Using Sumwise to illuminate the economics of solar
Last month the New South Wales government significantly downgraded the highly popular Solar Benefits Scheme that was implemented just this year. What does this mean for households looking to install solar panels? Do the economics work any more? What does this have to do with Sumwise?
In this post we will attempt to put aside all political, environmental, and technical aspects, and focus purely on the economics. We will aim to answer two questions: 1) Did the economics of putting up solar panels under the old scheme work? and 2) To what extent has the change to the scheme impacted the economics? We’ll demonstrate all of this with a working Sumwise model, embedded into this post below.
Earlier this year the New South Wales government enacted a scheme whereby households who install electricity generating (PV) solar panels on their roofs get paid for all the electricity they generate. Known as a gross feed-in tariff, the rate was set at 60c/kWh—which is roughly 3 times the average rate that households currently pay for their electricity during daylight hours. But, on 27 October, the government cut the feed-in tariff from this generous 60c, to a less generous 20c.
According to the NSW government,
We used Sumwise to build a financial model to calculate the economics. We’ve embedded this model below for you to play with. Go ahead and put in your own assumptions (cells shaded yellow) and observe the impacts on the key results: net present value (NPV); cumulative net cash flow; and cash breakeven year.
The scenario you see in the model below is for a 3kW system (approx. 15 panels), and assumes you get paid at the old rate i.e., 60c/kWh. Under this scenario, the net present value (NPV) of the opportunity works out at $6,424, with a cash break even in year 5. And playing around with the discount rate, you’ll find that the internal rate of return* (IRR) is approximately 23% after tax.** Assuming you had access to a lazy $10,000 odd, who wouldn’t jump at this opportunity? It turns out that too many people did just that, causing the government to panic and cut the feed-in tariff offered to new installations by two thirds—down to 20c/kWh.
To see what effect the change in tariff has on the economics of this opportunity, go to the yellow shaded cell in the “Tariff” row and enter “0.2″ i.e., 20c/kWh. The Key Outputs now shows an NPV loss of almost $5,000 (IRR of around 2%), and that it would take almost 13 years to reach cash breakeven. There isn’t a finance text book on earth that would recommend you make such an investment.
Some words of caution: our embedding technology doesn’t yet work with Internet Explorer. Currently, Sumwise embed is only supported by Chrome, Firefox and Safari.
The change in the feed-in tariff clearly makes this opportunity uneconomic for households. However, if you were to set the “System size kW” in the model above to 1.5, the NPV would be roughly break even (at the new lower tariff). This is because the Federal government offers 5x the normal rebate for the first 1.5kW of capacity (see
What’s even more relevant is the realisation that you would do better by installing your PV system outside of this scheme. The scheme offers you 20c/kWh fixed until 2016, but day-time energy already costs around this figure (on average), and we all know that energy prices are going up. You’d be better off connecting the system directly to your existing net meter. When you’re not using all the power your system generates, the electricity flows through your existing net meter into the grid, effectively running your meter in reverse.
I am probably being paranoid, but I have this image in my head of
* The internal rate of return IRR is the discount rate which gives you an NPV of zero.
** We’re not tax advisers, this is just our reading of the tax law—please make your own enquiries.