What is the Value of a Solar System to you?

There are many things to consider when investigating the purchase of a solar system, but one of the first to consider is the price you would be prepared to pay for the system. If, like me, you believe a solar system should be an investment that delivers real returns, i.e. the returns beat inflation, then you can work out the potential value of a solar system based on the electricity cost savings it generates.

This analysis does not consider the use of a solar system as a back-up system for load shedding, or for locations far from the national grid. It is purely for the use of solar system to reduce your monthly energy bill.

We can work out the potential value of a solar system by looking at the cost of the electricity you are likely to buy over the life of a solar system (lest assume 20 years). For this you will need the amount you spend on electricity every month and the rate you are paying per kilowatt-hour (this can be found on your municipal bill).

Let’s assume that you are paying according to the Cape Town Municipal Rate; R1.9243 for the first 600 kWh and R2.3401 for the rest. We also assume that you consume 1000 kWh per month. Your monthly bill is therefore R2090.62, made up as follows.

At this rate, your yearly electricity bill is R25 087.44, or R501 748 for 20 years if Eskom don’t apply for any increases.

Now let’s make the fairly solid assumption that Eskom, and therefore the municipality of Cape Town, is going to increase the price of electricity every year for the next 20 years. In the table below is the value of electricity to be paid over the next 20 years assuming an “expected” annual Municipal increase each year. The average increase in the table over the next 5 years is 8%. Given that Eskom has been asking for 12%, the increases used are possibly conservative.

Based on the assumptions, you are likely to pay R967 196 for electricity over the next 20 years.

In today’s money, assuming 6% inflation, the electricity is worth R502 082. In other words, if you could buy a solar system that provided all of your electricity for the next 20 years, it would benefit you if it cost less than R502 082 today.

If you could buy a system that provided all of your electricity for R300 000, you would have saved over R200 000 in today’s money. Not bad.

But what is the actual cost of a Solar system that would deliver all of your power needs, even in winter? Also who has R300 000 to R500 000 available? What if we only purchased a smaller solar system that supplied only a portion of our electricity needs?

One such system is a grid-tied solar system without energy storage (batteries). It connects onto the power line going into your home and supplies electricity to your home only while the sun is shining. The municipal power line will supply whatever power the solar system cannot supply (for example when it is raining) and at night when the solar system is not producing (for obvious reasons).

The advantage of this kind of system is that it is significantly cheaper, both its parts and the cost to install. The disadvantage is that it only works while the sun is shining. The energy that it produces cannot be stored for later use.

So what is the potential value of such a system?

The first point with these systems is that they will only reduce the portion of your electricity that is consumed in the day. If we assume that 25% of the power in a large house (using 12 000 kWh/A) is consumed during the daylights hours, then we can work out the value of the electricity that this type of solar system would replace.

Firstly, 25% of 12 000 kWh equates to 3000kWh/A or 250kWh/month. That’s a monthly saving of R2.3401 x 250 = R585.03 or R7 020.30 in the first year.

Now we sum it up for 20 years, using the same Municipal Power price increases and we get R270 654 total. Or, in today’s money, R140 500 (taking inflation into account).

Therefore, to get a real return from a solar system you should not pay more than R140 500 for a solar system that is going to reduce your power bill by 25%.

If for some reason, more than 25% of your electricity is used in the day, then you can afford to pay more (for example, if you have a swimming pool that is only pumping during the daylight hours). If you use less, you can afford to pay less to get a real return. The table bellows shows the calculated maximum you can pay for the solar system for various percentages consumed in the day.

Value of Solar System vs. Per Cent Annual Power Consumed in the day

This analysis gives you some idea of the value of a solar system, or at least one method to arrive at a value of a solar system.

Two errors I have seen in the calculations of the value of a solar system:

  1. Using unlikely Eskom increases: Some calculations of the value of a proposed solar system use Eskom increases of 12% for the next 20 years. This scenario is highly unlikely and inflates the estimated value.
  1. Self-consumption over-estimation: Some calculations of the value of a system assume that half a grid-tied solar system will reduce your electricity bill by half. This is based on the idea that the system operates for half the time. However, for most homes, especially for couples who both work, it is probably that significantly more than half of the power consumption of the home occurs at night.