Should you invest in a solar power system and, if so, how big a system should you get?
The answer depends upon your circumstances but I provide a free workbook below to make it easy for you to work out.
As the answer is heavily dependent upon arbitrary state incentives, I only address the issue in detail for people living in Queensland. I'll use real numbers based on my home. We're a fairly typical family of 4. For us, the answer is Yes but its a lot of risk for a small return so if the environmental considerations were not significant I would not be rushing to do it. Read on to see how you can answer the question for your own particular case.
The schemes on offer involve an initial outlay. The return from the system is expected to pay back this outlay, theoretically turning a profit after perhaps five years. Thus, a solar power system should be considered as an investment on which you hope to make a return. As there are lots of risks (failing panels, broken roof, new technology coming on the market, changing incentives…) this investment should potentially offer a good return.
Lets assume we're borrowing the money to get the system. Even if you have the funds on hand, this is a good way to factor in the 'cost of the money' - that is what you are not doing with it like earning interest.
There is a rather counter intuitive fact about generating solar power from home thanks to the government incentives. If we put electricity back into the grid, Our electricity provider will pay us 44c per KWH (sometimes more depending upon the provider - AGL have offered us 52c). This is known as the 'feed-in tariff'. In Queensland, it applies to the power we feed into the grid whenever our consumption falls below the power our solar system generates.
When we take electricity from the grid we pay an average of 24.8c per KWH. While this is clearly irrational (and we should therefore expect it to change in the near future) it has a dramatic impact on the economic viability of a solar panel system and it has some interesting consequences on the way we can optimise our income from the system.
The other incentive is the energy credits. These simply reduce the purchase price of the system. When we do the sums, we'll build these in to the purchase price. It is important to also include any extras in the price too. It may be necessary to change the meter for example.
Why is the feed-in tariff so important? If you can skew your electricity usage to minimise it during the day (not hard for most of us) then you can sell much of the power you generate at 44c or more and then buy the electricity you need at 24c or thereabouts.
For example, our consumption during the day is about 1KW. In the 8 hours of good sunlight this equates to 8KWH. Daytime usage is very important in deciding if solar power makes sense because this is when we are potentially earning from that generous feed-in tariff. In our case a 5KW solar system should generate 20kWH which means it saves us 8KWH at 24c and earns us 12KWH at 52c that's an earning of $8.16 per day putting us in profit on our bill. However, we must factor in the loan repayments.
The time for to get a return on our investment must be short enough to to allow us to believe that the risks are minimal. The rules are likely to change and the solar panel system will fail eventually so we'll aim to keep this period down to 5 years or less.
This is all looking quite complex so I've used a spreadsheet workbook to simplify it a bit by modeling the investment.
Click here to download the workbook. It was developed in Calc which is part of Open Office and is completely free. If you wasted money on Excel 2007 or later versions you can get an excel version by clicking here.
There are three sheets in the workbook.
So to see how your investment will perform, enter your values into the Loan sheet and the electricity sheet and look at the graph and figures on the summary sheet. The most important value is the cumulative return. This shows how much you are better (or worse) off in cash terms as the years go by. The ROI (return on investment) is interesting but its not too worrying that its negative because I only consider the actual financial return. For this calculation to be meaningful we would have to extend the workbook to model the residual value of the solar system (i.e. how much value it adds to your property).
You can also use the spreadsheet to ask some more interesting questions using a feature called "Goal Seek". This is in the Tools menu (Excel users, go fish - its there somewhere). This is a very powerful little tool which is best described using examples.
Say for example you filled in your initial details using the estimate, your bill and your loan offer and you want to see if you can adjust your day/night usage to get yourself cash positive (no outlay) from the very first year. You could try putting in different values and find a solution that works or you can use goal seek. Here's how:
Alternatively you might want to know how much you can borrow to buy your system in order to be in profit within 6 years:
Goal seek does what it says, its a very powerful utility in Calc (and Excel) that is often forgotten about.
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