Wednesday, January 16, 2013

Should you go off-grid?

My friend and fellow inventor, Anthony Kitchener, suggested I should try to answer this question – is it the right time to go off-grid?

We all know that the prices of PV systems and battery storage are coming down at the same time that the cost of grid-provided electricity is going up.  At some point there will be a crossover.  Notice I’m not talking about socket parity at peak output when PV power is already cheaper than grid-provided electricity.

So when will this crossover point for PV with battery storage be reached, or has it been reached already?

As you might imagine, to formulate a model to answer the question involves many considerations such as your location, your particular domestic circumstances and your expectations about the future cost of PV systems and battery storage.  In the post below, I give my modest contribution to the debate.

Here are my assumptions:
  • As an investor, you can make 3% per year after tax and inflation.
  • You live in a mythical location with an excellent solar resource such that you receive the average amount of sunshine each day.
  • The Capacity Factor of your PV system is 0.18.
  • PV panels will last for 25 years at rated output, so that a 1 kW system would deliver 24 × 365 × 0.18 / 365 = 4.32 kWhr/day each day for 25 years.
  • Your daily electricity requirement is 8.64 kWhr/day, which is exactly the output of a 2 kW system at your mythical location.  Further, half of this is required when the sun is not shining, so you need to store 4.32 kWhr/day.
  • Battery storage costs $1,000 per kWhr, and the batteries are capable of a complete charge/discharge cycle every day for 25 years.  This is a heroic assumption, but hopefully covered by assigning a high price to the cost of storage.
  • After government incentives, the specific cost of an installed PV system is $2/W.
  • Your annual electricity bill today is $1,000 and will not increase in real terms after inflation.
To disconnect from the grid, the cost to you of PV panels and storage will be $2 × 2,000 + 4.32 × 1,000 = $8,320, which let’s say you have available for investment.


Now we formulate two options.

Option 1: Stay connected to the grid

After 25 years of compounding at 3% after tax and inflation, your $8,320 becomes $8,320 × (1.03)^25 = $17,420.

Option 2: Disconnect from the grid

If you invest $1,000 each year (your annual electricity bill) for 25 years at 3% after tax and inflation, it compounds to $1,000 × (1.03^25 – 1)/0.03 = $36,459.  By that stage the PV panels and batteries would need replacement, a cost of $8,320, which leaves a balance of $36,459 – 8,320 = $28,139.

On this grossly simplified calculation, Option 2 is 62% superior to Option 1. 

Addendum: After this blog post had been republished at RenewEconomy, commenter Derek pointed out that is incorrect to subtract the cost of a new system after 25 years in Option 2.  Thus the return in Option 2 should be $36,459, which is a 109% advantage over Option 1.  That doesn't cause me to want to change my conclusions below, particularly in view of other comments at RenewEconomy about the costs and durability of battery storage.

Weaknesses in the assumptions can easily be pinpointed.  For example, I live in Sydney in an all-electric dwelling, and my peak electricity demand is in winter when the daily output of PV panels is below the annual average.  I would need to buy a generator set, which would get substantial use in winter, and I’d have spare power for sale in summer when the utilities wouldn’t pay much for it.  I’d need additional assumptions and/or data about demand, output, the cost of a generator set and the future cost of fuel.  Those calculations are for another day!

Conclusion

My conclusion is that to justify going off the grid for financial reasons, you‘d need to live in an exceptionally favourable location and in an accommodative lifestyle.  That’s my conclusion today, but it would be worth repeating the calculation in a few years when circumstances will surely have changed.

Acknowledgement: Thanks to Anthony Kitchener for the interesting suggestion.

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