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Feed-in tariffs: the new landscape

Posted by David Hunt on 14 November 2011 at 4:31 am

So the dust is settling on a truly manic few weeks. From rumour and leaks to the final announcement, we now know what the new feed-in tariff (FIT) regime will be. Of course there is ongoing lobbying and campaigning to fight the depth of the tariff cut, and we’ll be playing our part in that campaign.

However, we know that the ‘consultation’ ends two weeks AFTER the tariff rate cuts, and we know that the likelihood of DECC and the Government listening to reason is slim. So, what does that mean to those that have missed the opportunity to get installed before the 12th December deadline (6th in reality as the system has to be registered with your energy supplier by 12th).

A good analogy would be this; if you heard you’d won £2million on the lottery you’d be jumping for joy. If you then found out you had to share that with another winner you’d be disappointed for a few minutes, then you’d realise you’re still £1million better off. Well that is how it is with solar Feed in tariffs. You may not have won the full jackpot (43.3p), but you’ll still get a far better return than any ISA, bank or savings account, or any other investment. And it will still be tax-free, index-linked and fixed for 25 years.

Feed in tariffs have been very successful at achieving their aim of encouraging installation of solar panels, increasing volumes installed and therefore bringing down installation costs. Panel prices have dropped dramatically in the last year. Ignoring cheap and nasty products (and there are plenty about so beware) you could recently get a good quality 4kwp system fully installed for £12,500 including VAT.

However, one consequence of the new tariff rate, and it having been brought forward is that there is a lot of product heading for these shores that won’t arrive until after the tariff changes. The manufacturers know that to sell this they will need to discount. They also know that to sell systems in the new landscape prices will have to be kept low. These facts should mean further reduced installation costs, and a healthy return on investment even on the new tariffs.

As an example, post 12th December we are able to offer a 3.92kwp system based on leading Hyundai panels and an SMA inverter for under £9,500 including VAT. On a south facing roof that system would generate 3,258kWh a year (in the Midlands). If you use 70% of that and export 30% you would benefit each year from

FIT payment = £684.18
Energy Saving= £322.77 (based on 13p import price)
Export income=£30.30

Combined benefit=£1,036.75 or 10.67% return on investment.

Once you add feed-in tariff increases (they are index linked) and electricity price increases then this return goes up year on year. So, go back to our lottery analogy. It is not as good as the returns before 12 December, but I challenge anyone to find a better investment out there.

Clearly these figures will vary according to your location and orientation, but not by a great deal.

An amusing anecdote from this week from our Yorkshire office illustrates the point. A customer had been ‘mugged’ by an installer selling 4kWp (on unbranded panels) for £21,000. The customer was happy as he would get the 43.3p tariff rate. Once we pointed out this was a 7.88% return on investment, and we could get him a 10% return on investment on the 21p tariff rate, he was less than happy and cancelled his installation with the cowboys.

It always cheers me up when a cowboy in our industry comes unstuck, and I think the new tariff changes will mean a few of those cowboys will go elsewhere to find their quick money.

So solar panels still make sense, they address your energy costs, address your carbon output, and provide an exceptional investment opportunity. Our advice is this; if you have missed the boat on the 43.3p tariff you could share the jackpot, choose your product and installer wisely, and get proper advice, use YouGen and customer recommendations to select your installer. The long and short of it is that solar panels are here to stay, and that can only be good news for the environment, and bad news for the big six energy companies, and that makes me smile!

About the author: David Hunt was Head of Commercial for Renewable Solutions UK Ltd. He no longer works in the renewable energy sector.

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

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Comments

17 comments - read them below or add one

davejones79

davejones79Comment left on: 15 December 2011 at 8:06 pm

"If you use 70% of that and export 30% you would benefit each year from

FIT payment = £684.18
Energy Saving= £322.77 (based on 13p import price)
Export income=£30.30

Combined benefit=£1,036.75 or 10.67% return on investment."

I think the vast majority of households with a 3.92kWp system would really struggle to use 70% of the generated power per year. On a good summer's day that would mean using in excess of 2kW for most of the day. Even a typical immersion heater only uses 3kW, and only for a fairly short time. On a much smaller array maybe you would use over 50%, but not on a 4kWp.

Picking a 70% figure seems like a convenient way of massaging the figures upwards to get over a 10% return. I'd put the likely usage figure at 40% or less which brings the return down to more like 9.5%. In fact the EnergySavingTrust base their calculations on 25% usage of the generated electricity, or £115 per annum for the above example which brings the return down to 8.7%.

It just goes to show how much difference a small assumption like that can make on the return now that the feed-in-tarriff has been reduced. Make sure you check what assumptions are used in any quotes you obtain, they might not be like for like.

I work from home so the PV fuels my laptop, router, etc and we aim to put the washing machine & dishwasher on during sunny times. Using a slow cooker during the day obviously saves electricity you would otherwise use at night (unless you cook with gas), but there aren't a great deal of other ways you can skew your electric usage to daylight hours, especially if you don't work from home. We've only had the PV a couple of months so it's too early to tell what impact it's had on the electricity savings.

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BuildingDesignExpert

BuildingDesignExpertComment left on: 22 November 2011 at 4:06 pm

David at last a like minded soul. I wrote a blog which echos the sentiments you raise http://www.designoffice.org.uk/www_bde_com/blog/2011/11/whos-going-to-feed-the-feed-in-tariff/#more-576. We have got to get over this hurdle of the FiT cut and simply get on with it. The sooner the better.

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David Hunt

David Hunt from Comment left on: 22 November 2011 at 3:21 pm

Neglecting to take account of energy price increases skews the reality of payback. Among others Deutche Bank recently predicted a 50% energy price increase in the next five years. Historically, our domestic customers have been the retired or semi-retired looking to insulate themselves against energy price increases as they are faced with the reality of a practically fixed income. Certainly an income that won't keep pace with inflation and certainly not energy price increases. It has only been in the last year that the prime customers were those looking at PV in purely investment terms (and what an investment it was/is).

We see going forward that whilst FIT and RHI will play their part in stimulating affordability, it will be energy price increases that drive the market long term, and let's not forget care for the environment.

That is why we existed two years before the FIT and will continue as it decreases. And why we have always looked at a property and a customers needs without a particular technology in mind.  It is important to choose the right technology, or combination of technologies, as these case studies show http://www.eco-environments.co.uk/case-studies/mixed-technology-case-studies/default.phuse

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Cathy Debenham

Cathy DebenhamComment left on: 19 November 2011 at 2:53 am

Fred,

Thanks for the idea - I'll put it on my to-do list. And if anyone who is more financially literate than me wants to help, please get in touch...

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Fred1

Fred1Comment left on: 17 November 2011 at 10:01 am

Cathy,

I guess the government has reduced the Feed in Tariff to save money, having stimulated the industry and supply chain enough. Presumably prices will come down to stimulate demand and the government will then reduce the FIT again.

Once the idustry can stand on its own feet there will be no FIT payments.

Cathy have you run the economic model with zero FIT only looking at the electricity savings for home use and metered sales to the grid ??? I guess there would have to be multiple runs at various inflation rates, ? is 4% too high I thought the long term target was 2%? I  guess it would be interesting to look at  various ranges of replacement costs for invertors ( once or twice in 25 years at £x a time ) and the panel efficiencies over time, I wonder what it costs to remove and dispose of the old panels after 25 years.

Cathy looks like a good project for you. !!!

What range of capex does it take for solar power to fly without subsidy ? Is that what is happening in Germany and Spain?

 

Fred

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Cathy Debenham

Cathy DebenhamComment left on: 17 November 2011 at 7:53 am

Linn - if we're talking about older investors, then the comparison should be with an annuity, where you don't get your money back at the end, and not with an ISA.

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Adam W

Adam WComment left on: 16 November 2011 at 11:47 pm

> The true ecomonics are as produced by the spreadsheets published by ecocentre.org.uk

These spreadsheets do not seem to take into account the savings on fuel bills.

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Linn Rafferty

Linn Rafferty from JTec Energy PerformanceComment left on: 16 November 2011 at 7:39 pm

I've been reading the YouGen posts on this, and Mel's blog, and lots more, and find myself increasingly convinced that encouraging householders to invest in PV is going to be a very hard sell in future. 

I can see the validity of taking into account the fact that you do not get back your money at the end of the term, unlike an ISA, and can see that many householders will take this into account. However, there is one class of investor that may not look at it this way - the older investor.

Why should they particularly care if there is no money left at the end of the term? To put it bluntly, they won't be around at the end of 25 years. So if they have money to invest, they are only concerned with the rate of return on their investment, since the income they receive today is more important to them.

Am I being optimistic to think that retired folk may become the main target for PV in this new landscape? 

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greenerone

greeneroneComment left on: 16 November 2011 at 5:34 pm

If initial investment is not taken into account in the economics any income at all forces the rate of return to be infinite.

The true ecomonics are as produced by the spreadsheets published by ecocentre.org.uk.

The centre also have produced on their website a several page summary , a step by step example and a summary.

I believe they calculate at 43.3p " an ISA would have to produce 5.7% for 25 years to match investment in solar panels" they considered solar panels attractive under the old tariff.

However their calculations for the new tariff shows a different story

I believe they say " ... For the proposed tariff our enthusiasm for PV waned. The lower tariff means that a savings account would have to offer a measly 1.5% net annual interest rate each year for 25 years to keep pace with the financial return in photo voltaics. Most ISA's currently avaiable will easily beat this threshold.

The spreadsheets are very easy to use and any initial capex  andinflation rate can be entered. There is also an option to consider the option where money is borrowed, but this is now irrelevent due to the base case economics.

The figures quoted have the option to add maintence and tear down costs but these have been set to zero, so the results are optomistic.

As I see it these results are exactly what one would expect. The Government do not wish to spend a penny more on FIT's, so they have selected an uneconomic rate.

It will be interesting to see the monthly figures for installation in the first quarter of 2012, or perhaps Ofgem will stop publishing them to save embarasment...

It is a shame

greenerone

 

 

 

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Cathy Debenham

Cathy DebenhamComment left on: 16 November 2011 at 7:59 am

There's some useful (and transparent) number crunching on Mel Starrs' blog which use David's cost figures as a starting point. Worth reading.

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David Hunt

David Hunt from Comment left on: 15 November 2011 at 5:18 pm

You are quite right Sally, 

We do work out payback on FIT increases of 4% (last year was 4.8%, this years looks likely to be 5% +) and electricity price increases of 8.7% (The average increase since 2006 according to DECC), and it is important to be upfront about this, unlike some).

The cost of capital isn't included, but most of our domestic customers have self funded and not 'financed' their installations.

My point was that whilst the Govt have without question damaged the industry, the returns (and let's not forget Carbon Savings) are still very attractive. Our industry will grow now despite of government, not because of positive interventions.  

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JAYGEE

JAYGEEComment left on: 15 November 2011 at 2:56 pm

Like many others,I purchased solar PV on the calculated basis that the FIT would enable break even in around 10 years plus the obvious benefits to the planet. The scheme was government backed and one would assume was, therefore, safe. Then came along that 2 faced Energy Minister and the game was changed. Pay back in double the time i.e. 20 years, when my age is 66 does just not make sense! This is yet another example of the total unreliability of this non - elected government.

Luckily, my system was installed in mid Oct and my energy company has confirmed receipt of my application BUT I really feel for others of my age who trusted this regime and have lost out. 

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pigasus

pigasusComment left on: 15 November 2011 at 1:44 pm

David,

Using your figures for installation costs of £9500 and annual FIT payments starting at £684.18 and payable at the end of each year, I calculate the following investment returns, where the whole capital investment is returned along with interest:

If the FIT payment remained the same over the whole 25 years (a worst case scenario), then the investment return, including return of the original £9500 investment, works out at 5.15% pa.

If the FIT payment increased by 2% pa, due to inflation, each year for 25 years, the investment return, including return of the original £9500 investment, works out at 7.05% pa.

These aren't quite the 10% plus returns you have quoted, but they are great returns in today's market, particularly as the savings on electricity bills plus the export income are additional to these returns!

Sally

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Rudge Renewables

Rudge RenewablesComment left on: 15 November 2011 at 1:36 pm

Hi David

Your quite right about the lower system costs post 12th December, we will also be able to install a full 4kWp for under £10,000 inc VAT which is quite incredible when you compare to costs only 6 months ago. The industry is pulling out the stops to keep the PV market alive and kicking!

Unfortunately, if the Government get their way, an insistence on all properties  complying to energy rating band C without the support of the Green Deal will knock it right back in April.

Right now, through till end of March will still be great returns on PV, as 9% returns can still be easily achieved on Southern roofs.

We await the outcome of the 'consultation' ending 23rd December .

Chris Rudge 

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Fred1

Fred1Comment left on: 14 November 2011 at 7:52 pm

Good post jibberjabber,

 

Sellers will always quote the income over initial expenditure and quote it as a return.

It is a return but it is not the APR or ROR as calculated by the finance industry.

 

There is a very major difference between investing in a PV project where the initial capital is written off on day one, in fact the panels and transformer are of negative value on day one since there is a cost for maintenance and removal. And investing in an savings account

 

In an investment account there is no technical risk, no maintenance costs and no decommissioning costs and the yearly interest is added to year by year starting with the original capital ( I am assuming investment in non arctic circle non Mediterranean banks).

 

For the PV system it takes 10 to 15 to 20 years even to get your initial money back before any profit is made.

 

I would urge every potential investor to review the spreadsheets at

http://www.ecocentre.org.uk/en/renewableenergy

 

 

I believe like you there are a lot of misleading claims around, Even at the old 40 odd pence payment the RoR was 4-5 % at the new 20 pence rate the return is close to zero.

 

 

Thanks for the clarity jibberjabber

 

 

Fred

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jibberjabber

jibberjabberComment left on: 14 November 2011 at 4:38 pm

Are the rates of return on invesment figures quoted in the article misleading, despite the fact they are true?

For the system you quote above, costing £9,500, netting an annual benefit of £1,036.75 => 1,036.75/9,500 = 10.91%.

This sounds good. BUT, the money invested in the system is lost as the system holds negligible residual value, and so this has to be recouped. Also, how likely is it that most working households could use 70% of generated electricity?

If you stuck your money in an ISA instead you'd find you would have to make a return of only 3.8% per annum to beat the PV system, assuming an average annual inflation rate of 4.8% (as FITs are index linked though who knows what this will be in the future). This is because the money you originally put in it is still there - you get it back.

If inflation comes down to the magic 2% that the government would like, then an ISA would still beat the PV system if it paid out a mere 1.6% annually. Many cash ISAs are paying over 4% already.

For more information Eco Centre Wales have produced their own calculator: http://www.ecocentre.org.uk/en/renewableenergy

Are there any mistakes in their calculator, or in the logic I've provided here?

Don't get me wrong, I am a big supporter of domestic renewables, but I think we should not mislead on the financial information.

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@adrianenact

@adrianenactComment left on: 14 November 2011 at 4:27 pm

Shocking story about the £21k 4kWp system, I really hope the ex double glazing/kitchen sales companies do leave this market but I do fear that they will just find other ways to missell the returns to customers and continue to charge sky high prices.

Fully agree that the FiT is still an excellent investment and if energy prices keep going up by 10% a year the energy bill saving could be as much as the FiT payments.  

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