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Feed-in tariff for solar panels: how the sums stack up

You might be considering installing solar panels on your roof, to take advantage of the feed-in tariffs that most electricity suppliers are now obliged to offer. As an example, we can take a look at a typical domestic system. This assumes that the house has a south-facing pitched roof, with no significant shading throughout the year. Any deviation from this ideal situation will reduce the efficiency of the system, and hence the amount of electricity generated.

The government review of the Feed-in Tariff (FiT) scheme published in December 2015 set much lower tariffs for solar PV from January 2016 (see FITs cuts less than feared). This has placed much more emphasis on cutting your carbon emissions and reducing your energy bills by generating your own, free, renewable energy on site. So, there are still appreciable benefits to be gained.

A typical domestic system

stack of PV panelsLet's assume you have installed a 4.0 kilowatt peak (kWp) system, consisting of 16 photovoltaic (PV) panels. Using standard assumptions endorsed by the government about amounts of sunlight enjoyed by the Midlands, we can estimate that this will generate just over 3000 kilowatt hours (kWh) per year. Obviously, solar PV will generate much more electricity in summer than winter, so the tariff payments will vary accordingly throughout the year. You will also import less electricity from the grid, so cutting your electricity bills.

The new electricity meter measures how much power the system is generating, and in some cases it can determine how much is being supplied to the grid. But in the absence of an export meter, this figure is deemed to be 50% of the total.

IMPORTANT NOTE: Tariffs for Solar PV are now reviewed every three months and altered according to the level of take-up nationally. For a 4 kWp (i.e. 16-panel) system installed in July 2018, the generation tariff will be 3.93 p/kWh, and the export tariff 5.24p/kWh. The table below is based on these rates (see 'Feed-in tariffs: the essentials' for the latest FiTs rates).

Typical 4.0 kWp system System eligible for generation tariff rate of 4.07 p/kWh
Amount generated per year (kWh) 3200
Revenue from generation tariff @ 3.93 p/kWh (£) 125
Revenue from export tariff ('deemed'; i.e. estimated at 50%; rate = 5.24 p per kWh)* (£) 84
TOTAL ANNUAL PAYMENTS 209
Saving on electricity bill** 256.00
ANNUAL INCOME 465
Payback period (assuming installation cost of £6000) approx. 12-15 years
Annual return on investment 7.5%

*The FITs scheme requires a total generation electricity meter that measures the amount generated. However, for smaller systems the energy company may choose simply to estimate the amount exported, to avoid the cost of installing an export meter. This export is then 'deemed' to be 50% of the total generated.

**This figure for savings on the bill is notional. It assumes that roughly 50% of electricity generated by the panels is used in the house, and that you are paying your electricity supplier a rate of 16p/kWh for the electricity you import from the grid. However, the figure depends on how much electricity is used in the house when the solar panels are actually working. If the house is mainly unoccupied during the daytime, the savings will be relatively low compared to a household that uses lots of electricity during the day.

The government has undertaken to maintain the solar PV tariff for 20 years. The tariffs are tax-free and linked to the Retail Price Index, so should be 'inflation-proof'.

Energy storage

The electricity generated by solar PV can now be stored in the home in various ways to maximise savings on electricity imported from the grid. Battery storage systems are still relatively expensive but are falling in price all the time. See Energy storage: a smart move?

A cheaper alternative is to use an optimiser device to divert the electricity so it supplies energy to some form of heat store, such as an electric storage heater or via an immersion heater to a hot water cylinder. This is less efficient than battery storage, but nonetheless retains the energy in the home. See Optimiser makes the most of solar PV.

Return on investment

The capital cost of installing this system as outlined is assumed to be around £6000. So at current prices, in this example, the annual return is about 7.5%. In other words, the cost of the scheme will be repaid within about 12 years. With index linking of the FIT and the likely increasing cost of electricity, returns should turn out to be better than these projections. Given that solar panels have potential operating lives of 20-25 years or more, the system should ultimately generate a profit of at least £3000 at current prices, over the 20-year tariff lifetime. Generally, the larger the installation, the lower the initial cost per installed kWh capacity, the shorter the payback period, and the greater the long-term return on the investment.

BUT NOTE: It is very likely that the inverter will need replacing at least once during the lifetime of the installation, costing around £800 at current prices. Also, the performance of PV panels declines over time, typically at an average rate of about 1% per year. Operating lifetimes are generally estimated at 25 years.

Solar discount scheme

Sustainability Matters and Stafford Borough Council have organized a special discount on solar PV installations for residents and businesses in Stafford Borough. See the box below and click on the link for full details.

Stafford Area Community Solar

Solar PV discount scheme for residents, businesses, schools and community groups in Stafford Borough

Click here for full details

Loans

A big drawback to the FITs scheme is the capital cost of installation. It is worth talking to installers about possible finance options. Some banks may be prepared to make long-term loans against the guaranteed income generated by the FIT, and still leave the householder in profit. Are you considering 'free' solar panels? Take a look at 'Free solar panels: 'win-win' or 'no-no'?.

 

 

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