The removal of Feed-In Tariff payments for solar electricity generation and export at the end of March 2019 has meant a re-evaluation of the likely payback for those thinking of investing in a solar PV system. The situation is still fluid as we await the detailed response of energy companies to BEIS’s (Department for Business, Energy & Industrial Strategy) recently proposed legislation on “the introduction of a mandatory supplier-led route to market for small-scale low-carbon generation: the Smart Export Guarantee (SEG)”. The SEG scheme is due to come into legal effect in January 2020.
This article looks at 3 possible scenarios for SEG tariff payments and how they may impact on payback. It concludes that payback is likely to be over 20 years for most solar installations except under the most optimistic of generating conditions and tariff payments. The impact of potential SEG payments from adding battery storage to a solar pv system is not considered. This will be the subject of a future article.
Note: Article updated 10 June to reflect BEIS published response to SEG consultation.
Smart Export Guarantee (SEG) Overview
SEG legislation will cover remuneration for small-scale (upto 5MW) low-carbon generators for the electricity they export to the grid. This will include solar pv, anaerobic digestion, hydro, micro-combined heat and power (with an electrical capacity of 50kW or less) and onshore wind. Homeowners would need a Smart meter and export payments would be set by licensed electricity suppliers with 150,000 and over domestic customers. There will not be any specified minimum tariff rate, other than that a supplier must provide payment greater than zero at all times of export. It is likely that energy companies will offer variable pricing by 30-minute periods, so at 1pm (12 noon GMT) on a windy and sunny day payments may be very low indeed. There is no indication of the length of any export guarantee period.
SEG may also help those with battery storage. BEIS state that the legislation will provide “suppliers with the flexibility to purchase power from more complex systems including small-scale storage, and other forms of generation, if they choose to do so (and provided they are co-located with a SEG installation).“
Likely Payback On Installing Solar PV Panels
There is no minimum tariff rate for SEG which energy companies have to pay. Consequently it is hard to predict potential payback. However three scenarios have been explored here:
- Scenario A – Minimal: Using a worst case assumption that SEG rates are derisory and just above zero at an average of 1p /kWh exported then the payback on a solar pv panel system installed in June 2019 is likely to be over 25 years even with generation better than average (See Table 2 for details).
- Scenario B – Likely: Assuming SEG payments (from 2020) average out at 3p/kWh then payback may fall below 25 years – in optimum conditions it could be closer to 20 years (See Table 3).
- Scenario C – Optimistic: Assuming SEG payments are a generous average of 5p/kWh then payback is around 21 years for average generation conditions and falls below 20 years for ideal generation conditions.
We recommend waiting until energy suppliers publish their SEG export payment rates some time in the next few months (before January 2020), unless you are installing solar as a lifestyle choice to reduce your own carbon emissions. To properly assess the financial benefit offered by different energy companies full detail will be needed, especially for the peak output period (10am – 4pm in the summer).
See below for the details on how the payback analysis was done.
Basic System Performance Assumptions
The payback analysis below looks at two different sized solar PV arrays, 2.5kW Peak and 4kW Peak and with two different assumed annual outputs. Typical solar output is around 850 kWh of electricity per year for each kW of installed panel. Where solar irradiation is higher due to a sunnier location with an unshaded south facing roof then annual output of 1,000 kWh is possible.
Table 1: System assumptions
| System Size | Typical 2.5 kW Peak system | Optimum 2.5 kW Peak system | Typical 4 kW Peak system | Optimum 4 kW Peak system |
|---|---|---|---|---|
| Typical Install Cost * | £4,540 | £4,540 | £7,264 | £7,264 |
| Annual Output per kW Peak (kWh) ** | 850 | 1,000 | 850 | 1,000 |
| Typical Annual Output (kWh) | 2,125 | 2,500 | 3,400 | 4,000 |
| Energy self-consumed (kWh) *** | 858 | 900 | 1,249 | 1,306 |
| Exported energy (kWh) | 1,267 | 1,600 | 2,151 | 2,694 |
| Solar output exported*** | 59.6% | 64.0% | 63.3% | 67.4% |
| Annual home energy use (kWh) | 2,500 | 2,500 | 3,500 | 3,500 |
* based on a cost of £1,816/kW Peak from 2018/19 average costs from Microgeneration Certificate Scheme data.
** based on 850kWh/kW Peak annual output for typical installation and 1,000 kWh/kW Peak annual output for optimum installation.
***Based on typical home energy use profile
Scenario A – Minimal: Payback with SEG Payments of 1p /kWh
Assuming minimal SEG export payments, payback is over 25 years (See Table 2 below). With solar panels guaranteed for 20-25 years and better quality solar power inverters guaranteed for 10-15 years this is not an attractive investment.
Table 2: Assuming SEG Export Payments Average 1p / kWh
| System Size | Typical 2.5 kW Peak system | Optimum 2.5 kW Peak system | Typical 4 kW Peak system | Optimum 4 kW Peak system |
|---|---|---|---|---|
| System cost | £4,540 | £4,540 | £7,264 | £7,264 |
| – saving on electricity bills | £154.44 | £162.00 | £224.82 | £235.08 |
| – export payments | £12.67 | £16.00 | £21.51 | £26.94 |
| TOTAL ANNUAL BENEFIT | £167.11 | £178.00 | £246.33 | £262.02 |
| Simple payback | 27.2 years | 25.5 years | 29.5 years | 27.7 years |
Assumptions: Grid electricity is 18p/kWh. 60-67% of generated electricity exported (See Table 1) at average 1p /kWh to the grid (from January 2020)
Scenario B – Likely: Payback with 3p / kWh Export (SEG) Payments
There are no clear details on what level of SEG payments would be made by energy companies and for what period of time. It is certainly likely to be on average less than the 20-year export price guarantee offered with the previous FIT scheme. This analysis assumes an average 3p/kWh payment is made by energy suppliers and that the SEG or similar scheme would run for 20 years.
Table 3: Assuming SEG Export Payments Average 3p / kWh
| System Size | Typical 2.5 kW Peak system | Optimum 2.5 kW Peak system | Typical 4 kW Peak system | Optimum 4 kW Peak system |
|---|---|---|---|---|
| System cost | £4,540 | £4,540 | £7,264 | £7,264 |
| – saving on electricity bills | £154.11 | £162.00 | £224.82 | £235.08 |
| – export payments | £38.01 | £48.00 | £64.53 | £80.82 |
| TOTAL ANNUAL BENEFIT | £192.45 | £210.00 | £289.35 | £315.90 |
| Simple payback | 23.6 years | 21.6 years | 25.1 years | 23.0 years |
Scenario C – Optimistic: Payback with 5p / kWh Export (SEG) Payments
In a possible but slightly optimistic scenario, scenario C assumes an average 5p/kWh payment is made by energy suppliers and that the SEG or similar scheme would run for 20 years. 5p per kWh is close to the export payments made under the FIT scheme (currently 5.38p). Given that the highest solar output is at times when wholesale electricity prices are lower than this, it is unlikely that most energy suppliers will offer a rate this high, except as a short-term marketing tool to secure the supply of electricity and gas to a homeowner.
Table 4: Assuming SEG Export Payments Average 5p / kWh
| System Size | Typical 2.5 kW Peak system | Optimum 2.5 kW Peak system | Typical 4 kW Peak system | Optimum 4 kW Peak system |
|---|---|---|---|---|
| System cost | £4,540 | £4,540 | £7,264 | £7,264 |
| – saving on electricity bills | £154.44 | £162.00 | £224.82 | £235.08 |
| – export payments | £63.35 | £80.00 | £107.55 | £134.70 |
| TOTAL ANNUAL BENEFIT | £217.79 | £242.00 | £332.37 | £369.78 |
| Simple payback | 20.8 years | 18.8 years | 21.9 years | 19.6 years |
See details of how solar PV panel payback and costs looked in 2016
Data Sources
- BEIS: Annual Cost of Small-Scale Solar Technology Summary, May 2019
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