Understanding Solar Payback Time for Saving Money over the Next 4-7 Years

What is solar payback time?

Solar payback times is the time that it takes for a solar panel system to pay off the initial investment made. In Victoria, it generally takes 4-7 years for a solar panel system to pay itself off, after which point a homeowner can start to experience the true financial benefits associated with solar.

It is important to understand the different factors that affect the solar payback time so that you can make a smarter purchase and maximise your return on investment. These factors include:

  • The overall size of the solar panel system.
  • The initial cost.
  • Household energy consumption.
  • The annual output of the solar panel system.
  • Self-consumption of solar energy.
  • Solar feed-in tariffs.

All of the above will affect how much a person can save with solar, and inherently, impact on the solar payback time.

Solar panel system size

As a general rule, larger solar panel systems generate more electricity each year. In saying that, larger systems typically incur more sizeable upfront investments, are generally more costly to maintain, and also require more regular inspections by solar providers.

Currently, the most common system size for homes in Victoria is a 6.6-kilowatt solar panel system. This is because it is the most powerful in terms of how much usable electricity it can produce – saving you more money. A 6.6-kilowatt system has also become more cost-effective in recent years due to advances in technology.

In Australia, a6.6-kilowatt (kW) system tends to be the largest for homeowners, as it fits within the capacity of single-phase power, rather than requiring three-phase power.

Single-phase power has a limit of 6.6-kilowatts for solar power systems and will be able to supply a voltage of up to 230 volts (240 for Queensland and Western Australia) to household appliances – this is within the rang of most household devices.

Three-phase power, on the other hand, can power a solar panel system that is up to 30-kilowatts and can supply power to devices requiring 400+ volts. Items requiring this kind of power are commonly industrial machinery or commercial appliances for business and production use.

The initial cost

Depending on where you are in Australia, prices for solar panel systems can vary greatly. Nevertheless, the price of a system per kilowatt has declined by almost 40% over the last six years. When this is combined with government incentives for solar power, it makes it a perfect time to invest in solar.

As of August 2020, the average price for a solar panel system was between $1,200 – $1,600 per kilowatt. This would put the average cost of a 6.6-kilowatt system to be in the region of $9,000 in Australia – with even higher costs in areas such as Hobart or Darwin.

To make solar more affordable for residents, the Federal Government currently provides an upfront incentive for new installations through the issue of Small-scale Technology Certificates (STC). In Victoria, eligible applications can also apply for the “solar homes rebate” and “solar homes loan”, both of which are worth up to $1,850. Therefore, in Victoria, it is not uncommon for homeowners to see shorter solar payback times due to the special incentives offered by the State Government.

For more information regarding solar incentives, see our previous post titled “Solar Rebates And Incentives Explained”.

Household energy consumption

Energy consumption in the home is another significant factor which influences solar payback time.

An Australian household without gas uses an average of 5,000kilowatt-hours annually. This average would now be higher for people working from home during the COVID-19 pandemic.

Household electricity consumption fluctuates depending on the following:

  1. The number of people in the household. The higher this number is, the more daily electronics and devices are used, therefore impacting on the amount of electricity the home consumes.
  2. The housing type. Suburban houses and townhouses use more electricity than units and apartments, due to requiring more power for heating, cooling, and water.
  3. The mix of energy that a home has. Homes without gas tend to use more electricity, but also benefit more from solar panel systems due to using more of the solar energy they produce.
  4. The lifestyles of the people living in the residence. Parents whose children have left home use less power. Young families with teenage children use more.

The more that a household can reduce their annual electricity consumption, the shorter the solar payback period will be. It is recommended to request an energy bill breakdown from a utility provider to see how much electricity is being used daily.

The annual output of a solar panel system

The next factor which greatly influences the return of investment for a solar panel system is its annual output.

For a 6.6-kilowatt system, the average output per year in Victoria is 8,000 kilowatt-hours. This average is taking into account that the majority of homeowners will be unable to have solar panels facing in the optimum direction for power generation at all times – a feature that only the more expensive, automated systems have.

The annual output of a system is significantly affected by weather conditions and sunlight. This means areas such as Perth and Darwin are more likely to generate more electricity, having average outputs of 10,000 kilowatt-hours.

If a household can use the majority of the solar energy it produces, rather than selling it back to the grid, then this can significantly shorten the solar payback time.

Self-consumption of solar energy

Generally, households only consume a portion of the solar power they produce and then sell the rest back to the grid for the “feed-in tariff (FIT) price”. With that in mind, the cost of drawing electricity from the grid is actually more expensive than FIT prices. This means that households with a higher percentage of self-consumption will have faster solar payback times.

Smaller solar panel systems typically result in higher levels of self-consumption and faster payback times, but the overall savings are generally lower due to generating less solar energy. Larger solar panel systems, on the other hand, produce more electricity and have slower payback times, but the overall savings are generally higher.

The majority of experts agree that purchasing a smaller solar panel system to shorten the solar payback time is a “false economy” and owners of smaller systems often wish they had installed larger systems from the start.

While households vary in terms of self-consumption of solar energy, those with a 6.6-kilowatt system self-consume approximately 20-25% of the electricity generated. For people work from home or those who tend to have most of their power usage during the daytime hours, this figure will be a lot higher.

Important: Throughout the COVID-19 pandemic, Australia has seen a surge in people working from home. In saying that, solar power can be of significant benefit to those employees, especially if they can modify their daily electricity usage (to use more electricity during daytime hours, and less during the night).

If you are interested in learning more about the benefits of solar during COVID-19, read the article “The Benefits of Solar During COVID-19.”

Solar feed-in tariffs (FITs)

FIT prices are the final part of the solar payback time equation.

In places such as Darwin, the feed-in tariff is high enough that it is feasible to get an annual credit of $900-$1,200 with the power generated from a 6.6-kilowatt system. The average annual bill without solar power in that region is be between $1,300-$1,600 – meaning that a solar panel system pays for the electricity and earns a household upwards of $1,000 per year.

While the above figures are unlikely in areas with less optimal weather and environmental conditions, it is still possible to achieve close to a zero bill for electricity.

In Melbourne, the average annual electricity bill is between $1,200-$1,600 depending on age, area, and lifestyle. A 6.6-kilowatt system would make an estimated savings of $1,200-$1,300 per year based on current FIT prices. If a household modifies its habits and has a higher percentage of self-consumption during the day, these savings could increase a further 10-30%.

An investment for the future

Notwithstanding the average statistics, Victoria is in fact the second-fastest state for solar payback times due to the “solar homes rebate”. In saying that, it would only take a homeowner in Victoria between 4-7 years for their solar system to pay for itself – after that, any savings generated by the system could be considered true profits. Due to this, more and more homeowners are making the switch to solar as an investment for their future.

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