Electricity is changing.
To reach ‘net zero’, countries will need to look at electrifying or decarbonising their entire transport fleet.
But this possibility could be staggeringly expensive.
I’m listening to Leighton Smith’s interview with Michael Kelly. Emeritus professor of engineering, University of Cambridge. Michael hails from my hometown of New Plymouth.
He clarifies some startling prospects I had read previously:
- To electrify the vehicle fleet of the UK or New Zealand, you may need to increase electricity generation from 2.7x to 3x its current capacity.
- Production of a UK-sized fleet of EVs could consume a year of the world’s total supply of lithium.
- There will be significant costs — particularly opportunity cost — in attempting to transition to net zero. And those costs will fall disproportionately on developed nations.
Travelling around the country recently, I came across another person considering the installation of solar panels. Steve’s new Airbnb in the countryside is already energy-efficient by its design. Yet he is keen to secure significant off-grid generation.
With more and more people reviewing solar generation at home, I’m keen to look at a financial analysis for investors.
- Could investment in solar panels make financial sense for the average homeowner?
- What is the opportunity cost of investing your money in going partly off-grid?
- With electricity demand now projected to rise, what are the prospects for the ‘gentailer’ power companies?
Cost and savings from a typical solar installation
I’m going to use my own home as an example.
It’s about 230 sqm, with unobstructed Auckland sunshine across its roof span.
For the past financial year, I paid $3,664 to Genesis Energy. I estimate 10% of this was for bottled gas to run the luxury of a fireplace. So let’s call it $3,300 for electricity alone.
Now, what if I want to switch to solar?
The cost for solar installation is subject to many variables:
- Are you in a sunny location?
- Will you add storage batteries for when there is no sun?
- Will you sell excess power back to the grid?
- Are you prepared to change your utility company to get a more optimal buyback price?
For my place, on the back on an envelope, an optimal installation considering the above variables could save me 55%. That’s $1,815 every year!
But let’s look at the downside.
I like the aesthetics of my new Karaka iron roof. The roof can be seen from across the bay. Solar panels are going to change the look.
Put your vanity aside. There is also the question of the capital outlay. My optimal installation to save that 55% may mean a combination of solar panels and battery storage. Plus allowance for some roofline complexities.
Ballpark: $20,000.
So it could take about 11 years for the system to pay for itself.
Opportunity cost
At the moment, I own shares in two gentailers:
- Genesis Energy [NZX:GEN]
- Contact Energy [NZX:CEN]
Genesis Energy currently has a gross dividend yield of about 8.2% p.a.
It’s about the highest in the sector. And, like all dividends, it is subject to change year-to-year.
Yet, having been a shareholder since the IPO, dividends thus far have been remarkably steady.
Contact Energy has a gross dividend yield of about 5.4% p.a.
Last financial year, our modest investments in these two gentailers covered our power bills. More than twice over on dividends alone.
That’s before we consider capital gain — which I’ll get to in a moment.
For now, let’s take the midpoint of these two large dividend yields: 6.8%.
The potential yield from such dividends on my prospective $20,000 investment into solar would be $1,360. Before tax.
So it does appear I could save somewhere between $500 to $800 a year by going solar.
Of course, dividends cannot be guaranteed. Nor can any potential capital growth. The shares could fall in value.
But there would also be risks with my solar installation. Unexpected maintenance may be required. There is depreciation and potential battery degradation.
Outlook for the gentailers
If you’ve been reading Wealth Morning for any length of time, you’ll know I’m relatively bullish on the power-generation industry. Bias admitted.
Over the long run, New Zealand gentailers have proven surprisingly well-performing investments.
Now, with the stated goal of net zero by 2050, this is going to need the electrification of road transport. And as Michael Kelly pointed out, up to 3x the demand for power.
Does this mean electricity is going to become a lot more expensive?
Not necessarily.
It is going to mean that a lot more power needs to be generated. From solar. Wind. And other renewable sources, in particular.
The question, then, is who can generate electricity most efficiently, reliably, and at the best price?
Solar is now the cheapest form of electricity generation, according to the International Energy Agency. For this reason, large-scale generators like Contact Energy are entering solar.
Last month, the Company announced to the market:
‘Contact Energy (’Contact’) and global solar developer Lightsource bp (‘LSbp’) will collaborate on a series of grid-scale solar generation projects to create up to 380,000 megawatt hours of clean, affordable electricity annually by 2026 — enough to power 50,000 homes across the country.
‘Under the new 50/50 joint venture Contact and LSbp will source, develop and construct multiple solar farm projects in various locations across New Zealand. Contact will be able to purchase the electricity generated from the projects via a long-term power purchase agreement.
‘Contact CEO Mike Fuge said the new joint venture is aligned with Contact’s strategy to decarbonise New Zealand through the development and delivery of renewable generation projects.
‘Our strategy lays out a path for Contact to decarbonise New Zealand, and a critical aspect of this is our commitment to help meet the massive, anticipated demand for renewable electricity.’
I’m not sure my proposed $20,000 solar panel investment can compete with this scale.
It’s like a lot of things these days. I can make a great burger. More satisfying and enjoyable than a Big Mac. But I can’t make it on the same time/cost spectrum as McDonald’s [NYSE:MCD].
Hence, for me, I’m probably prepared to wager that the power generators will grow their earnings. Their share price. And their dividends over the next 11 years.
Such capital growth would mean — if my bet is correct — the savings for my household from solar will not stack up.
But there are other considerations beyond just investment.
If you’re wanting to do your bit, be more self-sufficient, and step beyond what may happen in this volatile world, home solar could still be for you.
Perhaps it’s like growing your own veggies. Not always economic, but ultimately satisfying. And potentially resilient in the face of Armageddon.
Well, this is an ongoing conversation. Solar panel prices are continuing to come down. And I haven’t really factored in here any dramatic increase to my own power needs, were we to add a spa pool. Or — on positive nickel and lithium supply analysis — even acquire an EV.
Meanwhile, I welcome your comments.
Where am I right? Or wrong?
Bouquets and brickbats welcome, as always.
Regards,
Simon Angelo
Editor, Wealth Morning
Important disclosures
Simon Angelo owns shares in Genesis Energy [NZX:GNE], Contact Energy [NZX:CEN], and McDonald’s [NYSE:MCD] via portfolio manager Vistafolio.
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)