A nervous wait for solar PV payback

The scaling back of feed-in tariffs in several Australian states will alter the shape of the PV market. It may not mean less solar systems but it will mean smaller ones.

In the last few months the New South Wales, South Australia and West Australia governments have scaled back the price PV owners are paid for electricity they export to the grid. The reduction has been to levels substantially below the retail electricity price these same owners pay for any electricity they import from the grid. The analysis detailed below suggests this will have two major implications for the solar sector:

1) The trend towards larger solar systems is likely to reverse and it makes much more sense for households to install a system of about 1 kilowatt rather than the three to five kilowatt systems that had become popular.

2) The more energy-efficient a household, the lower the incentive to install a solar system. Solar will make much more sense for large energy consuming households that are less likely to export their solar generation. Perversely the solar sector could find itself in a battle with government initiatives to improve household energy efficiency.

In WA, the price the main electricity retailer will pay is seven cents per kilowatt-hour for generation exported to the grid. In SA, the regulator requires retailers to pay 7.1 cents, which will then increase to 11.2 cents by 2013-14. In NSW, the regulator did not impose any mandatory requirement on electricity retailers, but suggested an appropriate rate would be between 5.2 cents to 10.3 cents. Meanwhile, the Australian Energy Market Commission expects that, by 2013-14, the price households pay for electricity they consume from the grid will rise to between 29 cents to 32 cents.

The table below provides an indicative illustration of how this is likely to affect the financial returns of a household solar system in the mainland capital cities for a 1.5 kilowatt system and a 3 kilowatt system (this excludes any government support such as renewable energy certificates). It is based on prices similar to those being offered by a number of major solar PV suppliers in Australia.

The table illustrates the time it would take before the amount of money saved by the system outweighs its cost – its ‘payback period’. It is also illustrates the profit a home-owner would have earned in 15 years after paying financing costs to the bank assuming an 8 per cent interest rate. It looks at two alternative tariff structures:

-- A one-for-one situation where solar PV owners get paid the same rate for their exported electricity as they pay for any electricity they import. Also the electricity price is kept at 25 cents rather than the 30 cents it is expected to rise to.

-- A potential future state where electricity is 30c/kWh and exported generation is paid just 8 cents

It also considers whether the household exports 25 per cent or 50 per cent of the solar system’s electricity generation.

Effect of different tariff structures on household solar PV financial returns


Note: System price assumed is $2,800 per kilowatt. Profit is based on net financial returns over 15 year period based on bank loan at 8 per cent nominal interest rate. Credit to Sarah Morton who developed the spreadsheet calculator.

For Melbourne a solar PV system is not a great investment under any case without government support. But the difference between tariffs on a one-for-one basis versus the alternative of 8 cents for exports is not all that great provided the household has installed a small system and is exporting less than 25 per cent of the generation. But if 50 per cent of the generation is exported (which I manage to do with a 1.4kW system) then you never manage to get a payback on the system and you’d have to be extremely altruistic to install a larger system.

For the other state mainland capitals the profit on a PV system is also not going to get anyone particularly excited. With a 1.5kW system it doesn’t make all that much difference between getting a one for one tariff structure or the 30 cent import/8 cent export tariff provided you export 25 per cent or less of generation. But again the red ink looks rather ugly if you install a larger system and export 50 per cent or more of the generation.

Of course the motivations behind purchasing solar systems are not entirely driven by a rational financial analysis. Also the renewable energy certificate rebate makes a big difference which is not incorporated in the table above. Nonetheless it seems reasonable to expect that such a large financial disadvantage for large systems will ultimately flow through to consumer decisions.  

Also what is particularly worrying is that the incentive to improve energy efficiency is significantly dulled by these changes in tariff structures for those with PV systems installed. My own home is not particularly radical in terms of its energy efficiency features, yet I manage to export 50 per cent of generation from my 1.4 kilowatt system (and it is regularly occupied during daytime periods) in large part due to use of natural gas and no air conditioner. Also households are likely to become similar to my own, driven by rapidly rising electricity prices, and plunging costs for energy efficient appliances and lighting. This may not bode well for the solar PV sector.