How does an investment in a solar power system compare against other financial investments?
This is a legitimate question from many people considering a solar purchase. Let's do some research.
The Australian Stock Exchange produced an average annual return of 9.5% since 2000, including dividends and capital growth. The US market (S&P 500) produced 8.6%.
Investing in Solar has pros and cons against stock market investments:
• Pros: It’s much more predictable. You have a really good idea of how much energy you’ll produce and a reasonable idea of how much you’ll save*.
• Cons: It’s not liquid so unlike listed shares, you can’t sell and convert to cash.
It’s more comparable with an investment in Private Equity (PE) where investors are prepared to sacrifice liquidity for better returns. They invest in a fund with a typical 4 to 7 year horizon and their money is locked in.
Most solar systems have a payback period in that same range, so let’s use PE as a benchmark. Various organisations have crunched the numbers to find average PE investor annualised returns are 10-15%.
Can Solar beat 10-15% returns on Private Equity?
Risks
The investment in Private Equity has many risk factors that I won't cover here. The investment in solar also has risks which I summarise below.
Factor |
Level of confidence |
|
System Size |
Certain |
|
System Cost |
Certain |
|
Panel Orientation |
Certain |
|
System Efficiency |
High |
|
Annual Sunshine for Location |
High |
|
Energy Output |
High (unless shaded by trees or buildings) |
|
Total Energy Used by Owner |
Medium-High (initially high confidence but may change over time) |
|
Solar Energy Used by Owner = Grid Energy Offset |
Medium |
|
Price of Grid Energy |
Medium (Initially certain but changes over time) |
|
Price paid for excess solar (feed-in tariff) |
Low (assume zero to be safe) |
|
System Lifespan |
Medium |
|
Maintenance Costs |
Medium |
| Value in a Property Sale scenario | Low-Medium |
How much does a solar power system cost?
In June 2024, SolarQuotes collected data on 251 systems sold that month and found an average system price of $9,767 and average system size of 9.8kW so that’s a nice, round $1000 per kW.
The optimal size for a system is the subject of an upcoming article. For a typical Sydney household, if your solar system (kW) is 1/4 of your average daily energy use ** (kWh on your bill), you’re likely to consume 39% of the system output.
So let’s say you pay $7,600 for 7.6 kW of solar installed on your roof. A decent system should generate 10,700 kWh of energy each year in Sydney ***.
Financial Outcomes
Your bill shows
30
kWh / day
7.6
kW system
(~ 1/4)
$1,000
per kW
$7,600
in total
The system generates
10,700
kWh / year
39%
of the energy produced
4,200
kWh / year
If you usually pay
40c
per kWh for electricity during the daytime
3.7%
per annum
$1,950
per year
4.3
years
Solar power system life and annual returns
Over 10 years, you can expect to make a net profit of $12,400 rising to $60,000 over 25 years of solar ownership (assuming the system lasts that long). If we adjust these figures to reflect the time-value-of-money, we get NPVs of $7,750 and $28,800 over the same time periods.
Maintenance costs are assumed to be negligible.
To compare with financial markets, we need to calculate the % return. This comes down to how long the system survives but with your typical 25yr panel warranty and 10yr inverter warranty, it’s safe to assume 10-25 yrs.
Here are the Internal Rate of Return (IRR) figures from this analysis, based on how long the system lasts. These can be compared against financial market returns.
5 yrs 6%
7 yrs 15%
10 yrs 21%
15 yrs 24%
20 yrs 25%
25 yrs 26%
Conclusion
An average system in Sydney should beat the average investment in the share market or in Private Equity, if it lasts 7 years or longer. Considering the warranties are usually 10 years on inverters and 25 years on panels, it's a pretty safe bet.
Additionally, there’s no tax to pay on solar returns while you would be taxed on financial market returns (unless you're a billionaire 😂).
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Notes and Assumptions
This article relies on several assumptions and averages needed in order to ensure it is concise and readable. We can’t account for every scenario but attempt to list the assumptions and limitations within the article and below.
* There’s a whole separate debate about negative feed-in tariffs but you can always configure your system for zero-exports and make financial decisions on the basis of $0 from exporting power. This analysis assumes zero so actual returns could be higher.
** Analysis based on a solar power system that is 1/4 of the daily kWh household consumption. Another article is in progress evaluating optimal system sizing. In the meantime, please get in touch for advice on this.
*** System Outputs for Melbourne are around 7% lower than Sydney. Brisbane is around 10% higher.
- Analysis is based on using mainstream solar panels (Jinko N-Type 400W) installed on a typical 22.5° roof slope, with their orientations split evenly between West, North-West, North, North-East and East.
- We assume a solar power system without a connected battery.
- Self-consumption figures based on typical household consumption pattern, modelled by OpenSolar.
- Electricity prices rise by 3.79% per year (figure from Pylon Solar)
- Future cash flows are discounted at the Australian 10 year risk free rate of 4.37%
- Investor returns based on data from MarketIndex (ASX) and Investopedia (S&P 500).
- Figures above based on a home consuming 30 kWh of electricity per day, however results can be generalised to any level of consumption if system size is thought of as a percentage of daily consumption.
- Figures based on the average solar power system quality and cost from SolarQuotes' data. More expensive systems may still be justified financially based on longer expected lifespans and higher efficiency (more output).