Can Solar Power Compete With The Grid?

Click here for the January 2013 update on the calculated cost of solar power.

It’s been awhile since I’ve done the sums on the actual cost of solar power for Australian households, and with the prices of systems having dropped lately I thought it was time for another look. So what does it really cost to get those solar-boosted electrons out of the wall and into your kettle, TV or computer?

No subsidies

To be fair to the black power industry, I’ve left out the subsidies. My calculations are based on coughing up the full price of the system, and not claiming anything for the Small Technology Certificates that would otherwise reduce out of pocked expenses.

And the results are….

Well, it depends on a number of things. These include the system size, how long it lasts, the installed cost, its location and the interest rate payable on the funds required to buy the system.

Crunching the numbers for a range of systems, lifespans and interest rates, I came up with figures of between 11.6 and 35.4 cents per kilowatt-hour (c/kWh) for systems located in Melbourne. That’s a pretty broad range, with the high end representing a rather pessimistic expectation on the life of the system. So realistically, and for smaller systems, the cost of solar power over the life of the system is more likely to fall in the range of 19-28 c/kWh. For larger systems, or systems in sunnier locations, knock a few cents per kWh off those figures.

Equal to the grid

Let’s put that in perspective. Major electricity retailers are currently quoting prices in the range of 19-29 cents per kWh during the periods when most power is used. For customers with dual rate or “smart” meters, a lower rate of 10-12 cents per kWh applies to power used between 11 pm and 7 am or at weekends.

Solar panels don’t generate much power between 11 pm and 7 am, so the upshot is, for most of the time when a solar system is pumping out the power, it is doing so at a cost comparable to grid power.

Time to go solar?

Right now, if you have the right sort of roof, the answer is probably yes. There are several reasons why. One is that subsidies that reduce the upfront cost of installing solar power are still available. Secondly, some states and territories are still offering premium feed-in tariffs. This means that any time your solar panels are producing more power than you are using in your home you may be paid a high rate for the surplus electricity that is fed into the power grid. And thirdly, it’s good for the environment. Solar power systems “repay” the energy that goes into their manufacture, transport and installation within a very short period of time, as little as a couple of years. Over their lifetime, they generate many times the energy required to make them.

 The nitty-gritty

The following tables show the cost in cents per kWh depending on system size, lifespan and the real rate of interest to finance the system (i.e. the nominal interest rate minus the rate of inflation).

For details on the assumptions and calculations behind these figures see Calculating the cost of solar power.

Remember, the systems costs quoted here are full price and do not take account of current subsidies.

2.28 KW system

Initial cost: $11,892 installed, new inverter after 20 years: $2,700 (today’s dollars)

4.94 KW system

Initial cost: $23,750 installed, new inverter after 20 years: $3,700 (today’s dollars)

10.26 KW system

Initial cost: $45,000 installed, new inverter after 20 years: $6,500 (today’s dollars)

A couple of notes. Under the method used to calculate these figures, and in the case of the 40 year lifespan, the costs per kWh are much higher over the first 20 years. They then fall dramatically once the initial system is paid off.

The other thing to bear in mind is that the cost of the solar power is locked in for the life of the system. The cost of grid power, on the other hand, is rising by substantially more than the inflation rate. This means that solar power is set to go from “competitive” with the grid to “cheaper than the grid”.

Extracting full value

If you can generate your own electricity for, say, 20 c/kWh instead of buying it from the grid at 25 c/kWh, then you’re ahead. But what if you can’t use all the power you generate? The economics then depend on how much your electricity company pays you for power you export to the grid (the feed-in tariff), and the proportion of power you use yourself.

Feed-in tariffs are a political hot potato at the moment. The amount varies from state to state, retailer to retailer, and many programs that pay a premium feed-in tariff are ending or under review. If you use most of the power you generate, or if you can get paid at least the generation cost of the power that you export, then solar will come out on top. And if you get in while subsidies and premium feed-in tariffs are still available, you’ll really be ahead.

A healthy future

Even without subsidies, solar power it is now competitive with the price of power at the wall socket. The cost of photovoltaics is expected to fall further, while the cost of grid power is expected to rise. A sensible approach to feed-in tariffs will help solar over the next few years, but as other subsidies are rolled back, indications are that rooftop solar faces a very healthy future.