As part of our new build house we are in the middle of having completed, we were weighing up the decision to get solar panels or not.
At the beginning I was excited about the prospect of starting a building from scratch in our expected long term location. It seemed the ideal time to install solar panels. But after running the numbers, as much as we wanted them, it didn’t stack up for us personally.
I thought I’d share some of the calculations we used to help us decide in case it is useful to anyone else considering the same. I’m not saying our way of looking at things is the right or only way. It is just the angle that we came from.
The cost of solar panels in New Zealand
Naturally, we started with investigating the cost of solar panels. Ours would have been a 5kw system, and based on our research, this would have cost around $14,000.
But we can’t stop with the cost of the solar panels only. We have to add in the opportunity cost of not using this money instead. Assuming we invest $14,000 at a long term 20 year 5% average return, we would be left with $37,000. An extra $23,000. Note that if you were to instead use a mortgage to fund the solar panels instead of cash, the opportunity cost will likely be lower, as the interest paid on the mortgage won’t be as high as the investment returns, due to interest on the full $14,000 being earned immediately when investing, but being spread out with the mortgage (A cost of $8,175 in this example, which is much less than the $23,000 opportunity cost for us personally). Note with the mortgage though, that although the opportunity cost is lower, the return on investment will be lower too due to interest paid.
So the total 20 year cost of solar panels for us would be more like $37,000. If we added it to the mortgage, a cost of $22,175. But we have better use for our cash than that.
How much money will I save with solar panels?
Then our thoughts turned to “if we are going to be spending $37,000, when can we expect to get our money back?”
To calculate this we had to estimate how much energy we produce per year. A bit tricky as we haven’t lived in the house yet! But a rough estimate suggests around 8,500 kw per year at a cost of around $2,250 per year. To get your own kw number you just look your annual power use either through your statements or an online portal if your electricity provider has one.
Then we calculated how much we expected to save using solar panels. We would be looking at around halving our power bill on average. So half of $2,250 being $1,125 savings the first year. This is hard to determine as it very much depends on weather, how we live in the house and what time of day we use electricity, amount of panels relative to power use, and so on. But from our research, half seems like a pretty optimistic assumption for us.
Assuming power goes up by 3% a year, then our second year savings would be $1,160, third year $1,195, all the way to year 20 around $1,975 a year. Total 20 year savings of $30,230. That equates to a return on investment of around 4% per year if we buy the solar panels with cash, or just 1.5% per year if we assume the financing was mortgaged.
Final thoughts
So a cost of $37,000 and savings of $30,000 over 20 years. It seems we would be around $7,000 better off financially not getting solar panels. Obviously this relies on certain assumptions. 5% investment returns and 3% power price inflation. Change any of those assumptions where it is larger or smaller than a 2 percentage point gap between the two and it can change the result more in favour of one option over another.
With the assumptions used though, we would never recover our costs as our $14,000 investment will continue to grow more quickly than the solar panels can recoup costs.
We would need to save 65% off our current power bill to be better off with solar panels in 20 years. Based on all our research, this seems highly unlikely.
Most solar panel companies say pay back is between 7-10 years, but none of them consider the very important opportunity cost! Which is still a very real cost. Those pay back statements are extremely misleading and shouldn’t really be allowed, as they are not considering one of the massive costs of not being able to use that money elsewhere.
If we were in a position where we didn’t have the cash available and had to use a mortgage, it might make a little more financial sense. With a cost of $22,175, that would be recovered in around 16 years with the used assumptions. With panels lasting around 25 years or longer, that might make a bit more sense, but we have the money to invest if we don’t buy solar panels, so it is a moot consideration. Even so, 16 years is still a long time for us. Life can change and it is a large upfront commitment for such a timeframe. We also think we can get a much better return on our money elsewhere than financing solar panels through the mortgage.
Hopefully in the future if the price of panels come down, or a subsidy is introduced, we will look at it again. We will likely be wiring up the house to future proof, just in case. But I am not holding out too much hope. Our government doesn’t seem to be encouraging the use of solar panels like other countries, where citizens are given a subsidy. In fact, our government has gone the opposite direction and is actually penalising those with solar power. The fixed daily charges are increasing over the next few years, making the calculation for solar panels even worse. Low power users will be spending more in coming years due to higher fixed daily rates.
It would be nice to be in a position to not have to consider or worry about the finances, but alas, we are not. We are not prepared to pay more than the cost of something, just for the privilege of having it. And for that reason alone, we are deciding against solar panels for now.
Update: After further research, we have decided to go ahead with solar panels. Read more on that update here.
Leave your comments below. Let me know if there is something I have missed or if you want to challenge any of the assumptions used.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here