Solar Power: Comparing Payback Periods With and Without Batteries

29 September 2020

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Solar power is now among the cheapest electricity sources, and many recent solar farms have lower generation costs than coal power plants. However, since sunlight cannot be controlled, the use of solar panels is limited by their variable output. Battery systems are a viable solution from a technical standpoint: they can be charged with surplus generation, and stored energy is used regardless of sunlight.

Batteries are still expensive as of 2020: small systems may cost over $1,000 per kWh of storage capacity, and even large projects will rarely achieve costs below $700/kWh. However, there is optimism in the industry after Tesla Battery Day 2020, where Elon Musk announced a potential cost reduction of up to 56% within three years.

This article will present a simple financial analysis, where the payback period is compared for three scenarios:

  • A 6 kW solar power system by itself.
  • A 6 kW system with a 12 kWh battery pack at current prices.
  • A 6 kW system with a 12 kWh battery back at 44% of current prices (56% less).

Note: The financial scenarios in this article are very simplified, to demonstrate how the business case for batteries could improve. However, a professional assessment is advised before starting an actual project.

Payback Period: 6 kW Solar Power System

The installed cost of a solar power system varies depending on the equipment brand and the manufacturer. However, installed costs of around $1,600 per kW are typical, which are reduced to $1,000 per kW thanks to the Australian solar rebate program. This means a 6-kW solar power system has a net cost of around $6,000.

Under favorable conditions, a 6-kW solar array can produce over 8,400 kWh per year. However, solar generation peaks around noon, while homes tend to use more electricity in the evening and early morning. In many cases, a large portion of solar generation must be exported in exchange for a feed-in tariff, which tends to be much lower than the retail kWh price.

In this example, we will assume that the electricity tariff is 30 cents/kWh and the feed-in tariff is 10 cents/kWh. Of the total generation, 4,380 kWh are exported and 4,020 kWh are consumed. The total annual savings are summarised below:

  • Savings from consumption = 4,020 kWh x $0.30/kWh = $1,206
  • Savings from exported electricity = 4,380 kWh x $0.10/kWh = $438
  • Total savings = $1,644

Considering the upfront cost of $6,000, the simple payback period in this example is 3.6 years.

Payback Period: 12 kWh Battery at Current Prices

By adding batteries to the solar power system above, the savings of 30 cents/kWh can be achieved for the full yearly output. All the electricity from solar panels that is not consumed right aways is stored in batteries for later use, instead of exporting it to the local grid. In this case, each kilowatt-hour used saves 30 cents, while exported kilowatt-hours are only worth 10 cents. 

  • Total savings with batteries = 8,400 kWh x $0.30/kWh = $2,520

However, batteries make the system more expensive by $12,000 and the total cost becomes $18,000. While savings are increased, the system becomes three times more expensive than in the previous scenario. Based on the new costs and savings, the simple payback is 7.1 years.

Payback Period: 12 kWh Battery, 56% Below Current Prices

This scenario offers the same savings as the previous one, since the full solar panel output of 8,400 kWh is used. As a result, the savings are still $2,520.

However, the solar battery system only costs $5,280 in this example, thanks to the 56% reduction, and the total system cost is $11,280. This reduces the simple payback from 7.1 years to 4.5 years. This is still longer than the payback period of solar power alone, but the difference is less than one year. Also, batteries provide services that are not available with only solar panels, such as the following:

  • Backup power during an electric service interruption.
  • Making the system eligible for battery incentives.
  • Getting incentives for participating in demand response or a virtual power plant.

For example, South Australia has a solar battery rebate program, with a value of $200/kWh as of September 2020. The 12-kWh battery in this example would be eligible for $2,400, reducing its net cost to $2,880. The total project cost is reduced to $8,880, and the simple payback is reduced to 3.5 years.

This last example is a best-case scenario, which assumes many favorable conditions: 56% cheaper batteries, a solar rebate, and a battery rebate. However, it demonstrates how batteries can become cost-effective under the right conditions.

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