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Solar Hot Water – Not Expensive

The Australian has a new Environment writer named Matthew Warren who has a history of doing PR work for the coal industry. This has the potential for insightful articles based on knowledge of what the industry is doing or for PR work for the coal industry masquerading as journalism. Unfortunately it seems like the latter is what we are getting.

Matthew’s latest effort is an article claiming a $6.5 billion cost to home-owners because of an “effective ban” on electric hot water systems that Labor might impose. Unfortunately he doesn’t clearly state what an effective ban is, but does note that apartments are exempt.

The specific claim that is used as the basis for the article is that solar hot-water systems cost $2,800 more than electric systems, and that after the solar hot-water rebate ($1,000) the additional cost would be $650,000,000 per annum, and that a period of 10 years would be required to replace all hot-water systems thus giving a cost of $6,500,000,000. So I presume that he expects that there would be 650,000,000/1,800 hot water systems installed per year which would be about 361,111.

According to the Australian Bureau of Statistics there were 6,744,800 households in Australia in 2003. Matthew’s article states that about 40% of homes can have gas hot-water systems fitted that comply with the proposed new regulations, given that and the exemption for apartment buildings let’s assume for the sake of discussion that 50% of homes would require a solar hot-water system. Assuming that each household has a separate hot-water system that means that for these claims to hole we need an average expected lifetime for a hot water system of 6,744,800/2/361,111 = about 9.3 years. If the currently installed hot-water systems are expected to be replaced in 9.3 years then we can expect that hot water systems tend to survive for an average of about 18.6 years. I wonder if that number is correct (some google searching didn’t turn up an answer). One of the disadvantages of old-fashioned media is that they tend not to include calculations or cite sources adequately so we can’t easily verify or disprove their claims, I wonder if this is deliberate…

Matthew admits that using a solar hot water system can be expected to save households $300 per annum in electricity expenses, I presume that this is based on current energy prices and that the savings can therefore be expected to increase as energy prices increase (we have a lack of water which is increasing the cost of producing electricity from coal).

Let’s assume for the sake of discussion that the typical home-owner has a mortgage, the Commonwealth Bank is currently advertising mortgages with a rate of just over 8%, the way things work is that there are various criteria for getting a discount rate which most borrowers can meet so the result will be slightly below 8%. If a solar hot water system costs $1,800 extra to install and the money comes from a mortgage then every year it will cost the home owner about 8% of $1,800 which is about $144 (a saving of $156 per annum). If the solar hot water system saves the home owner $300 per annum then at any interest rate below 300/1800 (16.66%) they will make money.

If there was no government subsidy and the entire $2,800 extra was paid by the home owner then at 8% interest it will cost $224 per annum (a saving of $76 per annum) and the interest rate would need to increase to 300/2800 = 10.7% to make it break even.

So for solar hot water to not save the home-owner money we need to have a significant increase in interest rates (which incidentally would bankrupt many home owners), AND to have electricity prices remain the same (which would require even more of our tax money to be spent on supporting the coal industry).

Finally Matthew complains that the solar hot-water rebate could cost the government $4 billion over the course of the scheme (the next 10 years). This sounds like a lot of money until you think about the 9 billion dollars a year that the government spends on subsidies for the coal, oil, and gas industries! On the current course the government would spend 90 billion dollars of our tax money subsidising polluting industries that cause climate change, but Matthew opposes spending 4 billion subsidising technology that prevents pollution and reduces climate change.

3 comments to Solar Hot Water – Not Expensive

  • Nigel

    Matthew Warren obviously thinks his readers are dumbed down consumers.

    “lift your game Matthew….and join the real world”

  • Craig

    Perhaps it is necessary to include depreciation in the calculation, the HWS will not last forever – perhaps a 10 year lie is typical, maybe longer. But this will reduce the IRR (or discount rate). I like your thinking – all these decision basically boil down to economics – how can I get the hot water I need for the least cost ($, CO2, noise, …). Solar Hot Water may have a role to play here, although modern heat pump systems are also very competitive. Unfortunately far too many associated with ‘alternative’ energy are badly clouded by wishful thinking. For example argueing for subsidied or domestic soler electricity is presently only justifiable as an ‘encouragement’ for the PV industry, while some other systems are viable.
    The main point is ‘how much does this cost us overall’. Government programs that reward (or force) solutions just because they have the word ‘solar’ in them are however a farce.

  • chary

    …the solar hot-water rebate could cost the government $4 billion over the course of the scheme (the next 10 years). This sounds like a lot of money until you think about the 9 billion dollars a year that the government spends on subsidies for the coal, oil, and gas industries! On the current course the government would spend 90 billion dollars of our tax money subsidising polluting industries that cause climate change, but Matthew opposes spending 4 billion subsidising technology that prevents pollution and reduces climate change…
    Most of us do splurge on luxuries where we never do any cost/benefit analysis. If one puts a value to to the social benefits the picture would change a great deal.