Jul, 2014

Why your power bill matters when we discuss a Solar Business Case

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There is huge variability in power prices, and we’ll explain why this matters so much.

Video – will solar power work for your business?

50kW example of solar power

An example of a 50kW system

Often when we talk to people about solar they say “sure, send me a quote” or “how much is a 50kW system?”.  We understand why people ask – they want to have a feel for their investment level and to compare one supplier against another.

However, there’s a bigger question. What will a 50kW, or a 100kW  – or any size system – DO for you?

What it does for you is actually quite different to what it might do for someone else.

And if you don’t know what it does for you, why would you want one?

Here’s why: the actual output of a 50kW system for you, or someone else might be similar – in terms of kWh of output, but the biggest factor in determining the economic benefit to you is NOT the output. It is the dollar value of the output. Specifically, the dollar value of the output which you self-consume.

Therefore, someone that pays more than you for electricity will benefit more than you.

And what we see is a huge range of power prices. It would not be uncommon to look at two bills and see one that could benefit three to four times more than another. Because we see solar as a financial investment for you, we can’t do our job of explaining the economic benefit without an examination of your bill.

Why is there such a variance in power rates?

First of all, there are two main categories of power bills  – standard tariffs and contestable accounts.

A standard tariff is typical for a small business, and depending on where you are and the industry you’re in you might pay 20-36c for power. Perhaps you negotiate a 12% discount off this amount, but that’s it. Your bill will be based on mostly charges per kWh and some daily charges. And yes, often there are lower rates for offpeak (or Controlled Load) usage as well. Often they can be half as much as a Peak tariff. In some time-of-use scenarios there are Peak, Shoulder and Off Peak.

Once your usage gets higher (normally over a couple of hundred kWh a day – 100MWh a year), you move into a new category and become contestable (eligibility varies based on geography and who owns the grid). You can negotiate a rate with a power company or engage a broker to do that for you. Your overall expenditure may be similar or less than before. It’s also more complicated. You will have a base energy charge, a distribution or network charge, and several smaller charges (SRES, NSW ESS, LRET, Carbon Charge etc).

The main change between a standard tariff and a contestable account is that a contestable account bills often skews towards peak demand as opposed to kWh usage. This new factor means a business is being charged for the monthly highest throughput rate. It’s not uncommon to see contestable bills where the peak demand charges account for 30-50% of the overall bill.

This breakdown matters because it is generally only charges per kWh that solar power can offset (the ones shown highlighted in yellow on this image). So, solar will often be a better investment for a small business than a larger business, as often the contestable account has a lower level of charges which are kWh based.  

There are exceptions of course, and some contestable bills are still skewed towards kWh rates – this is a great case for solar power.  This one shown below has a distribution charge of just over 19c per kWh which makes their overall variable rate per kWh almost 30c per kWh (what we call the “Solar Substitute Rate”). Note, we don’t include the carbon tax 2c / kWh as it is due to go. The way that distribution charges are determined is often out of your control, and determined not even by your retailer (who sends you your bill) but by the grid owner who sells power to your retailer.

The range we see are rates as low as 8-10c per kWh (combined, including all charges) up to 36c per kWh. So, the benefit of someone paying 36c per kWh could be 4 times that of someone paying 8c per kWh, for the same system. This is why this subject matters so much.

One thing we see quite often when people talk about their power rates is they’ll take an average rate – they’ll divide their overall bill by the number of kWh used and say “we pay 20c per kWh”. This may be half correct, but certainly is not right when looking at solar power and how it will perform for you. Really only the variable kWh charges should be looked at. (Solar can have some impact on peak demand charges, and we’ll examine that another day!).

As well as power rates, when you use power also matters. Many businesses are not running on a Saturday or a Sunday. This means that the power from solar is predominantly wasted. There may be some consumption (computers left on, some lights, a security system, maybe fridges). It’s rare to get a feed in tariff for this power, and in some areas – Queensland for example – you are not allowed to export power back into the grid for systems over 5kW as of 1st July 2014 (Previously it was 30kW that needed export control).

If your usage is high, then it may be that you still use all the power from the solar over non business days – this happens when there is a load such as a temperature controlled warehouse, or refrigeration. A constant load is generally a good thing for a solar case!   

We include wastage due to export in our modelling, so we can work out precisely what solar will do for you. If you are a contestable account, you can ask your retailer for ‘interval data’ which shows your power use from their logging every 15 or 30 minutes. With this, we can model with a higher level of accuracy the overlap of solar production and your consumption and deliver a highly accurate result.

The power bill, and your interval data also give us useful information to size a system correctly, so that we are optimising the system size for self consumption and the best return on investment.

This means our model is accurate, and sometimes even a bit conservative. We’d rather be conservative than overstate the impact of solar, and be guilty of overselling the benefits.

Sometimes, the result of this modelling is that solar will be a great investment  – perhaps a 4 or 5 year payback period. And, sometimes it is just plain ugly. Sometimes we see payback periods of 15 + years, and we will be the first to say that solar isn’t a great economic investment in that case. There may be other reasons to do it – you may have a mandate for CSR, but our job is to demonstrate the financials.

For many larger power users, we are seeing that the result is a payback of 6-8 years, which is in essence a return on investment of 12-16% per annum.

For someone paying less than 10c per kWh, their return on investment might be well over 10-12 years. For someone paying 36c per kWh, they might see a payback in 3.5-4 years depending on if they are a 5 day a week business or a 7 day a week business.  

In summary, this is why we think that giving someone a quote for solar is not useful. We want to give people real information for decision making. Unless someone already had the capability to work out their benefit and ROI, then almost certainly they will learn from what we’ll show them. Most people have not been through this process.

We’ve also seen some economic modelling which looks impressive but is just plain wrong. Often people include significant power price increases. We model just 2.5% increase per year, and we think this is reasonable for business. Generally, demand for power is falling and power companies are not hiking up costs. There are exceptions of course, and recently we’ve seen some 10-12% increases in standard tariffs in Queensland, but these are unlikely to flow through to contestable accounts.

So if you would like an assessment of what solar will do for you, let’s start with one of your power bills. What we get back to you contains the cost part of a quote (naturally), but also a detailed benefits analysis and even a year by year breakdown of benefits.