Skip to main content
Observer Ethical awards Winners 2011

YouGen Blog

Solar panels are now an investment opportunity

Posted by Cathy Debenham on 16 July 2010 at 11:40 am

There are lots of reasons people install solar panels on their roof. It may be to protect themselves from rising energy prices, a desire to reduce their carbon footprint, or concern about energy security. Until recently, it certainly wasn't to make money.

However, two things have changed. The introduction of the feed-in tariff is one. The other is the extremely low interest rates in the UK right now.

The feed-in tariff is the government's financial incentive scheme to encourage people to generate electricity at home. To make it attractive, they have introduced a scheme that will pay people for the electricity they generate, and a small additional amount for any excess electricity that is exported back into the national grid. These payments continue for 25 years, and have been pitched to give a 6 - 8% return on investment. In addition, they are index-linked and tax-free.

With interest rates at an all time low, the feed-in tariff makes an investment in solar panels a much more attractive proposition financially. At the moment, it’s probably most suitable for those who have a capital lump sum to invest, or are considering what to do with their pension pot and whether to look for an alternative to an annuity. In due course, the planned Green Deal is expected to make it accessible to everyone.

So how does it work?

First you need a roof that faces between south east and south west, is free of shading, and ideally, is angled between 30 and 40 degrees. The solar panels weigh quite a bit, so your roof must be strong enough to hold them.

A 2kWp solar photovoltaic (PV) system costs around £10 - 12,000 to install. Most domestic systems are between 1.5 and 3 kWp. As a rule of thumb, a 1kWp system will generate an average of 850kWh of power in the UK (more in the south, less in the north). Around half tends to be used in the home, with the rest exported to the grid.

The feed-in tariff will pay 41.3p for every KWh of electricity the solar panels generate (if your installation is bigger than 4kWp the rate falls to 36.1p). In addition you receive 3p for every unit exported to the grid, and of course your bill for electricity bought from the grid will fall. The feed-in tariff for solar PV lasts for 25 years.

For the example below I have taken a 2 kilowatt peak solar PV installation:

Cost of installation: £12,000
Annual output: 1,700 kWh
Feed-in tariff generation rate @ 41.3p/kWh: £702.10
Used in the home: 850 kWh
Savings from electricity bill @ 12p/kWh: £102
Exported: 850 kWh
Income from export @ 3p/kWh: £25.50
Total return: £829.60
Return on investment: 7%

The feed-in tariff is available for wind turbines, micro-hydro schemes and micro-CHP (combined heat and power), and will pay out for 20 years (10 years for CHP). As most people don't have a suitable site for wind or hydro, and CHP is only just coming on the market, I have focused on solar for this article. 

Photo: Edmund Tse

By

If you have a question about anything in the above blog, please ask it in the comments section below.

Like this blog? Keep up to date with our free monthly newsletter

Comments

11 comments - read them below or add one

Cathy Debenham

Cathy DebenhamComment left on: 11 December 2012 at 11:14 am

Hi Mr Mart

Thank you for your interesting workings out. I don't think I can add anything to your analysis, as that's not my expertise. However, there are a couple of things you need to take into consideration when doing your calculations:

1. The figures in this blog are now out of date. There have been various changes to the feed-in tariff since I wrote it and the generation rate for systems up to 4kW is 15.44p, export tariff is 4.5p, life of the tariff is 20 years, and the cost of an installation of 4kW is c. £6-7,000. You can always find up to date feed-in tariff rates on our solar PV information page.

2. When considering the 'free' panels you want to work out how much of your electricity bill comes from day time use, and remember that the panels generate most of the electricity in the summer when there's more sun (usually) and the days are longer.

report abuse

Mr Mart

Mr MartComment left on: 9 December 2012 at 5:13 pm

Have just been looking closer at this. A fairer way to look at free contractual installation versus buying your own system is this:

Lets assume you have £12000 and want an annual income from this of £829.60 as in your example.

1 You could pay £12000 to have a system installed and make £829.60pa as in your example.

2 You could have a system installed for free just enabling a saving on the electricity you generated and used yourself (your example gives that as £106pa). The £12000 you invest in a tax free ISA at 3%. Each year you take £727.60 (£829.60-£106) from this account. Because £727.60 is more than 3% the account will run down. I’ve worked this on a spreadsheet and guess when it reaches zero – in 25 years!

So in 1 you get to 25yrs and the end of the feed in contract, you still own the panels and will no doubt be able to still get paid something for excess electricity.

In 2 after 25yrs you will have no money left in the account but the panels now become yours (with ‘A Shade Greener’ anyway) and you can now also get paid for excess electricity.

So 1&2 are comparable financially but 2 has the advantage that you have money in the ISA and can vary withdrawals to suite circumstances, and maintenance and insurance are covered by the contract company. It should also be possible to get a better interest rate for such a long-term investment.

Do my figures make sense or have I missed something?

report abuse

Mr Mart

Mr MartComment left on: 9 December 2012 at 1:03 pm

What never seems to be taken into account when working out returns on investment in solar power is that your original investment is basically unrecoverable. Taking your example of investing £12,000, if I invest that in an ISA at 3%, after 20yrs with compound interest I'll have £21673. Invested in solar power I will have 20x £829.60 = £16952. For the first 14yrs I am just paying off the £12000 invested in the panels.

The situation is rather different if you take the interest every year as income but to say you get a return of 7% as apposed to 3% is misleading as with the 3% investment it is always possible to access your original investment of £12000 whereas solar panels do not last forever and are difficult to sell secondhand.

I am 62 and therefore am only interested in returns under about 20yrs. Therefore a free installation giving me around 1/3rd off my electricity bill seems the best way forward. What do you think?

report abuse

Cathy Debenham

Cathy DebenhamComment left on: 25 April 2011 at 8:38 pm

Hi Elderly Gent

No, your meter shouldn't be running backwards! If you tell your electricity supplier, they will replace it with a new digital meter free of charge.

Cathy

report abuse

elderly gent

elderly gentComment left on: 25 April 2011 at 4:24 pm

When I am producing more electricity than I am using and feeding the grid, should my meter be running in reverse? Mine is.

report abuse

nigeldodd

nigeldoddComment left on: 10 November 2010 at 11:47 am

The uk government is incentivising us by paying 41.3 p/kWh to install using an accredited supplier. 

Obviously this is saving carbon emissions on a local scale but I would like to know the carbon cost of manufacture, distribution and installation. I suspect the main cost will  be in manufacture but we need to know this to make an informed decision that is not influenced by the government's distortion of the economics.

report abuse

Cathy Debenham

Cathy DebenhamComment left on: 19 August 2010 at 9:07 am

I want to clarify the figures I have used above as I've just been asked a question which indicates I didn't explain it clearly enough. 

The figure above of 850kWh used in the home, relates not to my total electricity usage, but to the amount of the electricity generated by the solar panels that I will use directly in the house, rather than export to the grid. This means that I will buy 850kWh less units from the electricity company, saving myself around £102 a year on electricity bills.

Generally people don't specify a solar panel installation expecting it to cover all their home usage of electricity - as most of the electricity use happens when the sun's not shining - ie at night or in winter.

report abuse

Cavity

CavityComment left on: 17 August 2010 at 3:23 pm

Although you use 3,400kWh per year you will use electricity when your system isn't generating, for example at night.

You will therefore have to use the national grid as a virtual battery by selling into the grid when you have a surplus and buying back from the grid when you have a deficit.

To further refine your figures you need to guestimate what percentage you will be able to use as you generate it and what you will need to buy. I believe the general assumption is 50% home use / 50% export but in my case I think home use will be much lower - nearer 10%. (I did an energy audit to estimate what I would, or could, use during the day) 

Cost of installation: £20,000
Annual output: 3,400 kWh
Feed-in tariff generation rate @ 41.3p/kWh: £1,404.20
Used in the home: 3400 kWh
Savings from electricity bill @ 12p/kWh: £204.00
Exported: 1,700 kWh
Income from export @ 3p/kWh: £51
Total return: £1,659.20
Return on investment: 8.25%

As you can see it doesn't actually make a lot of difference to your return.

report abuse

Cathy Debenham

Cathy DebenhamComment left on: 30 July 2010 at 11:21 am

Hi

As sashton says, you won't use all the electricity you generate in the home - unless you've got some very energy-intensive business running during the day.

I've got a 2kWp system, and export around half - and I do all my washing etc during the day, and work from home.

Also have you got an export meter installed? If not, most of the energy companies will pay you on an estimated export rate of 50%. So you'll need to adjust the expected savings from the electricity bill, and the export amounts from your calculation.

Sorry to take so long to reply - I've been holiday!

report abuse

sashton

sashtonComment left on: 21 July 2010 at 9:42 pm

@thesnodgrass

It is unlikely that you will use all you generate. This is down to the time when you generate and the time when you use. There are methods you can use to move your consumption into your generating window (timeclocks on washing machines etc.) but these will not make much overall impression on the whole picture.

I have a similar system to the one you propose. 3.8kwpp at a cost of £15k. This year, despite closely managing a significant proportion of our use, we expect to generate 3.4mwh this year and export 2mwh. Roughly, we have halved the amount of electricity we buy to 1.5mwh/y.

The main factor seems to be the occupation pattern for your household. i.e. DINK (Dual Income No Kids) will find it hardest to use all generated solar power as the home is likely to be empty during the day.

 

report abuse

thesnodgrass

thesnodgrassComment left on: 21 July 2010 at 11:47 am

Cathy in my house we use 3400 kWh of electricity per year which is closer to the national average.

If I got a 4 kWh system are my figures below roughly right, please?

Cost of installation: £20,000
Annual output: 3,400 kWh
Feed-in tariff generation rate @ 41.3p/kWh: £1,404.20
Used in the home: 3400 kWh
Savings from electricity bill @ 12p/kWh: £408.00
Exported: 0 kWh
Income from export @ 3p/kWh: £0
Total return: £1,812.20
Return on investment: 9%

report abuse

Leave a comment

You must log in to make a comment. If you haven't already registered, please sign up as a company or an individual, then come back and have your say.