Market decides bigger solar is better

Shrinking cost differentials have made bigger systems more tempting for customers, meaning the fall away of feed-in tariffs is not translating to a system size retreat. In fact the average system is up almost a kilowatt on last year.

About a year ago I puzzled over a chart which illustrated that the size of solar systems being installed in Australia was getting larger rather than smaller. At that time many states had slashed the price paid for any electricity exported by household solar systems to the grid. 

I’d predicted about two years ago that this would mean the size of systems being installed would be get smaller not bigger. Given households were only getting paid around 8 cents for a kilowatt-hour of power exported, but paying something like 20 to 40 cents for power they consumed, it made financial sense to install a solar system of about two kilowatts or less. This would be enough to offset a household’s own consumption, but not substantially exceed it resulting in exports of power getting paid a pittance.

This was supported by analysis by the Alternative Technology Association detailed in Climate Spectator back in September last year.

Well a year on, and in spite of the feed-in tariffs now being cut to wholesale rates across every state across the land, the trend towards bigger systems has continued, as shown in our charts of the week.

The first chart below shows that the days of the dinky one to 1.5kW (shown in grey and yellow), which used to represent 85 per cent of installations back in 2009, are now well and truly over. They now represent little more than 5 per cent of installations. Indeed even systems between 1.6 and 3kW in size (light green) are on the way out. Seventy per cent of installations are now 3kW or greater.

Proportion of systems installed by difference levels of capacity

Graph for Market decides bigger solar is better

Source: Green Energy Markets in conjunction with SunWiz and SolarBusinessServices (2014)

Some of these bigger systems will have been installed on business premises where output would not exceed consumption (for example, note how 10kW-plus systems are starting to creep up). But most would be on residential premises where you’d expect the output of a 3kW-plus sized system would substantially exceed the consumption of the home. 

This doesn’t seem to make sense.

However, there’s another trend at work in the Australian solar market. The price households pay after rebates for a small solar system has pretty much stagnated, while the cost of large solar systems have been continuing to drop considerably. 

According to Clean Energy Regulator data the average price a household paid for a sub 2kW system in the first quarter of 2011 was about $2200 per kW of capacity. But you’d pay about $3500 per kilowatt for a system of around 5kW largely because the level of the rebate per kilowatt stepped down dramatically for capacity above 1.5kW (due to the Small-scale Technology Certificate multiplier). Essentially, customers saw absolutely no economies of scale pricing benefit from bigger systems.

The removal of the STC rebate multiplier for the first 1.5 kilowatts has meant that now the government rebate is the same per kilowatt whether you go for a big or a small system. But this isn’t the only thing that has made larger systems more competitive. 

The two charts below taken from a recent edition of Climate Spectator’s Solar Choice PV Price Check, shows that the price per watt for a 1.5kW system jumps around a lot and doesn’t seem to have a discernible trend up or down. But the trend in the price per watt for 5kW systems is very clearly headed down. This trend is largely independent of government rebate changes which had concluded in January 2013, while prices have continued to trend downwards. The average price per watt for a 5kW system is now clearly better than a 1.5kW system at $1.75 instead of $2.25. Compare that to the beginning of the charts in August 2012 when the average price per watt for a 5kW system was slightly higher than for a 1.5kW system.

Price per watt for a 1.5kW system

Graph for Market decides bigger solar is better

Price per watt for a 5 kW system

Graph for Market decides bigger solar is better

What seems to have happened is that in spite of feed-in tariffs being slashed, the differential in cost between going for a small 1.5kW system and going for something much bigger has narrowed considerably.  While it probably still makes better financial sense for a household to install 2kW instead of three to 5kW, they are making decisions using other rules other than net present value or return on investment. This might be, ‘How much can I put on my roof for a budget of $5000 or $10,000?’ Five kilowatt systems are now comfortably below $10,000 whereas they used to be several thousand north of that. Another deciding factor might be 'how many kilowatts do I need to zero my electricity bill? Or even, ‘I want a bigger system than my neighbour’. 

Also, I suspect that the marketing strategies of solar retailers have changed. In the past when the STC multiplier was significant and sales were easier to come by, mass marketing of 1.5kW systems was common and it was a quick and easy sell relative to 5kW, which carried a price tag that was a hard ask of a customer. But the numbers of installations have declined considerably since 2011. With installations now harder to come by, when you do get a customer who’s interested, you really want to make it count by upselling them to the biggest system they can afford and fit on the roof. Also, with module costs now representing a much smaller component of overall costs, 5kW is not that much of a stretch from selling a customer 2kW.

Clearly many households make purchasing decisions based on things other than a spreadsheet calculation. So far this has been a saviour for the solar sector, which has seen the number of installations plunge but kept installed kilowatts at reasonable levels. 

It may also bode well for selling battery storage systems in the future. Once the system is on a roof, customers will be motivated to consider how to maximise its value. Also customers may be willing to buy batteries even if the economics don’t completely stack-up because they have emotional drivers at work such as hating their electricity company or wanting some insurance against blackouts even if they are extremely rare.

Related Articles