Note: This is a guest post from James Martin from SolarChoice in Australia.
For decades, renewable energy advocates have had a dream of solar panels on every viable roof. Although rooftop solar has become considerably more accessible and commonplace in the last decade or so, this dream remains a distant reality in the USA, with under 2% of households having installed solar nationwide as of 2017. Even the country’s solar leader – California – has a solar penetration rate of only about 15%.
Meanwhile, in Australia, over 1 in 5 homes have solar on their roofs around the country, and top solar state – South Australia – has a solar penetration rate of over 30%. In Tasmania, the country’s solar laggard and southernmost (i.e. least sunny) state, that rate is still about 17%. These are enviable numbers – and in fact Australia can make the proud claim of leading the world in rooftop solar uptake.
A key reason for the popularity of solar power Down Under has a lot to do with solar system prices, which are significantly lower in Australia than in the States. Here we take a look at why solar is so attractive in Australia despite arguably less favourable incentive conditions – with a particular focus on price.
Image via Roy Morgan Research
It takes more than just sunshine to make solar make sense
It’s not just the sunny nature of the Australian island/continent that makes it such a hotspot for solar photovoltaics (PV), although this certainly helps. (Germany, whose southernmost point of latitude is roughly level with northern Maine, also has a higher rate of solar uptake than the USA.) The two main drivers of solar adoption in Australia high electricity prices and low solar installation costs.
The reasons behind Australia’s exorbitant electricity prices are complicated, but suffice to say that the most electricity market-savvy Australian household still pays roughly $0.25AUD (or about $0.19USD) per kilowatt-hour (kWh) of energy purchased from the grid, while the average American household pays about $0.13USD. This high usage rate – coupled with steadily increasing fixed daily charges – has driven frustrated Aussie households into the arms of a solar industry eager to assist.
In contrast to inexorably rising power bills, Australian solar system prices (which Solar Choice tracks in a monthly Solar PV Price Index), have been steadily making their way downwards over the past decade or so. This has been good news for Australian solar shoppers, as many of the various state & federal government incentives once essential for solar to make economic sense have either closed or been reduced.
As feed-in incentives fall, affordability becomes more important
Low solar system prices have been especially crucial the the health of the Australian solar market because solar feed-in tariff programs (the cousin of the USA’s net metering schemes) are closed to new applicants in every state besides the sparsely populated Northern Territory. In the place of the much more lucrative, subsidised feed-in rates are significantly lower, market-based rates – which may be as low as zero in some states, but which are currently hovering around $0.12AUD/kWh ($0.09USD/kWh) in most states.
What this means is that solar households maximise the value of their solar by ‘self-consuming’ it – switching on devices like washing machines, dryers and pool pumps while the sun is shining. Every unit of solar energy used by the home is one less unit that needs to be purchased from the grid, saving them $0.25AUD. Any excess solar will earn the household a credit of roughly half that amount – $0.10-$0.14AUD/kWh. Solar system owners on net energy metering in the US, on the other hand, get full credit for the solar energy they produce – regardless of whether they use it themselves. (In Australia, such programs are generally referred to as a 1-for-1 feed-in tariff.)
To export or to self-consume?
In a nutshell, in Australia the performance of a solar system as an investment depends on how the system owner uses it – for better or for worse. If solar is affordable, however, then that behavioural change means the difference between a good and a great investment – as opposed to the difference between a bad or a good investment.
The table below shows how solar panels perform as an investment in Australia under two different scenarios: 100% grid export (i.e. no self-consumption) or 30% self-consumption. As you can see, returns are pretty good in all cities under the 30% scenario, with the longest payback period being just over 8 years with an internal rate of return (IRR) of over 10% for Hobart, Tasmania.
But even under a 100% export scenario, solar is not an unattractive prospect in roughly half the country’s capital cities, with payback periods under 10 years and IRRs of over 10% in many instances.
Source: Solar Choice
How much do solar systems cost in Australia?
As of November 2017, the average price for a solar system in Australia is about $1.32AUD per watt (or about $1.00USD). For a 5 kilowatt (kW) solar system – the most popular system size in the country – it’s about $1.13AUD/W ($0.85USD). This works out to about $5,650AUD ($4,270USD) for a fully installed 5kW system.
Both of the Australian $/W figures above are less than a third of the average cost of a solar system in the US, which currently about $3-3.70USD/W.
Solar prices in Australia vs USA: Key differences
The difference between $4,270USD and $15,800USD for a solar system of the same generation capacity is nothing to be sneezed at. But why is the gap so staggeringly huge between the two countries – especially when the US solar market is actually larger (in absolute numbers) than the Australian one, and most consumer goods are actually cheaper in the States than Australia?
There are a handful of factors that go a long way towards explaining the difference. We’ve detailed some of them below.
- Unlike the US, Australia does not have any significant local solar panel manufacturing – and therefore no import/protection tariffs on solar components from overseas (especially China). The purpose of these tariffs is to ensure that domestic manufacturers can compete on a more even playing field with cheaper, imported products. In the absence of local manufacturing, there’s no need for import tariffs, and indeed local consumers and industry alike benefit from the low import prices. This of course isn’t to say that import tariffs are strictly bad (they’re good for local American manufacturing), but it does mean that there’s a sort of de facto limit to how low solar system prices can go.
- Australia has a very strong, up-front incentive for small-scale solar systems (up to 100kW) through the small-scale component of the federal government’s Renewable Energy Target. The exact form that this incentive takes is a bit complicated to explain, but in a nutshell it helps to knock about 30% off the out-of-pocket cost of going solar.
- Australia’s rooftop solar market is mature and competition is fierce, which has helped to drive down ‘soft costs’ – things like marketing, finance and (most notoriously) permiting costs that aren’t included in the hardware side of the equation. (Read more on the topic from the Rocky Mountain Institute.)
- There is a general awareness in Australia that solar is affordable and a good investment, which means that solar companies don’t need to spend as much connecting with and then convincing households to go solar. Contrast this with the rather complicated situation in the US, where solar leases and power purchase agreements still dominate the market (as to opposed to straightforward purchase or conventional financing options). This is mainly because the high cost of solar and relatively low electricity prices make it necessary for households to look at the long-term savings that solar can deliver (through a lease/PPA) as opposed to the investment opportunity that solar presents.
Is solar worth it in the USA?
For ordinary people who like clean energy and the idea of energy independence, Australia is a perfect storm of favourable conditions. With solar prices in the US still high and the primary incentive scheme being tax-based (namely, the ITC, among others), on the other hand, solar companies have had to be a bit more creative about they manage to deliver both the financial as well as environmental benefits to solar end users.
Such efforts to date have delivered enormous success, with record-breaking growth happening in recent years. There’s still progress to be made, however, in bringing down the cost of solar to the point where it is an investment in solar a ‘no brainer’ for households around the country – without any of the fancy finance packages. The way things are moving, we know it’s only a matter of time until the USA catches up to Australia on this front.