Chapter 2

Introduction

Every month, millions of households receive an electricity bill. Most people glance at the total amount due, pay it and move on. Few stop to consider how that figure was actually calculated.

In reality, an electricity bill is made up of several different charges, each representing a different aspect of supplying electricity to a home or business. Understanding these charges is essential because a solar power system does not reduce them all equally. Some costs remain largely unchanged, while others can be reduced significantly by generating electricity on-site. Before we can calculate how much money solar saves, we first need to understand exactly what we're paying for.

Reading an Electricity Bill

Although electricity bills vary between countries and energy suppliers, they all contain the same basic information. They show how much electricity has been imported from the grid during the billing period, the tariff charged for that electricity and the total amount owed. Many bills also include information such as billing dates, meter readings, electricity usage history and any exported solar electricity where applicable.

Rather than being a simple invoice, the electricity bill provides a summary of how energy has been bought, sold and used over the entire billing period. Once these different sections are understood, it becomes much easier to see how installing solar changes the final cost.

The Two Main Charges

For most households, the electricity bill consists of two main components.

The first is the daily supply charge. This is a fixed amount paid each day simply for remaining connected to the electricity network. It helps fund the infrastructure that delivers electricity to homes, including poles, wires, substations and maintenance of the distribution network.

The second is the energy charge. Unlike the daily supply charge, this depends on how much electricity is actually used.

Electricity consumption is measured in kilowatt-hours (kWh), with each unit imported from the grid charged according to the customer's electricity tariff.

Because solar reduces the amount of electricity that needs to be imported, it primarily reduces this variable energy charge. The daily supply charge, however, usually remains unchanged for grid-connected customers.

Understanding Electricity Tariffs

Not every unit of electricity costs the same. Some electricity retailers charge a single rate regardless of when electricity is used. Others apply different prices depending on the time of day.

Under time-of-use tariffs, electricity is typically most expensive during periods of high demand, often in the early evening when many people return home. Lower prices may apply overnight or during periods of lower demand.

Some regions also offer separate peak, shoulder and off-peak pricing structures. These tariffs influence the financial value of solar because rooftop systems naturally generate most of their electricity during daylight hours, helping offset electricity that might otherwise be purchased at higher daytime prices.

Understanding when electricity is used can therefore be almost as important as understanding how much is used.

How Solar Changes the Bill

Without solar, every unit of electricity used by the home is imported from the grid. Once a solar system is installed, the flow of electricity changes.

Whenever the solar panels generate electricity, that energy is supplied to the home first. This is known as self-consumption. If the home requires more electricity than the solar panels are producing, the additional energy is imported from the grid in the normal way. If the solar panels generate more electricity than the home is using, the surplus is exported to the electricity network for use elsewhere.

Instead of purchasing every kilowatt-hour from the grid, the homeowner now produces some of their own electricity and may even sell excess generation back to the network.

Feed-in Tariffs

Many electricity retailers pay customers for surplus solar electricity exported to the grid. This payment is known as a feed-in tariff. The value of exported electricity varies between countries, electricity retailers and government policies, and these rates can change over time.

Although exporting electricity provides an additional financial benefit, feed-in tariffs are often lower than the retail price of buying electricity from the grid. For this reason, using solar electricity directly within the home is usually more valuable than exporting it.

Every kilowatt-hour consumed immediately avoids purchasing electricity at the full retail price, while exported electricity is typically paid at a lower rate. This difference explains why increasing self-consumption often produces the greatest financial savings.

Where the Savings Really Come From

Many people assume that installing solar eliminates their electricity bill completely. In reality, the financial savings come from reducing the amount of electricity purchased from the grid rather than eliminating all electricity costs.

The daily supply charge usually remains. Electricity may still be imported during the night or on cloudy days. However, every unit of solar electricity used directly within the home reduces the amount that must be purchased from the electricity retailer.

Over months and years, these avoided purchases become the largest source of financial value. Export payments provide an additional benefit, but the greatest savings almost always come from generating electricity at the same time it is needed.

Understanding this principle is the key to understanding solar economics.

Looking Ahead

Generating electricity is only the first step. The next question is how to make every kilowatt-hour as valuable as possible.

Should surplus electricity be exported to the grid, or stored for later use? How much extra value can a battery provide? And when does battery storage make financial sense?

In the next chapter, we'll explore how batteries change the economics of solar by increasing self-consumption and helping households make better use of the electricity they generate.