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Is solar still a good investment after the cuts?

Due to the overwhelming success of the feed-in tariff the government had no choice to cut the rates on offer to homeowners looking to invest in solar. We can all argue the odds about whether or not the cuts were just or fair but the fact is that the tariff rate is now at 21 pence per kilowatt hour. At this rate is solar still a good investment?

The popularity of the FIT scheme in itself is a testament to how generous the rates were. In a much tougher economic climate the generous returns for installing a solar photovoltaic system seemed like an investment that was too good to be true. Thousands of people invested and although there are no official figures thousands more opted for a free solar panel system.

Initially when the scheme was first launched any early adopters were going to pay a hefty premium but still get a good return. You could have paid twice the amount for a solar system compared to buying the same system today but you would still be looking at a return of between 4-8%. As the cost of systems fell and installers literally got better and faster at installing the costs came down. Estimates vary as to how much prices have fallen but you only need to look at the variation in solar panel costs to see that it is difficult to settle on an accurate figure. Suffice to say that payback periods were teetering towards the 4-5 year mark for the canny consumer and certainly in the 7 to 10 year bracket for most.

Costs and returns

  • When looking at the possible returns for investing in solar pv you have to consider a few variables
  • The initial cost
  • Maintenance and monitoring costs
  • Energy savings and exports
  • Revenue from FITs

The government always wanted the percentage returns for investing in solar to be around 8%. In theory high enough to attract people with suitable homes where solar would make sense. Having the returns too high would mean homeowners installing systems on inappropriate aspects in the hope of getting a return on their money and cowboy installers miss-selling solar to the public with cheap systems and over inflated revenue projections.

Is your home suitable?

The first thing to consider is your home's suitability, with lower rates being paid under the government scheme you need to make sure every kilowatt counts. After all if your system does not generate enough energy you may not even make a return at all. So what does this mean in practice?

System size

The larger the system the lower the cost per kilowatt to install as you have fixed costs such as installation costs and inverter cost. By investing in a system as close to 4kWp as possible will mean that you will get the bet returns. A larger roof means that you will get a better return on your investment.

Orientation, location and pitch

In the northern hemisphere its all about being south, that means the farther south your home is located geographically and the closer to south your roof faces the better. A roof that is over 55 degrees off south is going to be less efficient than one closer to due south. A flat roof is not ideal, neither is too steep a pitch, an angle of 30 to 40 degrees is believed to be optimal, the lower end being more suitable for southerly locations in the UK. You installer will be able to provide you with SAP calculations giving you estimates of potential returns.

System types and costs

Panel and inverter technology has progressed even in the few years that solar has been taken seriously in the UK. Inverters are now much more efficient at converting the DC power coming from the panels to AC power that can be used in the home. Installers now tend to use panels that work better in the UK climate and are able to make better use of lower light levels and more diffuse light.

Ideally you want a proven and reliable panel and inverter combination; after all you don't want to have to fork out should your panels fail out of warranty or you inverter folds. Is there a charge for maintaining and monitoring your system? This is something you should be asking you installer and you shouldn't just take their word for it. Find out what panel and inverter make and model they use and research it.

Obviously the less you pay for your system the better your return will be. Getting the best price generally means shopping around and getting quotes with like for like systems. Chinese panels tend to be cheaper but not always as reliable and efficient. Doing your research means you will be better placed to get the right system at the right price.

I have seen systems around the 4kWp size being advertised for as little as £10,000. Headline prices are not always what they appear to be, do they include VAT (5%), support, maintenance, an assured third party warranty or guarantee? An experienced installer will be able to install the system a lot faster and therefore at a lower cost.

Getting the most out of your system

If you are installing a photovoltaic system then you will want to get the most out of it in order to maximise your return. Outside of the feed-in tariff the savings made through using your free solar power is the next biggest factor in boosting your revenue. The more you use whilst the panels are generating the lower your energy bills are going to be. According to one free solar usage study the average savings on your electricity bills from using solar is 37%.

Solar only works during the day and the power generated cannot be stored cost effectively for later use. There are developments in battery technology, notably flow batteries that will make this possible by for now any excess power is exported to the grid. The amount paid through the export tariff is about 3 pence per kilowatt, as the average cost of electricity is around 13 pence it makes clear sense to use as much of the energy you generate at home.

To use your free daytime electricity means running appliances during the day rather than at night. In practice this means starting appliance cycles before you leave for work or using them on timers where safe to do so. In the summer with the longer days it is easier to use more electricity as the longer days also mean more electricity is going to be available from your panels.

So is solar still a good investment?

The short answer is yes, the long answer is as long as you install the right system at the right price. Let's look at some figures, for a home in East Anglia that is looking to install an optimum 4kWp system. Looking at data from the Energy Savings Trust you system would generate 3,347 kilowatt hours of electricity over the course of a year. So at a rate of 21 pence you would earn just over £700 from the FIT. If you then reduce your average bill by 37% this would be an annual saving of 1,238 times 13 pence which equates to about £160 bill saving. The rest of the 2109 kWh is exported at 3.1 pence earning you about £65.

  • FIT payment = 3,347 * 21p = £700
  • Bill savings = 1,238 * 13p = £160
  • Exported = 2,109 * 3.1p = £65
  • First year earnings/savings = £925

The total figures are rounded for easier reading and some assumptions have to be made based on averages. So if you could get a 4kWp system installed for around £10,000 then you would have a payback period of a little over 10 years. A more expensive £12,500 system would mean a payback period of over 13 years, still not a bad investment though.

The calculations do not take into account the increase in electricity costs, the increased index linked tariff rate and the falling efficiency of the system as this would make the calculations far too complicated. You installer would be able to give you a more accurate prediction of your systems potential.

If you are looking at a smaller system the payback period and percentage returns are going to be lower. As mentioned before this is because bigger means more cost effective, installing a small 1kWp system at the wrong price would mean that you only just break even.

A few final points

  • Make sure you get a good price so that your investment makes sense
  • Larger is better
  • Do your research and get quotes

Written by Allan from FreeSolarPanelsUK