Three things that can affect the ROI of your solar system
Low quality products, bad design decisions, and poor workmanship can all hurt your return on investment when you purchase solar. In this article, we will discuss 3 factors that can influence your ROI.
Going solar is an investment decision, since you’re assuming the cost of owning the system to save on electricity bills. If you get high-quality solar equipment and a professional installation, your savings will be many times higher than your costs, and the payback period can be as short as three years. Unfortunately, the opposite also applies: low quality products, bad design decisions, and poor workmanship can all hurt your return on investment. In this article, we will discuss 3 factors that can influence your ROI when going solar.
1) Energy consumption habits for solar ROI
Unlike a diesel generator, a solar panel system cannot be switched on and off as needed. The hours around noon are the most productive because there is more sunlight available, and generation drops to zero at sunset. As a result, homes that consume more energy during the day can use more solar power directly. On the other hand, homes that consume more energy at night must change their habits to use solar power directly, or they need a battery system to store electricity for nighttime.
Matching solar generation with home energy consumption is very important: you save the full value of solar electricity used at home, but you only get partial savings from surplus kilowatt-hours that get exported to the grid.
- This happens because the feed-in tariff (FIT) paid to you is typically much lower than the retail tariff charged.
- Feed-in tariffs vary by state and territory, and they also depend on your electricity provider. However, many residential tariffs in Australia exceed 30 cents/kWh, while many FITs are below 10 cents/kWh.
Based on these numbers, you save $300 if you consume 1,000 kWh from your solar panels, but only get $100 if you export those 1,000 kWh.
After installing a solar panel system, you can save even more by rescheduling your appliances to operate around noon. While this is not possible for lighting and other devices that are necessary at night, you can reschedule appliances that are not time-sensitive. For example, you can program your washing machine or dryer to operate at noon, or you can configure a storage water heater to accumulate hot water for the night.
In summary, you can increase your solar ROI by using more electricity from your solar panels, and exporting less to the grid.
2) Sizing your solar system correctly
Solar systems are sized in kilowatts, where one kilowatt is roughly equivalent to three solar panels. The ideal system size will depend on your total energy consumption, but also how that energy is used.
- Larger homes tend to use solar systems of higher capacity, simply because they consume more electricity.
- If two homes have the same total consumption but different usage habits, the one with the highest consumption around noon can use a larger solar array – before reaching the point where the system will depend on feed-in tariffs or energy storage.
An undersized solar system will not have a major effect on your energy bills. However, an oversized system will end up sending most of its production to the grid, in exchange for a low feed-in tariff. This can be demonstrated below:
- Assume that two homeowners in Queensland are installing solar systems, and their capacities are 8 kW and 12 kW.
- After subtracting the STC incentive, the 8-kW system has a cost of $7,700, and the 12-kW system has a cost of $11,500.
- The 8-kW solar system produces 12,000 kWh/year, while the 12-kW system produces 18,000 kWh.
- Both homes are charged 28 cents/kWh, while getting paid an FIT of 10 cents/kWh, and they have similar consumption habits.
Assume that the usable generation is 7,500 kWh in both homes, which means Home #1 exports 4,500 kWh. While Home #2 exports 10,500 kWh. Applying the retail and feed-in tariffs to these numbers, we get the following results:
|Home||Solar Consumption (28 cents/kWh)||Solar Exports (10 cents/kWh)||Economic Benefit ($ per year)|
|Home #1||7,500 kWh||4,500 kWh||$2,550|
|Home #2||7,500 kWh||10,500 kWh||$3,150|
Since Homeowner #1 paid $7,700 for the system, the ROI is 33% and the payback period is 3 years. The dollar savings are higher for Homeowner #2, but there is also a higher price of $11,500. This reduces the ROI to 27%, and the payback period is extended to 3.7 years.
Again, this is just a simplified calculation, and only a professional solar design can determine your actual savings. However, this example demonstrates how oversizing can reduce your solar ROI, especially when feed-in tariffs are low.
Oversizing your solar system can have a negative impact on ROI, since surplus electricity exported to the grid only gets partial credit (feed-in tariff).
3) Finding the best roof position
Shading is the #1 enemy of solar panels, since it causes their power output to decrease sharply. A good solar design takes advantage of your roof areas that get plenty of sunshine, while avoiding shadows.
Solar panel orientation is also important, since the sun’s position in the sky changes constantly, depending on several factors – the time of the day, the season, and your geographic location.
- In Australia, north-facing roofs get the most sunlight throughout the year, on average.
- However, west-facing roofs get more sunshine in the afternoon. When these areas are used for solar panels, their production overlaps with some peak hours in electricity tariffs. This is precisely when you are charged the highest kWh prices, and solar generation is more valuable.
While each project is unique, north-facing roof sections without shading tend to be the best areas for solar panels. West-facing roofs are also a great option if your electricity provider charges a time-of-use tariff.
You can increase your solar ROI by not installing any panels in shaded areas of your roof, and finding the ideal orientation that maximises the sunlight received.
The importance of choosing the right solar provider and repayment plan
In this article, we have discussed technical and financial factors that impact your solar ROI. However, this information is only useful if you work with a solar provider who applies it during the design and installation process – like us!
A professional installation also makes you eligible for solar incentive programs, which further improve your return on investment. For example, you can only claim the nationwide STC rebate if your solar products are approved by the Clean Energy Council, and the system installers are CEC-accredited.
Also, consider that the payback periods above were based on an example where homeowners pay upfront. There are low-interest financing options when going solar, which result in annual payments below your power bill savings. In this case, the loan is fully covered by a part of your savings, and there are zero net costs – the payback period becomes instant.
Learn more about going solar on our blog.