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