with solar.

graph of bill with and without solar

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Once you combine the ‘invisible’ savings (from not needing to purchase electricity from the grid) with the feed-in tariff, the amount of money solar saves you can translate to a very respectable return on investment.

As mentioned above, the 5kW system used in this example would cost about $8,000 at today’s prices.

Saving $1,600 per year gives you a 20% annual return on an $8,000 system. And assuming electricity prices rise every year (a pretty safe bet), your return will increase every year for the 25+ years your solar system lasts.

Try getting that from the bank!

But what if I’m not home during the day?

If you are not at home during the day (hello to all you 9-5ers!), you will typically self-consume about 20-30% of a well sized solar system (as opposed to 40% in the example above), pushing the simple payback out to 8-10 years.

Bear in mind that this is still a 10-12% return on your investment.

(Side note: Avoid any solar company that calculates your payback based on 100% self-consumption. No-one has 100% self-consumption. The company is being dishonest to get your sale.)

Is $1,600 per year a good return on a 5kW solar system?

A high-end 5kW system, at the time of writing (May 2017), will cost you about $8k installed.

So $1,600 of annual savings is a simple payback of just over 5 years.

And this is where we come to another misconception about the returns from an investment in solar. Many folks believe that a payback of 5 years means that they see no financial benefit for 5 years.  This is wrong, wrong wrong! We need to take cash flow into account.

When you work out the actual cash flows, many folks find that they are actually losing money by not having solar (Oh dear – I really am starting to sound like a sleazy salesman – sorry – but please bear with me because this is true!)

Working out the simple cash flow for a $1,600 per year return on an $8,000 spend.

Most people either pay for solar out of savings or add it to their mortgage.

If you have $8,000 in the bank right now it is probably earning about 4% interest. Let’s call it 5% to make the maths easy.

If you add $8,000 to your mortgage you are probably paying about 5% interest on it.

Either way you have an “opportunity cost” or “cost of finance” of 5% ($400 per year) if you splash $8k on buying solar.

But outweighing this is the $1,600 per year you would be saving with solar.

(And if you add it to your mortgage it should cost you about $10 per week to buy the solar system but save you $30 per week. Wow.)

And just to be clear – I’m not saying you will get this return if you buy solar. You may get less, you may get more. Your savings will absolutely depend on how much electricity you consume in daylight hours.

The best way to see if you can get the kinds of returns illustrated in this example is to get a number of independent solar installers to do the maths for you based on your unique situation. Then you can decide if solar will work for you financially.

If you’re considering installing solar panels for your home, SolarQuotes can help you get 3 quotes from high quality installers (including payback calculations) quickly and easily: 

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I was a lost sheep in a field of wolves without your help”

– Margret, Castle Hill, NSW

 

About Finn Peacock

I’m a Chartered Electrical Engineer, Solar and Energy Efficiency nut, dad, and founder of SolarQuotes.com.au. My last “real job” was working for the CSIRO in their renewable energy division. Since 2009 over 270,000 Australians have used my site to get quotes for high quality solar from pre-vetted solar installers.

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