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Why Inflation is Good For Solar Panels

Posted by Adam Sewall In Friday, November 19 2010 under: Clean Power Finance, Inflation, Cost and Financing

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

"a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available 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 the following picture, via our friends over at Clean Power Finance.

Solar panel electricity bill inflation-protected savings

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 energy system is meeting more than half our annual electricity needs -- pretty cool, huh?

(Related: How Much Do Solar Panels Cost?)

Now, you might have noticed that, in year 13, the gap between the pre-solar line and the post-solar line is wider than it was in the first year -- and the gap is wider still in year twenty-five. In other words, the amount of money solar power saves us increases over time. What's going on here?

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

So what's the point? Solar panels, it turns out, are excellent at reducing the impact of rising electricity costs. The above chart assumes a five percent average annual increase in the price of electricity. (In nominal terms, this is about right when looking at U.S. retail electricity prices between 1973 and 2009.) Because we installed a solar energy system, our electricity bill is not only lower -- it doesn't go up as drastically as it would had we not gone solar. 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 from region to region, so it's difficult to generalize for the entire country. California, for instance, has since 1970 seen electricity prices go up by a figure that's closer to 6.5 percent. Some states in the southeast, by contrast, have relatively lower rates of inflation, along with some of the country's lowest electricity prices. All else equal, it makes a lot more financial sense to install solar panels in California than, say, in Alabama. Depending on your own situation, you can pick your own electricity price inflation rate ("annual bill escalation") using our solar cost calculator.

Second, it's important to consider inflation of energy prices relative to inflation in the broader economy. We'll avoid the boring details. Just remember that electricity isn't the only thing whose price tends to go up over time. Gasoline and corn and toothpaste and blue jeans are all prone to price inflation.

Finally, while past numbers are useful, they will not be perfect predictors of the future. Energy prices may go up, 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've all lived through $4.00-a-gallon gasoline before...).

Anyway, hope you found this blurb on inflation and solar panels helpful and interesting. If you've got comments or questions, please feel free to post them below.

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