If you want to be wealthy

People who want to be wealthy have many attitudes. One very important one is that they are prepared to defer pleasures to build more wealth. In this article, I want to talk about this.

But first, I want to clarify what I mean by wealth. I'm not envisaging some Scrooge character sitting on a pile of gold,  or wealthy plutocrats lighting their cigars with wads of $100 notes. I am thinking about financial independence. The ability to make your own path, and make decisions about the course of your life that aren't controlled by financial considerations. If you are not a believer in wealth, do not write off this article. Hear me out.

Up front cost, long term benefit

If you want to become wealthy, all you need to do is maximise the difference between what you earn and what you spend (where income is greater than expenditure), and invest that difference. Do this for a long time, and you will be wealthy.
Where people struggle is that they want expensive pleasures now, not later. Because of this, their spending creeps up towards (or even exceeds) their income. Thus, they never save money and will never be wealthy. Wealthy people (those who built their wealth) do not do this. They control their spending, keeping it low, while they create capital with their savings -- capital that continues to generate more income for them.

Where to invest?

Investing wisely is critical, and I will not try and advise you. I will suggest, though, that you could consider investing in renewable energy and energy efficiency. These are not investments that yield a dividend in the normal sense, but they will reduce your expenses. In a way, this is better because a reduction in expenses is not taxable. As I've said previously, I estimate the investments I've made at my house to have a ROI of 17.5% -- a rate that may actually increase with time (as the cost of power increases) -- I challenge you to find a similarly-yielding investment with this level of security.

Societies

In the same way as a wealthy individual will invest for the future, so too do societies. I would argue that the preservation of environmental capital is prudent for a society that values its future. I hope it's obvious that an individual or society that is spending its capital cannot expect to be wealthy in the future. (I hope that Australians realise this and don't yoke ourselves to fossil fuels.)

Renewable energy

This idea of investing now to generate future wealth is a powerful reason to invest in renewable energy, which has higher upfront costs, but much cheaper lifecycle and whole-system costs. If we, as a society, can increase our investments in this sector, it will help ensure our continued wealth.

Your investment

If you want to be wealthy, I recommend you do not put your money into a flashy car or a new kitchen or bathroom. I recommend you invest in energy efficiency and solar PV. Unlike fancy renovations, energy efficiency and solar PV will give you more money in your pocket, every month, ever after.


This article was written by Angus Wallace, and first appeared at guesstimatedapproximations.blogspot.com.au

Power consumption at my house

Summary

We have a normal house, and have not invested greatly in energy efficiency, but we are very careful with our power use. We have spent about $2500 installing a solar hot water heater, and have bought some energy saving LED light bulbs, and are very aware when we use power. All of our appliances are at least reasonable when it comes to power use, and we have installed a small (2 kW) solar PV system (we paid $5000 for a good one, but similar systems are available for $2000). We are now in a situation where we are exporting (selling) about 3x the power we are importing (using), and I expect to have negative power bills (ie. the utility pays us). I have estimated our ROI for this investment to be about 17.5%. We do not have a generous tariff on our solar PV (we get 24 c/kWh when we sell, and are charged 35 c/kWh for what we buy). We buy 100% GreenPower. I think this makes the case that high electricity bills aren't a necessity, and that you have the power to do something about it.

Our power consumption

This is a short post which shows graphs of the power consumption at my house. There is nothing fancy about it -- I just take regular meter readings myself so that I can monitor the system's performance. These graphs should stay up-to-date as I add new data. I show these data so that you can see what is possible in a very normal Australian house. We don't have fancy passive-house design or lots of expensive modifications. We just don't use a lot of power because we're careful. Our house was built in 1955 and is unassuming. We do not use gas at all (well, we have a gas bottle on the BBQ which we use a handful of times each year).



We have a standard grid-tied solar PV system. This means that any power it produces, that we are not using then-and-there, is exported to the grid. The amount of power exported is measured. If we are using power (eg. electricity in the house) while the system is producing, then only the excess power is exported (ie. the difference between what's generated at the panels and what we consume). If our consumption exceeds what we're generating, then we're importing power.



The first graph shows daily consumption (get power from grid, red) and solar PV export (send power to grid, green). I don't take a meter reading every day, so where I don't take a reading the graph shows an average since the previous meter reading. Notice the sharp change at the beginning of September where the electric storage hot water system was switched off. This reduced our daily power consumption by about two thirds (from to 3 kWh/day). Note that I live in Australia -- winter is from June to August!




The second graph shows our cumulative consumption and solar PV export. Seasonal variation in exported solar PV production is very evident (green line, from May to August). The production decrease in winter looks worse than it actually is because this shows not the generated power, but the exported power (which has our instantaneous use subtracted from it, which is higher in winter). Also note that the angle of power consumption changes at the beginning of September, when the electric storage hot water system was switched off. Our 2 kW solar PV system is mounted flat on a tiled roof. I don't know the exact angle, but it would be less than about 30 degrees, which is sub-optimal for winter production (because of the angle of the sun in winter, they would produce more power if they were at a steeper angle -- 60 degrees in Adelaide). They do and are unshaded all day.













This article was written by Angus Wallace and first appeared on guesstimatedapproximations.blogspot.com.au

When does it make sense to go off-grid

Consider a household that already has enough PV to cover their personal use, just not always at the times they want to use it. They might consider going off-grid by buying batteries, etc.

This is the situation I'm in. We use about 3 kWh/day, and are exporting, on average, about 7-8 kWh/day -- so we certainly have plenty of power. If we went off-grid, we'd probably want at least 5 days' power, so 15 kWh storage. I haven't priced this exactly, but I think such a system would be at least AU $8000.

What would this save us? Well, currently our exported power is sufficiently above our consumption that I estimate our bills will be $0 henceforth (ie. I think we are exporting enough power to pay for our consumption and the grid connection). Therefore, there's no benefit to us doing that!

In fact, at current electricity prices, I can't think of a situation where doing this would be justifiable. Perhaps if we were paid significantly less (ie. as the difference between what we pay to use power versus what we are paid for supplying power becomes greater, such a system would become more attractive. What sort of difference would be needed to make this worthwhile?

I'm assuming a fixed cost of $8000 to take ourselves off-grid. I recognise that for most people (because of their greater consumption) it would be more expensive. However, in that case their savings would be greater. It's not proportional though: because we use so little power, the connection fee makes up a sizeable proportion of our bill.

Exploratory model

I have done some basic modelling of how variations in our electricity billing would affect the payback of a basic off-grid system.  There are two main components to our bill -- a quarterly service fee (connection fee), and a charge per unit of energy (kWh) used. I've modelled a range of fess and tariffs, which are shown in the table below. Different connection fees are shown across the top, and different tariff structures (the difference between our consumption tariff and the Feed in Tariff (FiT)) are shown down the side. The values in the middle is the estimated ROI for the appropriate fee-tariff combination. My belief is that the "difference in tariffs" will go up, while the basic consumption tariff stays about the same and that the quarterly connection fee will also go up. There is talk of increasing the cost of connection, so that "solar users pay their fair share" (factually incorrect: it's not that houses-without-solar subsidise houses-with-solar, but that houses-without-airconditioning subsidise those with airconditioning. Utilities don't want to discourage consumption. These articles discuss in detail.). Also, the cost of off-grid battery storage is likely to decrease markedly in the next few years, but for simplicity I've only considered an $8000 system.

I've colour-coded the data, and believe that the red ROI levels are uncompelling. The orange is marginal but might be considered by someone who was passionate about being off-grid. The green results are starting to look economic.

I modelled the payback on the basis of varying the difference in consumption tariff and the FiT. At the moment, we pay AU$0.35 / kWh for electricity we use and get AU$0.24 / kWh for electricity we export to the grid. The difference is AU$0.11 -- but I expect this to increase in the future (especially when the FiT decreases in 2016). I've also modelled changes in the quarterly connection fee. Now, it is $70/quarter, but I think it's likely to increase.

Results

With our current tariff structure, I estimate the ROI for an off-grid system to be 6% -- this is not compelling. If the tariffs remain the same, but the quarterly cost increases to $130, I estimate the ROI to be 9% -- still marginal. Similarly, if the quarterly cost remains $70 but the difference between import and export pricing rises from AU$0.11 to AU$0.22 (quite possible in 2016), then I estimate the ROI to be 9%. If the difference between import and export pricing rises to AU$0.30 AND the quarterly cost increases to $100 (I consider this reasonably likely in the next 3 years), then the ROI is 12% -- this is starting to look like it could worth doing. Couple that with a 25% decrease in the price of off-grid systems in that time (given that some people are predicting a 50% decrease in price by 2020, this seems plausible) and the ROI is 15% -- I would consider doing this, and I bet a lot of other people would too.

Caveats

One caveat is that because we use so little power, changes in the quarterly connection fee have a big affect on the ROI. For households that use a lot more power, this will be less important and only the "difference in tariffs" will have much effect.
A second caveat is that this model does not consider any on-going expenses associated with maintenance of an off-grid system.


This post was written by Angus Wallace and first appeared at guesstimatedapproximations.blogspot.com.au

Renewable energy as an investment

Summary: My wife and I have invested about $8000 in solar PV, a solar hot water, and a better fridge. I estimate the return on this investment to be 17.5%, which I think makes a compelling case for people to do similarly.

I moved into my house in early 2013. Just before Christmas, we had a 2 kW solar PV system installed. We decided to get a good one, with an SMA inverter, and it cost about $5000. I realise there are similarly-sized systems that are much cheaper, but I wanted to be more confident in the longevity of the system.
Since buying it, I've been monitoring our power use quite closely, but we have always been quite careful in our use. We generally don't use heating or cooling (though we do have an electric blanket on the bed, and an electric throw for the very chilly evenings) -- the house doesn't get below 13 C or above 30 C so it's pretty bearable.
When we bought the house, it had an electric storage hot water system (300L), which I knew was a very inefficient way to heat water. My goal was always to switch to a solar hot water system. My feeling was that the existing electric storage unit would likely use about 3 kWh/day, which I thought was pretty wasteful and uneconomic. To install a hot water heater in Australia costs nearly $5000. For what it is, this is a lot of money (a solar hot water heater is something that can be built pretty easily). I started investigating cheaper options, and found that a Chinese-made 240L evacuated-tube and built solar hot water systems can be bought in Australia for about $1300. I bought one, and installed it on the roof. The setup I've gone for is quite complicated, because I decided to get a separate smaller unit to supply the kitchen, and also wanted to switch the house to rainwater (other posts to come).

We finally did this two weeks ago, and I've been surprised. It appears that the electric storage hot water system was using more like 6 kWh/day -- a huge amount of power! Without it, our average daily consumption (admittedly only over a 2 week period) is 3 kWh/day. I have done a bit of modelling of the estimated savings that we are gaining from the combination of the solar PV and hot water system, and I estimate that we are saving, on average, almost AU$4/day. At this rate, we will repay the investment in just over 5.5 years (ignoring any kind of future discounting, or cost of finance) for a ROI of 17.5%. Assumptions:

• 0.35 c/kWh cost of electricity drawn from the grid (this is the rate in SA)
• 0.22 c/kWh paid for electricity exported to the grid (we got in for the last available Feed in Tariff (FiT), so for people installing now the economics will not be quite as good. Also our FiT will end in 2016 which will affect the future economics. By this time though, the system will have paid for half its cost.)
• boosting of the system (using electricity to heat the water when the sun is insufficient -- eg. the middle of winter) is sufficiently rare not to affect the overall statistics. I think this is likely.

The last assumption might seem unlikely to you -- when we've been through winter, I'll comment on the frequency with which we need to boost the system. However, the analysis I've performed so far ignores that some of the electricity produced by the PV is consumed directly (ie. it's offsetting our consumption), which means that our savings are actually a bit higher than $4 / day, and hence our ROI is actually a bit higher than I've calculated.


This post was written by Angus Wallace and first appeared at guesstimatedapproximations.blogspot.com.au