Show me the money: the economics of going electric

Our Electric Homes report showed that New Zealand is one of the few places to have crossed the ‘electrification tipping point’, where heat pumps for your rooms or hot water, electric vehicles and induction cooktops are much cheaper to buy and run over their lifetime than fossil fuel equivalents. 

The 'sticker price' of these electric machines is usually higher, so you might need to get a loan, but the running costs are a lot lower. Even if you include the higher upfront costs and interest on a loan, the average home can save around $4,000 per year by upgrading to electric machines and running them via a combination of the grid and solar and batteries. 

Big savings for households add up to big savings for the country: our research shows that avoiding foreign fossil fuel molecules and instead running the economy on local electrons could save the country $29 million a day by 2040, so it's in our national interest to go electric.

So how does this all stack up? How can electric machines or solar panels that are more expensive to buy at the start save us so much money in the end? Let's crunch those numbers.*

Jump to sections: 

• Pay it forward
• More for your money
• ‍Up, up and away
• Driving down bills‍
• Swapping fuel for finance
• Farming electricity
• Fine margins
• How low can you go?
• From micro to macro
• Unlocking the savings
• The wash up

TLDR? Check out our infographic

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‍Pay it forward‍

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Humans are notoriously bad long-term thinkers and not everyone instantly grasps how an upfront investment can pay off over the long-run. 

Solar is a great example because you’re basically buying a few decades (or more) of energy all in one go. 

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You can pay for it all at the start if you have the cash, or, just like a home loan, pay it off over time in instalments with interest added if you have to borrow money.

Because your electricity bills will go down significantly when you have solar installed, you can subtract those savings from the upfront costs to figure out how long it will take to pay it back. 

Better still, you can compare what the cost of interest payments would be compared to what you currently pay in energy costs. 

If we were to make a sweeping statement, a 9kW solar system installed at the start of your mortgage for $18,000 will save you around $60,000 on electricity in 30 years.

Without solar, you would spend around $90,000 on electricity in that time, but with solar you spend about $30,000. Location, roof orientation, how many electric machines you have and how many people live in your home will all influence this figure, but you get the idea.

Electric machines are generally more expensive to buy, but they are so much better at using energy than fossil fuel machines. This means they can do the same job but cost a lot less to run and, just like solar, those savings can go towards paying back the higher upfront cost.

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More for your money

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When we buy power from the grid about half our bill is the cost of generating the power and the other half is the cost of all the poles and wires to get it to our homes, farms and businesses. In total we are paying around 35c for a unit of electricity (AKA one kWh).

For the typical home in New Zealand it will cost you around 13c to generate a unit of electricity with your own rooftop solar when you put the upfront cost on your mortgage. It’s around 7c without a loan. That’s a big gap and that’s why we say rooftop solar is the cheapest form of delivered electricity New Zealand homes can get. 

The exciting opportunity for customers here is that the price of solar and batteries continues to fall, while the cost of grid electricity continues to rise, and in New Zealand, your power is currently worth a lot to the grid.

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If you head over to PowerSwitch you will see a range of buy-back rates from retailers. Ecotricity offers 21c per unit for the solar you export at peak, while Octopus Energy offers a 40c peak export rate, but only between April 1 and Sept 30.  Others are a lot lower.

Making money on the solar you don't use reduces your electricity bill further (or brings it down to zero or even turns it into a credit for low-energy users) and this reduces the time it takes to pay off the upfront cost. 

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Up, up and away

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Grid prices are expected to keep rising at above the rate of inflation, as they have for decades, and petrol and diesel have followed similar trends. At Rewiring Aotearoa, we’re pro-grid. We will need all the poles and wires and plenty more renewable generation to power our much more electric economy in the future. But we’re against unnecessary spending on grid upgrades, which is set to be the biggest component of electricity bill increases for New Zealanders in the coming years. 

The so-called ‘gas death spiral’, where fewer people on the network need to share the costs to maintain it, and a looming supply shortage and lack of suppliers is set to increase those gas bills significantly. 

While it’s important to shop around for better deals with energy providers, retail competition is not likely to bring down electricity bills because of those increased line charges, which all retailers pass on. 

Solar, on the other hand, locks in the lowest cost electricity for a few decades. And upgrading to electric machines removes the need for expensive and volatile fossil fuels.  

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Driving down bills

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If you can avoid petrol or diesel and instead fill up an electric vehicle with the cheap electrons you’ve generated from your roof, you’ll be saving a lot more. 

Around 60% of the average home’s total energy use comes from vehicles and these savings on petrol or diesel are what people often fail to account for when they’re doing the household sums. EV owners charging at home with solar can save almost $20,000 over 15 years or around $10,000 if charged via the grid. 

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The massive gap between what people were paying for electricity and fuel bills previously and what they end up paying after going electric and solar is the thing that tends to stand out most (and because they have already paid upfront many say that it feels like they’re getting it for free).

We often hear people say that they’re never home when the sun is shining, but for the average amount of driving in New Zealand you only need to charge your car once or twice a week, you can time your water to heat during the solar window, run your household appliances during the day, and get paid more to export any extra, so there is nothing going to waste. 

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Swapping fuel for finance

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If you already have the capital, going electric and solar is in most cases a no brainer. But, for many, solar and other more expensive electric machines are things that they need to go into debt to access.

The higher upfront costs are still the biggest barrier for most, but if the repayments (including interest) are cheaper than the electricity or gas you’re currently having to buy for your home, and if financing and charging an electric car is cheaper than the petrol equivalent, you could be saving money from day one. 

That’s why we talk about swapping fuel for finance and this graphic from The Machine Count report sums it up.

To use cars as an example, buying a $52,000 EV with a 5.5% loan and charging it via the grid would cost around $135 per week or $128 per week if you had solar.

Buying a $39,000 internal combustion car and then paying for maintenance and fuel would cost $148 per week.

Small sums add up to big numbers and, over 15 years, that would be a saving of between $11,000-16,000 with an EV. 

If you got a quote for solar or batteries a few years ago, get another one. The price of panels and batteries have dropped around 90% in the past decade. The economics may not have stacked up as well a few years ago, but things have changed markedly since then and these technologies have gone from the most expensive sources of energy to some of the cheapest.

Similar things are happening with electric vehicles and hot water heat pumps, so take another look - and make sure you weigh up the lifetime costs of ownership, rather than just looking at the sticker price.

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Farming electricity

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As the disclaimers say, past performance is not a reliable indicator of future returns and every business is different, but Forest Lodge Orchard has had solar and batteries on its cherry orchard since 2019 and last year added 120 more panels onto some unproductive land. This cost around $120,000 and these panels will make somewhere between $20,000 and $30,000 worth of electricity a year. That means these solar panels are making about half the minimum wage. 

A farm like this can generate electricity for about 7c per unit with a loan at 5.5% interest. This would be as low as 3c per unit if paying with cash.

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The biggest savings from solar come from using as much of it as possible, rather than exporting. Forest Lodge has taken that to the extreme (and managed to get two quite big bites of the cherry as a result) because it runs 21 electric machines and produces around 85% of the energy it requires. That means it saves around $40,000 a year on diesel.  

Forest Lodge is on the wholesale electricity rate, which is a lot more volatile, but it suits their appetite for risk and has so far provided plenty of rewards. Because the orchard has batteries to store all its cheap solar, it is protected if the wholesale price gets too high and it is also paid more to export electricity at times of high demand. This makes batteries a much more bankable investment. 

Becks Smith, who installed solar on her Maniototo farm and now runs a company called Solayer that helps other farmers follow suit, says solar and storage is one of the only ways farmers can reduce their costs without compromising on something.

She spent $100,000 putting in 108 panels. Her annual electricity cost beforehand was $28,000 and she estimates that will be halved with solar through a combination of bill reductions ($9,000) and export revenue ($5,000). That means she will pay that investment off in around six or seven years.

There are a growing number of farmers who are taking the opportunity to save money by generating their own energy - and, where possible, using it to fuel their machines. A recent survey showed that 70% of farmers would consider installing solar to reduce their energy costs and it was popular across the board. 

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Fine margins 

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Recently, Forest Lodge was pushing power it produced for 7c back to the grid for 45c, which shows you just how broken New Zealand’s electricity system is. In February, it invoiced a gentailer $4,800 for the energy the farm provided. Now that's a changing of the tides!

Last winter the wholesale price went as high as 90c in the middle of the day due to a lack of water in our hydro lakes and a gas shortage. This February it averaged around 30c (which is still too high and shows the market is screaming out for more generation). 

The Energy Competition Task Force looks like it is about to make changes that will mean customers with solar and batteries will be paid more fairly for exporting at peak times - and, given the Electricity Authority is obligated to look after the interests of the people who use the electricity system, so they damn well should. 

In Australia, wholesale prices have gone to zero in the middle of the day because of all the solar in the system, but this is a good thing for our most vulnerable and particularly for those smart enough to make use of that cheap energy. This is unlikely to happen anytime soon in New Zealand, so the opportunity to make some pocket money from exporting solar is still there. 

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How low can you go?

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What about the opportunity cost of buying solar vs. investing in something else like stocks or putting that money into Kiwisaver? Solar doesn’t compound like the stock market, and the payback period doesn’t account for ‘the time value of money’, but the main differences are that energy is not really optional and you don't have to pay tax on the money you save. 

It’s important to stick to the long-term plan with your other investments. But think of your energy like a compulsory subscription that you need to function in the modern world. Running more efficient electric machines with renewable electricity is the cheapest and most stable energy subscription you can get and, just as paying down your mortgage and finding ways to reduce those costs is smart, reducing your energy costs also makes good financial sense. 

We all need somewhere to live and anyone lucky enough to own their home or car generally understands the financial benefits of owning vs. renting. But we don't tend to think that way when it comes to energy. Even though we use it every day, most of us are still renting from big energy landlords that are likely to keep putting up the rent when we could instead own our cheaper energy and use as much of it as possible.  

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From micro to macro

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Just as households, farms and businesses benefit in the long-term from more efficient electric machines, going hard on electrification could save the country $29 million a day by 2040. 

Last year, alongside the chief economists of the Reserve Bank and Climate Change Commission, we produced the Investing in Tomorrow report, which showed that by avoiding some of the world’s most expensive and mostly imported fossil fuels, the cumulative savings would add up to around $11 billion by 2040 (this is the equivalent of about 30 Dunedin Hospitals, 16 City Rail Links and 380,000 Queenstown Roundabouts). Some believe fixing climate change is too expensive, but it’s actually now more expensive not to fix it. 

Mike Taylor from Pie Funds wrote recently that going electric could help fix our balance of trade because we won’t need to import as much oil. And MBIE’s recent report showed it’s also the cheapest and most effective way to sort out our fuel security.

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Unlocking the savings

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So, given all the evidence showing electrification makes sense for New Zealand, what's holding everyone back? Upfront costs are a major barrier to uptake, and that’s why finance is the key to fixing our energy system, reducing the cost of living and slashing emissions. We desperately need more finance innovation. Solar panels and electric machines should be recognised as cost reducers and you should be able to get stable fixed term loans to buy them. 

At the moment, low-interest green loans are often quite hard to get, are only available to mortgage holders and don’t last long enough. This is why Rewiring Aotearoa is currently working on a scheme that would give every rateable property access to low-interest loans for electrification upgrades. These loans would be paid back over time or when the property sells. And it would come at zero or even negative cost to the Government. 

We are also continuing to encourage banks to create new products that are available to more customers - and encourage the Government and the Reserve Bank to take actions that will make this more attractive for banks to do.

Renters make up a large (and growing) chunk of the population in New Zealand and lower income homes tend to spend a greater proportion of their income on energy, so they stand to benefit even more from the bill reductions and price stability of these technologies. Unfortunately, the split incentive between landlords and tenants means that while landlords have to pay for these upgrades, it’s the tenants that benefit, so it’s less likely to happen. 

A loan scheme like this should also appeal to landlords because they will either have to pay for a replacement fossil fuel system out of their own pocket when the old one breaks down or buy a more efficient electric equivalent with a low interest loan and pay it back later. 

This model could also be used for solar, with what’s sometimes known as a ‘comfort levy’ added to the rent in exchange for much lower electricity bills for the tenant. The landlord gets a more desirable property and higher rent and the tenant reduces their overall cost of living. It’s a win-win - and there are win-wins all around when it comes to electrification. 

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The wash up

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There are many New Zealanders who have gone electric, installed solar, got smarter with their energy use and saved stacks of cash. The Rewiring Aotearoa website is littered with stories of people who have slashed their energy bills (and emissions) and around 70,000 homes have installed solar in New Zealand so far. While it's nothing on Australia, the growth rate is at record levels here and ‘the neighbourhood effect’ is real. We are herding creatures, after all, so when one house on the street goes electric and gets solar, we often see it spread. 

You will always have to pay for an energy subscription. Going electric costs more at the outset but is the cheapest energy subscription you can get. Sometimes you have to spend money to save money and, like all the best investors, you have to play the long game.

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*We recognise that everyone’s financial situation is different. There are rules (and disclaimers) in place for a reason. And convincing people to take on debt is serious business. This is not intended to be financial advice but, based on the robust research of a fiercely independent NGO and plenty of ‘anecdata’, it’s clear that there are savings staring many New Zealanders in the face right now. Accessing those savings requires some education - as well as innovation in the finance sector to help everyone get hold of these cost-reducing, emission-slashing machines.

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