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The impact of the new feed-in tariff rates for small scale solar PV

Posted by Cathy Debenham on 24 May 2012 at 1:09 pm

Feed-in tariff rates for solar PV installations of 4kW or less will fall from 21p to 16p per kWh from 1 August 2012. This was just one of the changes announced by energy minister Greg Barker in the House of Commons today.

He also announced that from 1 August the export rate will increase from 3.2p per kWh to 4.5p per kWh. The tariff will continue to be linked to the retail price index, and the life time of the tariff will reduce from 25 years to 20 years. He said these reductions are aimed at delivering a 6% rate of return. However, my calculations indicate that higher returns are likely.

Below I have done the figures for installation of a 4kW installation now and compared it with figures for the new rates after 1 August. By these calculations rate of return will fall from 11.8% to 10%, and pay back will take a bit longer, increasing from 8. 4 to 10 years.

Until 31 July 2012
Cost of installation: £8,500
Annual output: 3,400 kWh
Feed-in tariff generation rate @21p/kWh: £714
Used in the home: 1,700 kWh
Savings from electricity bill @14p/kWh: £238
Exported: 1,700 kWh
Income from export @3.2p/kWh: £54.4
Annual return: £1006.40 (for 25 years, with tariff linked to retail price index)
Payback: 8.4 years

From 1 August 2012
Cost of installation: £8,500
Annual output: 3,400 kWh
Feed-in tariff generation rate @16p/kWh: £544
Used in the home: 1,700 kWh
Savings from electricity bill @14p/kWh: £238
Exported: 1,700 kWh
Income from export @4.5p/kWh: £76.50
Annual return: £858.50 (for 20 years, with tariff linked to retail price index)
Payback: 10 years.

NB: The rate of return above is not comparable with bank interest, share purchases or ISAs, where you get your capital back. DECC calculates the rate of return for 4kW and below installations as 6.3%. Click here and download the impact assessment to see its methodology.

Barker also announced the new system for planned degression of the feed-in tariff rates. The rate will come down every three months. The amount of the cut will depend on rates of deployment in the months before the decision, and the rate will be made public two months before it comes in force. For example, November's rate will depend on how much solar is installed in the period May to July; and will be announced on or before 1 September.

Rather than being political decision, Barker announced an automatic system. The rates will be frozen if less than 200MW of solar is installed in the preceding three months. They will be cut by 3.5% if between 200MW and 400MW of solar is deployed. If more than 400MW is installed cuts could be as high as 28%.

This he says is a system of TLC (transparency, longevity and certainty) which aims to smooth out deployment of solar PV.

Edited on 31/5/12  and again on 11/6/12

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Comments

12 comments - read them below or add one

Malcolm

Malcolm Comment left on: 8 June 2012 at 10:21 pm

Hi Fred,

 

Unfortunately your example again ignores the interest you would have got from an ISA or other savings account. Again using the ISA example after 13 years you would still have your capital £8,500 plus 13* £385.50p = £4,972.50p or 58% more than with  solar.

 

It takes 17.8 years to equal the return with solar giving you 2.2 years at £850pa = £1,870 additional pounds.

If nothing's gone wrong with the system for 20 years (and I doubt you can get a 20 year guarantee, if you can take the cost of that off the additional pounds) you've then got 20 year old panels on your roof which I would say must be getting close to the end of their lives. How many thousands of pounds will it take to replace them? or if you're not replacing them to remove them and repair your roof?

 

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Fred1

Fred1Comment left on: 4 June 2012 at 8:12 am

Malcolm -----very good point.

The loss of capital in year one reduces  the "return" of first years divided by capital paid out from a "return" of 10% down to an APR of 4-5 % ; similar to risk free ISA accounts where the capital is untouched. It seems that this is consistent with the method DECC are using...

It can be looked at another way; I give someone £8,500 and for 13 years they give me £850 of your own money back then for the next seven years you get an additional £850 back so you make 7 times £850 over a twenty year period, I think this works out at an average of about £297.5 per year for twenty years or 3.5% .

But you have to take on the risks of repair and replacement and scaffolding etc to remove the system after 20 years.

There is also the political uncertainty. I note that electric cars, previously subsidised are now I believe going to be taxed normally, so the people who bought one under the promise they would be "looked after" if the invested are apparently now disapointed....

There have already been changes to the FIT scheme perhaps it is now wiser to take stock and watch what happens rather than rush in....

An interesting problem.....

 

Fred

 

 

 

 

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Malcolm

Malcolm Comment left on: 3 June 2012 at 9:30 pm

I feel the above calculations miss one vital point and these calcs always seem to "forget" this

 

A very well known building society pays 4.5% on a 5 year ISA which on £8,500 returns £382.50p per annum (ISAs are tax free and a couple can invest more than £8,500pa). I therefore think the calcs should be

 

 

Until 31 July 2012
Cost of installation: £8,500
Annual output: 3,400 kWh
Feed-in tariff generation rate @21p/kWh: £714
Used in the home: 1,700 kWh
Savings from electricity bill @14p/kWh: £238
Exported: 1,700 kWh
Income from export @3.2p/kWh: £54.4
Annual return: £1006.40 - £382.50p = £623.90p(for 25 years, with tariff linked to retail price index)
Return on investment:  
Payback:  13.6 years

From 1 August 2012
Cost of installation: £8,500
Annual output: 3,400 kWh
Feed-in tariff generation rate @16p/kWh: £544
Used in the home: 1,700 kWh
Savings from electricity bill @14p/kWh: £238
Exported: 1,700 kWh
Income from export @4.5p/kWh: £76.50
Annual return: £858.50 - £382.50p = £476.00p (for 20 years, with tariff linked to retail price index)
Return on investment:  
Payback: 17.8years

 

 

All this assumes that nothing ever goes wrong with the system the panels never need cleaning they don't need replacing or repairing nor does the inverter or any of the rest of the system, for twenty years or twenty five years.  Also I feel 1,700kWh used in the home is on the generous side.  

 

Plus all the time your receiving money from the ISA you can get your capital back, at the end of the first five years penalty free.

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Hiltingbury

HiltingburyComment left on: 25 May 2012 at 3:56 pm

Based on my experience I think you be unlikely consume 1,700 kWh during the daytime in your own house. I believe most of us export far more than 50%, which if generally true changes the calculations a bit.

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Cathy Debenham

Cathy DebenhamComment left on: 25 May 2012 at 3:18 pm

@Hiltingbury: I think that you are right for most domestic installations. I also export more than half, despite working from home. However, small businesses, or community organisations, that have high day time use may well use more than half. People need to adjust their calculations based on their energy usage patterns.

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Cathy Debenham

Cathy DebenhamComment left on: 25 May 2012 at 1:46 pm

Comment from SallyS

If I put £8500 in the bank and received interest equivalent to £850 a year for 20 years. At the end of 20 years, I would still have £8500 in my account, available to reinvest if I wanted. This is a true 10% return on my investment. In your example, there is no capital remaining at the end of 20 years. This is more like investing in a fixed period index linked annuity where the annual annuity payments are made up of interest plus a portion of the original capital. Receiving £850 a year reflects an underlying interest rate which is significantly less than 10%.

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Colin Deakin

Colin Deakin Comment left on: 25 May 2012 at 9:45 am

Presumably the new rates (16p per unit) do not apply to existing installations. They will stay at 21p?

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Cathy Debenham

Cathy DebenhamComment left on: 25 May 2012 at 9:10 am

@Colin: you're right. The new 16p rate is for any installations from 1 August 2012. Anyone installing now will get 21p (index linked) for the whole 25 year life of the tariff.

From 1 August the life of the tariff will reduce to 20 years for new installations.

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Cathy Debenham

Cathy DebenhamComment left on: 25 May 2012 at 8:23 am

@Cannonballdaze: The government sets a minimum export rate. My understanding is that they expected electricity companies to compete to attract customers by offering above the minimum, but that hasn't happened. They can still do so...

@Robert: It applies to new all new installations from 1 August.

@Fred1: Yes, that's right. 

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Fred1

Fred1Comment left on: 24 May 2012 at 8:57 pm

Do you mean a "return of 10%" ignoring the loss of capital in the  first year ? ie first year income divided by initial capex...

I seem to recall the DECC calculation takes into account the write off of capital in the the first year and so comes out with a rate of return range of 4.5% to 6% depending on when the inverter is replaced, I do not recall the current DECC model having any allowance for scaffolding and removal of the panels at the end of life....

The reduction of tariff pushes the solar rate of return closer to tax free, risk free  ISA accounts, which I guess from DECC's point of view is good....

I guess it would have been worse if the reduction had been to 13p. I hope the Chinese drop the price of their panels soon, so that the FIT scheme survives.

Fred

 

 

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RobertPalgrave

RobertPalgraveComment left on: 24 May 2012 at 7:38 pm

Does the new export rate apply to all existing FiT-registered installations below 4kWp, or just new ones? 

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cannonballdaze

cannonballdazeComment left on: 24 May 2012 at 6:06 pm

I thought the export rate was set by the electricity companies (i.e. the buyer of the electricity) ?

Is it now set by the government ?

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