#### Worked Examples

Read through some worked examples to help decide what might be best for you

The sun’s energy is free for everyone, not like the electricity that is sent to you via the electricity grid. The only thing stopping you from harnessing this free energy is not owning the technology to make it usable. Of course the technology isn’t free, however there are some constructive ways of acquiring a solar power generating system that you may not have thought of and there are also still some government solar rebate schemes available which could give you a discount as high as 30% on your system.

If structured correctly, a new solar PV system owner can actually get themselves into a situation where the savings on their energy bill is more than the cost of servicing the loan to buy and install the system. Let’s check out an example to show you how it works.

We will use an example household which uses 37.9 kWh of electricity per day and note that the electricity usage component of their bill is $989. After the installation of a 4 kW solar PV system at a cost of $8,000, they are able to reduce their consumption from the electricity grid to 23.5 kWh per day. The 4 kW Solar PV system produces 19 kWh of electricity on an average day, some of that electricity is used for the household’s consumption and any excess electricity generated is sent out to the electricity grid for a small credit on their bill. The sum of the usage cost and the small credit gave the household a new quarterly electricity usage component of $582. So they are saving $408 per quarter.

Now let’s assume they funded the $8,000 capital cost of the solar PV system by use of a loan at a rate of 8.4% p.a. over a 10-year term.

The quarterly repayments on the loan would be $297 (that’s $23 per week). So the household is paying $297 per quarter as principal and interest repayments on their loan to save $408 per quarter on their electricity bill. They’re ahead by $111 per quarter, from day one (that’s $8.5 per week). Then, once the loan is fully repaid, they own the solar PV system outright, and from then on are saving the whole $408 per quarter on their electricity account. Also it is worth noting, by this time electricity rates will probably be higher, which would magnify the returns even more. For the amounts used in this example, every cent per kWh electricity rates go up, the savings increase by about $10 per quarter.

If you are currently in a situation where you have an outstanding loan on your home and have been making over-payments, check with your bank to see if you have a no-fee redraw facility, which is quite common these days. You will probably find the over-paid funds on your loan are better off being put to work reducing your electricity bill with a solar PV system than offsetting your interest repayments on your home-loan. Most variable home loans have an interest rate slightly below 5.00% p.a. at the time of writing in September 2017.

The extra interest cost on $8,000 drawn from your home loan overdraft account could be as low as $400 per year or $100 per quarter. If you’re saving $408 on your electricity account each quarter, you’re ahead by a quarterly $308. You don’t need to be a rocket scientist to see the great opportunity here! If you were disciplined and put that $308 saving back into your home loan account each quarter, you would pay off your home even sooner too. Obviously interest rates fluctuate so the interest cost may go up, but so do electricity usage rates! If we make the assumption electricity rates will go up in the future, which is a fair assumption based on the historical rate of change, this means the savings from generating your own electricity will be magnified every time the rates everyone else pays are increased.

Another concept to keep in mind is it makes sense to incorporate the solar system into your home loan because you are adding the physical system to the roof of your physical home. If and when you ever decide to sell your home, the solar system will be sold with it and the value of the system should be included in the property valuation from your real estate agent; therefore, you will regain some of the cost of the solar system upon settlement, knowing the valuation of your home should be slightly increased due to the fact it comes with its very own solar PV electricity generating machine.

So this is an obvious payment method, cash from your own bank account. Not all of us have the cash on-hand ready to go, to buy a solar PV system, but if you do, this could be the best option for you. With interest rates on deposits so low, many investors are looking for places to park their cash where it can work harder for them. If you do the math, you’ll find a rooftop solar PV system for your home will likely be a higher yielding alternative for your money. Again, we will use the same household from the example.

This household was spending $989 per quarter on the usage portion of their electricity account. They spent $8,000 capital on the installation of a 4 kW solar PV system. Let’s say this $8,000 came from their savings account or a term deposit where the funds were earning interest at a rate of 2.5% p.a. The annual income from the bank on the $8,000 would be $200, or $50 every quarter. The savings from the installation of the solar PV system in the example were $408 per quarter. After 4 years and 11 months the household would’ve earnt back their $8,000 initial capital outlay and they would continue to receive their income in the form of savings on their electricity account of $408 per quarter, or $31.5 per week for the life of the solar system.

To be fair to the bank loan method of payment which by default has a principle and interest repayment, we will assume that all 3 methods need to eventually pay the $8,000 back to the source of the funds over 10 years, that way, we are comparing apples with apples. This means, for the option where the solar PV system is funded from a home-loan overdraft account, after 10 years the $8,000 will be repaid back to the overdraft account and likewise with the bank account option, the $8,000 will be paid back to the savings bank account over 10 years.

It is noteworthy that the increasing benefit from left to right on the stacked-column graph is a direct result of the lower interest rate applied to each scenario. So basically the cheaper you can get access to the money, the better off you are. If you pay with savings, all you forego is the interest you would have earnt on the money had you left it in the bank. If you pay with overdraft from a home loan, because a home loan is a secured loan, the bank sees it as a lower risk and therefore the interest rate is comparatively very low. With a bank loan, which has no security, the rate is inevitably going to be higher, which is why the bank loan scenario carries the lowest benefit.

Scenario: | Do Nothing | Bank Loan | Home Loan Overdraft | Cash from Savings |
---|---|---|---|---|

Electricity usage account (quarterly) | $989 | $582 | $582 | $582 |

Electricity Savings (quarterly) | $0 | $408 | $408 | $408 |

Cost of Solar PV System (Once-off) | $0 | $8,000 | $8,000 | $8,000 |

Interest Rate (p.a.) | n/a | 8.4% | 5.0% | 2.5% |

Loan Repayments (quarterly) | n/a | $297 | $255 | $225 |

Total Net Expense (quarterly) | $989 | $879 | $837 | $807 |

Net Benefit (quarterly) | $0 | $111 | $153 | $183 |

**IMPORTANT NOTE:** the electricity usage and savings data on this web page is a hypothetical example and should not be relied upon to forecast your personal situation. If you are unsure about your personal situation, please contact Darwin Solar and we can work a live example for you based on your own electricity account.