From 8 February to 31 March 2016 Feed-In Tariff generation payments for solar electricity have been set at 4.39p per kWh. This is a big cut on rates seen in 2015 so what will that mean for a householder thinking of investing in a solar PV system in the first quarter of 2016?
Solar Panel Can Still Be A Good Idea
Installing solar panels in 2016 will be a much more considered lifestyle choice rather than an easy investment decision. Consumers will need to think in more detail about whether their homes are best suited to solar generation. Home with better potential investment returns are:
- South facing unshaded homes with optimum roof angles in sunnier locations where annual generation closer to 1,000 kWh per kW of solar panel can be achieved rather than the current average of 850 kWh per year per kW of panel.
- New build properties or roof refurbishments where costs such as scaffolding and roof work would be part of the overall construction rather than additional costs.
What Are The Investment Returns For Solar Panels?
If you care about the planet then installing solar panels, alongside reducing your home’s overall energy footprint, is probably something that interests you. For many is us with limited savings this is also tied to whether it also makes financial sense.
For the average property it will take between 14 and 18 years to get your investment in solar back. After that you still get free electricity and earn money for any energy you export to the grid as well as Feed-In Tariff generation payments until the panels are 20 years old. A precise return is not guaranteed as it does depend on a few factors:
- How much you pay for the initial system installation and what repair and maintenance costs are required
- How suitable your roof location is for solar electricity generation and as a result how much electricity you actually generate over the 20-year period
Better locations will see higher outputs and slightly better paybacks but badly positioned and shaded panels in areas of the country with less sunshine will produce less and the payback will be longer.
Table 1 shows paybacks for different system sizes and installation/maintenance costs
Table 1 – Payback on solar pv panels at different installation and maintenance costs and February 2016 Feed In Tariff rates.
Below we look at some of the detail behind these figures.
Installation And Maintenance Costs
A typical 4kW system costs home-owners around £6,500 today for a retrofit on an existing roof; new build prices should be cheaper. With the pressure of falling Feed-In Tariff payments we would expect this to fall to around £5,750 in the first half of 2016. The start of 2016 is going to be a very tough time for solar installation companies so it will take time for a clear pattern of prices to emerge and some will have more aggressive prices than others.
There is little maintenance required on solar panels; the rain should keep them clean in most cases. The power inverter the system uses is generally only guaranteed for 10 years so a cautious customer will allow for the cost of replacing it during the 20 year Feed-In Tariff period. Replacing it today would cost around £1,000 but we have assumed the cost will be nearer £600 in 10 to 12 years time as costs reduce with increased global volumes. If you are lucky enough not to have to replace your inverter during the 20 years then you save a further £600 and your payback drops by between one and two years.
Table 2 below summarises the different potential costs and also the average annual output and income generated by a solar system.
Table 2 – Likely costs of solar PV systems
So we can say that a 4kW system installed in 2016 will have a total cost (including an allowance for a replacement inverter after 10 years) of between £6,350 and £7,100.
Will Costs Of Installing Solar PV Systems Actually Come Down?
Part of the thinking behind reducing the solar PV generating tariff in 2016 was to put pressure on suppliers and installers to reduce costs. However the EU are keeping minimum import prices (MIP) for Chinese suppliers, introduced in 2013, in place until 2017 at the earliest. Also from August 2016 HMRC propose to increase VAT on solar installations from 5% to 20%. So significant cost savings look a big challenge in early 2016, especially as most solar installation firms are losing economies of scale by cutting back on their volume of installations. We think some firms do have scope for limited reductions which is what we have reflected. What remains to be seen is how quickly manufacturers and distributors of solar equipment respond to the pressure. It makes no sense to most of them to cut prices before 2016 so it is hard to predict what will happen in reality.
We can now look at the savings and income from the system.
Income/savings from solar PV system in more detail
From 8 February 2016 solar panel FIT (Feed-In Tariff) payments will be 4.39p per kWh generated and 4.85p per kWh exported. These payments are for 20 years.
Let’s assume that a household pays 13p per kWh for purchasing energy from the grid (a typical rate excluding the standing charge, which still needs to be paid irrespective of usage). The FIT scheme assumes that 50% of the generated electricity is used by the householder and 50% exported to the grid. Typical income/savings per year are shown in Table 1. This assumes that 850kWh is generated annually by the system for every 1kWP of solar PV array installed.
This figure will vary depending on where in the country you are, the direction and angle of the roof, how shaded the roof is and the efficiency of the solar PV panels. As a guide a typical 4 bedroom family house using 7,000 kWh per year with a current electricity spend of circa £1,140 per year which has an EPC in band D and a south facing roof could install a 4kWp system on their roof. Assuming this was reasonably well located and unshaded the system would produce around 3,400 kWh of electricity per year i.e. about half of their annual electricity use.
Table 3 – Income/savings
It is unlikely that solar PV panels will be a very attractive investment for a home-owner in the early part of 2016. Do look at the detail of any claims by installation companies and if they are charging more than £6,000 for a 4kW system the best advice would be to wait until costs fall.
The threat of the VAT rise to 20% in August 2016 will probably not improve the situation.
Our advice: Unless you can register your solar installation before 14 January 2016 don’t expect big investment returns on solar PV panels. Without further revisions to the Feed-In Tariff rates by the government and the cancellation of the planned VAT increase then the situation is unlikely to change until some time in 2017. Homes in sunnier areas of the country with optimal roof positions where higher annual generation are possible (1,000 kWh of annual output per kW of panel rather than the assumed 850 kWh) and new build properties may find paybacks slightly more attractive but this will just bring the payback down by a couple of years to around 12 years.