Understanding the Ownership Cost of Solar Power
15 October 2020
Solar power is often described as a free electricity source, since sunlight has zero cost. However, it would be more correct to say that solar panels free energy, but they are assets with ownership costs. Regardless of this, solar generation now has a lower cost than fossil fuel generation, even when compared with coal.
The ownership cost of a solar power system is the sum of several expenses, which include equipment, maintenance, financing, part replacements and insurance. When you sign a solar PPA, these costs are assumed by the system provider and you pay for kilowatt-hours instead.
This article will break down the main expenses for owners of solar power systems.
Solar Power Equipment and Installation Costs
When deploying a solar power system, most of the ownership cost is assumed upfront. Solar components have low costs in Australia, compared with North America and Europe, and even small projects normally cost less than $1,700 per installed kilowatt. After subtracting the rebates offered through the Small-scale Renewable Energy Scheme, reaching costs below $1,000 per kilowatt is possible.
In many cases, the upfront cost of a solar power system is 60-70% of the total ownership cost. Once the solar array is operational, there are only smaller expenses like maintenance and part replacements. There is also interest payment when a solar installation is financed with a loan, and getting insurance is a smart business decision. Companies can also depreciate their solar arrays over time – this is not a real expense, but it can be added to the balance sheet.
What Is the Maintenance Cost of Solar Power?
Among all types of power generation equipment, solar panels are characterized by their simplicity and low maintenance costs. In Australia, the annual operation and maintenance cost can be less than $10 per kilowatt. This means a 100-kW solar installation will have O&M costs of only around $1,000 per year.
Solar components can fail, and part replacements may be necessary. However, this is not an issue when using equipment with a solid warranty. There are still labor costs when replacing damaged components, but total replacement costs over time are normally below 10% of the initial investment.
- Normally, the second-highest expense when owning a solar array is replacing the inverters after 10 years.
- However, the top inverter brands are now offering products with extended warranties of up to 20 years.
Assuming that part replacements over time are less than 10% of the initial investment, the total cost is below $10,000 for a 100-kW solar array. Spread over a 20-year period, this is less than $500 per year.
Solar Power Financing and Insurance Costs
When a solar power system is installed with loan financing, interest payment is added to total costs. Assume you take a $100,000 loan, with an annual interest rate of 5% and repayment period of 10 years. The monthly payment is $1,061, which results in a total of $127,320 over 10 years. The total interest paid in this example is $27,320.
Insurance rates for solar power systems are typically below 1% per year, which would result in a premium below $1,000 for the 100-kW solar array in this example. Some large solar projects have access to insurance rates as low as 0.25%.
Conclusion: Summarizing Solar Ownership Costs
In this article, we assumed that a 100-kW solar array has an upfront cost of $100,000 after deducting the Australian solar rebate. Without the rebate, the project cost would be around $160,000. When adding O&M and insurance, the annual cost is around $2,500, and this adds up to $50,000 over a 25-year period. When adding the interest payments of $27,320, the total costs after the initial investment add up $77,320.
In this example, the solar array has a total ownership cost of $237,320, and the initial investment of $160,000 is 67% of the total ownership costs. However, the net investment is less, since the Australian solar incentive program covers around $60,000. This means the net ownership cost over time is around $177,320.
This is a conservative example, since many solar projects achieve lower maintenance and insurance costs, and there are also loans with lower interest rates. In these cases, the cumulative costs after the initial investment are less. An actual financial analysis will also consider price inflation over time, but that factor is beyond the scope of this blog post.
