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How Inflation Affects Solar Costs

October 01, 2022

You should consider inflation every time you make important financial decisions that extend for several years. There are two types of money: real money and nominal money. Real money defines the value of money depending on what it can buy, usually after compensating for inflation. Nominal money focuses on the face value of money while ignoring its shrinking value due to inflation. When making financial decisions that span years, you should make them in terms of real money, also known as net present value (NPV). If you fail to factor in inflation, you will be misled by the number of dollars, yet their value shrinks yearly. This blog will discuss how inflation affects solar costs.

The Effects Of Inflation

The effects of inflation are twofold when you are purchasing a solar system. First, inflation reduces utility rate increases. For example, your real cost of electricity doesn't go up at all if utility rates increase by 3% while inflation is also 3% per year. The 3% inflation neutralizes the rate increase. If the nominal rate increase is 3% and inflation is 2%, then this is only a 1% real rate increase. On the other hand, if the rates increase by 3% and inflation is 4%, then rates go down by 1%.

The next effect of inflation when buying a solar system is that it makes it more attractive to finance a photo-voltaic (PV) system instead of buying it in cash. This is because you use today's dollars to purchase your solar system in cash. However, if you finance the system and pay for it over time, the loan payments you make will be in future dollars. This is because the face value of future dollars stays the same while the real value shrinks due to inflation.

Financing a solar system instead of paying cash saves you money in the future. For example, if your household or other expenses increase by 3% yearly due to inflation, the increase would be 34% in ten years. You would expect the costs to go up by 30% over ten years. However, annual compounding makes the increase more than simply multiplying 3% by 10.

With inflation, an item that cost $100 today would cost $134 in ten years. However, the real value remains the same, i.e., $100 in today's dollars. Therefore, in ten years' time, $134 will only buy what $100 can buy today. Thus, the value of the dollar, in terms of what it can buy, shrinks by 3% every year. If you keep $100 today and use it after ten years, it will only buy goods worth $74.

When you borrow money, inflation favors you. For example, you could save up to $4885 if you borrowed money to finance a $18440 solar system at an interest rate of 4.74% for 20 years, and the inflation rate is 3%. If you borrow the same amount when inflation is at 3% and the interest rate is at 8.25%, you will save $8500. When you borrow money, inflation is your friend, especially if the interest rate is fixed.

However, you will still benefit from inflation even if the interest rates vary, just not as much as when the interest rates are fixed. Loan rates always consider the inflation rate. Therefore, loan rates go up when inflation is high. Therefore, if you have a variable interest rate financing, the rates will go up and down with inflation. However, this is not as bad as it seems when the interest rate is offset by repaying the loan with dollars with less value.

Inflation Rates Prediction

How can solar system buyers predict inflation? Nobody knows the turn that inflation will take, although numerous predictions exist. The federal Consumer Price Index (CPI) is the standard indicator of past inflation. Here is what it indicates regarding past inflation:

  • Between 1983-2015, inflation averaged 2.8% per year
  • Before 1983, inflation was extremely high, averaging at 8.8% between 1973-1982
  • Since the crash in 2008, inflation has averaged 1.4%

It is challenging to determine how inflation will do in the near future. Most economists use 3% as a reasonable long-range prediction of an increase in inflation per year. The Solar Consumer Advisor uses a prediction of 3% in its solar panel cost savings calculator.

Not All Predictions Are Correct

Most solar cost calculators and estimators get the inflation factor wrong, especially as the utility rate increases. Most estimators ignore inflation when predicting solar prices, which significantly distorts consumers' costs and savings. If you still consider an $18,440 net cost system with a yearly increase of 3% for both inflation and SCE costs, the costs would be $48,000 without solar.

The maximum savings upon obtaining the best financing would be $37,200. However, if estimators leave in the 3% SCE rate but leave out the 3% inflation, the SCE costs without solar would be $16500, and the savings would be around $13,000. Most estimators do this, including the costs you are likely to see in your quotes. These figures are exaggerated because they assume that future dollars have the same value as the present dollars. However, this is not the case unless the inflation rate is zero. Therefore, solar panel cost and savings calculators must take inflation into account.

The Current State Of The Solar Panel Industry

Reuters states that U.S solar installations are likely to contract in 2022 due to inflation. Solar installations in the U.S soared by 19% in 2021 to hit a record high. However, this installation rate will likely decline in 2022 as developers struggle with shipping delays and cost inflation. The clean energy industry is lobbying intensely for Congress to extend subsidies that have been crucial to its growth. According to a report by Solar Energy Industries Association and the energy research firm Wood Mackenzie, the nation will not meet its goal of decarbonizing the electricity sector by 2035 if solar credits are not renewed.

In 2021, solar energy accounted for nearly half of generation capacity in the U.S. This is mainly due to the robust demand for clean energy by businesses, homeowners, and utilities. In 2021, the solar energy industry installed 23.6 gigawatts of projects. Nearly three-quarters of these projects were large installations for big customers and utilities. However, the sector could decline by 14% in 2022 as developers delay or cancel projects because of high costs and supply constraints, some caused by the coronavirus pandemic.

The cost of solar projects rose by 18% in 2021. This was a significant blow for the industry that had faced dramatic price reductions in the last decade, enabling it to compete with fossil-fuel-fired projects.

The solar energy industry wants Congress to keep the 30% tax credit for ten years. With these credits, the solar sector would increase to 700 gigawatts by 2032. However, without the tax credits, the industry would only increase to 464 gigawatts. The top state for solar installations in 2021 was Texas, followed by California, Florida, Virginia, and Georgia.

Whether Solar Is A Good Investment Against Inflation

With the rising inflation, you could be wondering whether installing a solar system is a viable decision. Deferring the decision to install a solar system could be costly for many reasons. First, there is a constant increase in the cost of electrical components across the solar industry. The prices of elements like PVC pipe, copper, aluminum, and metal conduct are skyrocketing. After many years of decline, solar equipment prices are starting to increase.

The price of solar panels, metal solar rackings, and other components that make up a solar system is rising. Waiting a week, month, or longer, before installing a solar system could add up the costs. Supply chain issues and inflation could add hundreds or even thousands of dollars to your solar energy project. The costs will vary depending on the size of your solar system.

Solar Power Systems Are An Asset

Solar systems will likely increase in value with financial market volatility and inflation. They are a great example of a hard asset. A solar energy system consists of tangible property and uses energy from the sun to produce electricity. As inflation soars, electricity prices also go up, making the value of solar assets appreciate. When you have electricity from the sun, you reduce your reliance on grid power, boosting your energy and financial independence.

Inflation occurs as the dollar's purchasing power diminishes. When the currency is devalued, goods and services prices go up. In the 1960s, electricity prices were stable, averaging around 2 cents or $0.02 per kilowatt-hour. However, in 1971, inflation took off when the U.S dollar's connection to a gold standard was severed. From the 1970s to the early 1980s, the price of electricity went from $0.02 to $0.07 on average. This was an increase of 25% in only two years. If the electricity prices skyrocket, your solar energy will save thousands of dollars.

Solar Financing Offers Low-Interest Rates

As outlined earlier, purchasing your solar system through financing instead of paying cash could help you get around inflation. Therefore, if finding the capital to pay for your solar system proves challenging, obtaining financing could help you buy when the prices are still relatively low. A great way of leveraging debt is borrowing at the current low-interest rate. Low-interest costs allow you to lock in your future costs of solar for your home or business. Locking in financing today is a good move because interest rates could rapidly rise. Even as electricity prices increase, you will enjoy paying much less for electricity with solar energy.

Whether Solar Panels Will Be Cheaper In The Future

The technology that converts sunlight into clean electricity has been around for many years. However, it was only in the 2000s that solar panels became a practical energy alternative. As technology improved and the solar industry matured, the cost of installing a solar system began to rise. By the 2010s, solar energy was no longer a passion project for the wealthy and environmentally conscious individuals. Instead, it was a cost-effective way for homes, businesses, and farms to generate emission-free electricity.

In the last decade, there was a significant decrease in the cost of going solar. The question is, will this decline continue in the 2020s? If you were to install a solar system in the year 2000, you would pay an average of $11 per watt, amounting to around $550,000. If you were to install the same system in 2010, you would pay about $6 per watt, amounting to $300,000. Installing a 50 kW system in 2020 would cost approximately $112,500. However, with the many incentives available to people seeking to own a solar system, the system could cost about $83,250, less than $1.70 per watt.

A solar system could help you to eliminate an electric bill of around $600, meaning that the system would pay for itself and help you save thousands of dollars over a 30-year lifespan. However, it is essential to note that the price per watt depends on the size of the system. A smaller system will have fewer savings than a larger system.

It is unlikely that there will be a dramatic decrease in solar prices in the future due to inflation. As the solar manufacturing and installation processes become more efficient, there will be less room for hard costs. Therefore, a larger portion of the price will consist of soft prices that include financing and permitting. In addition, soft prices tend to increase with inflation. Thus, if soft prices constitute the central portion of a solar system price, inflation will contribute more to the cost of the system. Therefore, even as the hard costs decrease, they will have little impact on the price of installing a solar system.

Find A Reliable Solar System Supplier Near Me

The effects of inflation on solar prices depend on several factors, including whether you buy the system in cash or through financing. In addition, other factors could also contribute to higher solar prices. The factors include the size of the system, the ease of installation, and government incentives. If you plan to install a solar system but are uncertain about inflation in the Bay Area and Northern California, contact Sun Solar Electric. Our experts will guide you and help you choose an ideal system for your home. Call us at 707-658-2157 and speak to one of our experts.

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