Why Inflation is Good For Solar Panels

20 November of 2010 by

As Merriam-Webster tells us, inflation is defined as:

“a continuing rise in the general price level usuallyattributed to an increase in the volume of money and credit relative toavailable goods and services.”

I know, I know — not exactly the kind of thing you want to be reading on a Friday. But before your eyes glaze over, take a look at thefollowing picture, via our friends over at Clean Power Finance.

solar panels electricity inflation savings Why Inflation is Good For Solar Panels

As you can see, we’ve got two situations.One in which we don’t install a solar energy system (shown by the“pre-solar” blue dotted line) and one in which we do install a solar energy system (shown by the “post-solar” green line). After installing solar panels, our annual electric bill goes from about $1,000 to, say, around $450. Our new solar energysystem is meeting more than half our annual electricity needs — prettycool, huh?

(Related: How Much Do Solar Panels Cost?)

Now, you might have noticed that, in year13, the gap between the pre-solar line and the post-solar line is widerthan it was in the first year — and the gap is wider still in yeartwenty-five. In other words, the amount of money solar power saves usincreases over time. What’s going on here?

In a word, inflation. The price of gridelectricity — the stuff you buy from your utility company — doesn’t stay put. Rather, like many prices, it tends to go up over time. How fastelectricity prices increase depends on a number of factors. The cost offuel — like coal and natural gas — is one. The amount of money a utility needs to pay for upgrades to its electricity grid is another. Costslike these are passed through to customers.

So what’s the point? Solar panels, it turns out, are excellent at reducing the impact of rising electricitycosts. The above chart assumes a five percent average annual increase in the price of electricity. (In nominal terms, this is about right whenlooking at U.S. retail electricity prices between 1973 and 2009.) Because we installed a solar energy system, our electricity bill is not onlylower — it doesn’t go up as drastically as it would had we not gonesolar. See the “savings grow by 184%” note above? That’s what we’re talking about.

To be sure, there are a few relevant side notes.

First, electricity prices vary a lot fromregion to region, so it’s difficult to generalize for the entirecountry. California, for instance, has since 1970 seen electricityprices go up by a figure that’s closer to 6.5 percent. Some states inthe southeast, by contrast, have relatively lower rates of inflation,along with some of the country’s lowest electricity prices. All elseequal, it makes a lot more financial sense to install solar panels inCalifornia than, say, in Alabama. Depending on your own situation, youcan pick your own electricity price inflation rate (“annual billescalation”) using our solar cost calculator.

Second, it’s important to look at inflation in both nominal and “real” terms. We’ll avoid the boring details. Justremember that electricity isn’t the only thing whose price tends to goup over time. Gasoline and corn and toothpaste and blue jeans are allprone to price inflation. Real inflation numbers take this into account — and, accordingly, show you if the price of a particular item isincreasing relatively faster or slower than other goods.

Finally, while past numbers are useful,they will not be perfect predictors of the future. Energy prices may goup, they may go down, they may hold steady. If we had to bet, however,we at GetSolar would probably put our money on price increases. (We’veall lived through $4.00-a-gallon gasoline before…).

Anyway, hope you found this blurb oninflation and solar panels helpful and interesting. If you’ve gotcomments or questions, please feel free to post them below.

Why Inflation is Good For Solar Panels

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