Note: This article was written in March 2012. On the 1st of August 2012 the FiT rates were again reduced to keep the level of return on investment constant. The new rates are as follows:

Band (kW) Standard generation tariff (p/kWh) Multi-installation tariff (p/kWh) Lower tariff (if energy efficiency requirement not met) (p/kWh)
<4kW (new build and retrofit) 16.0 14.4 7.1
>4-10kW 14.5 13.05 7.1
>10-50kW 13.5 12.15 7.1
stand-alone 7.1 n/a n/a

Note: The standard generation tariffs apply to homes with an EPC (Energy Performance Certificate) band D or above. If a home is band E or less it is only eligible for the lower tariff rate.

Original article:

In March 2011 the Feed-in Tariff (FiT) stood at 37.8p per kWh for new build properties and 43.1p per kWh for existing properties. With the then average price of PV (photo­voltaic) install­ations – around £12,500 for a 3kWp system – that produced a return on investment (ROI) of approx 7%. In March 2012, the FiT will stand at 21p per kWh for both new build and retrofit, and with the current average price of PV installations (approx £8,500 for a 3kWp system) this will still produce an ROI of around 7%. So if PV made sense in 2011, it makes sense in 2012.

The significant factor in the equation is the (roughly 22%) fall in PV prices through 2011. This was due to a sudden increase in demand and increased competition. The effect was to put the FiT scheme out of kilter. Instead of the promised 6% to 7% ROI, lucky customers could get over 11%.

The energy companies who pay the FiT have Government approval to increase their prices to generate the extra revenue needed. While the amount being paid out per installation stayed the same, the increase in demand meant that the total amount being paid out by the energy companies increased beyond expectation.

The Feed-in Tariff is funded by everyone who pays an electricity or gas bill but ultimately it is those unable or unwilling to install systems who carry the burden. The oft-quoted example is the little old lady living in a council tower block. She has neither the opportun­ity nor the means to install PV, is on a low fixed income, but has to bear the increase in her electricity bill. So while many people are declaring it is the end of the UK PV industry, the chop to a FiT of 21p means that we still get our 7% return on investment and the old lady in the council block has a lower electricity bill.

Note: Government Loses Appeal. On 25th January, the Government lost its appeal to reduce FiT rates on all installations completed after 12th December 2011, leading to a huge surge in installations. The result is that FiT rates won’t be cut until 1st April, but will apply to all new installations after 3rd March.

The sums

Assume a 3kWp* system on a south-facing pitched roof producing 2,400kWh per year. Assume also that 40% of production is used in the house and the balance exported to the Grid:
Purchase price (incl VAT)                £8,500
FiT?annual income                              £500
Annual energy cost saving                 £125
Exported energy                                   £43
Combined income and savings          £672
Return on investment                         7.9% (falling to 6.1% after 25 years)
* Figures will differ between sites and system specs

A Money-Making Venture?

PV, more than other renewable technology, is considered in purely financial terms. Just a few years ago, hardy souls installed PV for the environmental benefit and a bit of free electricity. Then we started thinking in terms of payback — how soon would we start making a profit? The advent of FiTs brought with it the idea of a capital investment and a return on that investment. Financial rules are now applied, as if we were considering buying shares in one of the big banks. There is a risk and the buyer needs to be aware of underlying performance.

A Few Things to Bear in Mind

PV arrays are denoted as kWp. That is the peak output in kilowatts. A 4kWp array will produce 4kW output only in ideal conditions — on a bright, cloudless day. For the rest of the year it will produce somewhat less.

The bigger the system, the lower the unit cost. A 2kWp system will cost £7,500 to £8,000 installed while a 4kWp system might cost around £9,000. The reason being that the ‘infrastructure’ – cabling, scaffolding, the inverter, etc. – costs pretty much the same whatever the system size (up to 4kWp).

The average electricity production across the UK for good-quality panels is some 800kWh per 1kWp. So a 4kWp system will produce around 3,200kwh per year. Actual production will vary with the site and with the quality of the panels.

Consider the power demands of various pieces of household equipment and the fluctuating output with passing seasons, and that we use most equipment in the evening, and we quickly see that the proportion of production we can actually use in the house is quite small. The figure used is typically 50% but that may not always reflect reality.

PV panels degrade over time. Actual production can fall by more than 20% over 25 years (the duration of the FiT scheme). To an extent that is offset as it’s linked to the Retail Price Index, but what you get in Year 1 is not what you’ll get in Year 25.

PV panels take around 20 years to recover the CO2 emitted during their production. In both financial and CO2 terms PV is a long-term investment. Wind or hydro power will both outperform PV but the opportunity for PV is available to many more people.

An important point for renovators is that the Government intends to make only homes with Level D Energy Performance Certificates or above eligible for FiTs. For many older homes, achieving this standard will involve radically overhauling the building’s insulation levels.

What the experts say about cuts

“As frustrating and confusing as this situation has been for everyone, earning 21p/kWh, and having lower energy bills too, is still the best deal in town. Now that solar panel prices are coming down, we estimate that a typical 10-panel system can deliver a gross return on investment of 6.7% — far better than you could expect to receive from a bank or building society savings account.” Richard Swords, Managing Director, Greenenviro Energy Systems Ltd. (0800 064 6014)

“Admittedly, the new rate isn’t as attractive as previously, however, even at 21p/kWh installing solar panels still remains a sound investment decision, not least because it means you can offset some of your bills against rising electricity costs. The best advice for homeowners who are thinking about installing solar panels is to ignore the headline-grabbing negative press about FiTs and look at the real returns they provide.” Chris Hopkins, Managing Director of Ploughcroft (0800 034 4100)

“Our UK price index from over 100 solar installers shows strong price drops in 2011. We expect further drops in 2012 as many installers have great deals coming up to drive demand following the Feed-in ­Tariff cuts — some of which would align UK prices with other European countries.” Gertjan van der Goot, founder of CompareMySolar (comparemysolar.co.uk)

“As solar PV equipment and installation costs have tumbled over the last few years it is natural that the Government should balance this by addressing incentive levels, albeit it at an earlier than expected date. Future programmes must deter the limited amount of mis-selling and insufficiently trained installers that has been evident in the solar PV story so far, due to the high rewards on offer.” Graham Russell, Managing Director of Viessmann (01952 675000)

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