Solar power: How does it work and is it cheaper than traditional energy?

Jun 27, 2020
Solar energy might cost more initially but it'll save you in the long run. Source: Supplied by Energy IQ.

When renewable energy made the move to residential homes, people were impressed by its futuristic ways of reducing the carbon footprint but weary of its expensive installation process. However, the best part about solar panels and other renewable energy sources is that they’ll always make their money back eventually.

Data from the renewable energy switch company Energy IQ said Australians have saved more than $200 on their annual bill when they made the switch to renewable energy. And according to CEO Ross Sharman, the switch to renewable energy is inevitable with prices of solar and wind constantly proving to be cheaper than coal.

“Every household switch will be an investment in our renewable future and create a significantly positive impact on our environment and resulting climate,” he said. “An increase in demand will in turn, reduce our energy bills and collective emissions over time as well.”

Australians can move to renewable energy plans and save impressive amounts of money without needing to purchase or install any equipment like solar panels. Renewable energy – whether installing it yourself or switching to renewable energy providers – is now not only kinder to the environment but also kinder to the hip pocket.

How does solar energy work?

The sun delivers more energy to the planet in an hour than we use in a year from fossil, nuclear and all renewable sources combined, according to a US study. But harnessing that energy is the hard part. Solar panels use photovoltaic (PV) cells to convert solar energy into electricity.

This is then collected and stored in solar batteries to output electricity after sunset or offset electricity usage. This not only ends up being cheaper in the long run but also helps to reduce your carbon footprint tenfold by removing unsustainable fossil fuels from your home.

What’s the cost difference?

Solar energy and traditional energy are not measured in the same way which can make price and consumption comparisons between the two quite complicated. According to a Canstar Blue electricity survey, the average Australian’s electricity bill comes in around $1,400 to $1,700.

Meanwhile, the upfront costs of solar are slightly more expensive. Experts recommend that if you have the money and the roof space to spare, getting a larger panel is always worth it with most solar experts recommending you go bigger than 5.5kW. But the price can vary pretty extensively depending on your location, system size, competition in the market, quality of panels, quality of installation and site and orientation issues.

Solar Calculator roughly estimated an average upfront cost of panels, installation, GST and the rebate to see what the ballpark figure might be if you were to look at going green. For a 3kW system it could cost $4,600, 5kW for $6,200, 6.6kW for $8,200 and finally a 10kW for $13,900.

When will you make your money back?

When it comes to solar electricity bills, it might take some time to earn back what you initially spent on the cost of installation and panels but according to Finder, you should see the returns within a decade depending on the size. A 2.5kW system could take four years while a 20kW might only take seven.

This is known as the solar payback time and can change depending on the size of the battery, where you live, the angle of your roof and the retailer. Lower parts of Victoria that get less sun will see a longer payback time, while areas like South Australia, Queensland and the Northern Territory that have more sun and higher grid tariffs might only take the minimum of four years.

How to earn your money back

You can make a pretty penny with the solar feed-in tariff (FiT). FiT is what you get paid when you sell your unused solar electricity back to the grid. It’s perfect if you aren’t using a lot of energy when the sun is at its peak throughout the day as the excess energy sitting in the system can then be sent back to give you a pretty decent credit on your bill.

Australia doesn’t have a nationalised program so the rate of FiTs change between states. Currently, it can stand anywhere from 6 and 29 cents per kWh depending on the retailer. It’s worth noting that if you receive cash as the payment for the FiT then it’ll be counted in your pension income test but if you receive it as a credit on an electricity bill then it won’t be.

Small-scale technology certificates (STCs) are also useful for making your money back. These are certificates are based on the amount of electricity the system creates and are collected and sold back to retailers to offset the price of installation.

Finally, energy vouchers and rebates are also available but differ between states. For instance, pensioners who own a home in the ACT can access the solar program that subsidises up to 50 per cent for the supply and installation of a roof top solar system capped at $2,500.

Queensland offers interest-free loans and grants for solar panel installation and storage, SA offers loans up to $6,000 to help pay for installation of home batteries and Victoria offers a rebate of up to $2,225 for solar panel installation and $1,000 for installing a solar hot water system. Meanwhile, NSW offered a solar scheme in 2018 for 3,400 low-income households to forgo their low-income household rebate in exchange for a small-sized solar system.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.

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