Monday, 28 November 2011

Solar PV still a good investment

Our panels, as many as we could squeeze on.
The government announced recently a proposal to massively reduce the level of feed in tariffs for small scale PV - down from 43p/kWh to 21p/kWh*. See this page on the DECC site.  This has been a huge shock to suppliers and investors with projects in the pipeline. The proposals are even worse for commercial rent-a-roof schemes because they will come under a new, lower, multi-installation tariff which is 16.8p/kWh. However, since panel prices have come down such a lot, as have interest rates, it is still a pretty good deal in my view.

In case you don't know what the Feed in Tariff is, the idea is that you get paid a guaranteed price for electricity you generate from certain renewable sources such as solar photovoltaic cells (PV panels) or wind turbines. The tariff is index linked and, for domestic installations, tax free. The levels are reviewed and reduced over time for new installations but once you have your contract your rates are set for 25 years.  You gain in three ways:
  • from the generator tariff on everything you generate whether you use it yourself or not
  • from the smaller export tariff on electricity you export to the grid
  • by not paying for the electricity you use yourself. 
Altogether this  is a great incentive to investment and helps boost the production of clean renewable electricity. The tariffs are different for different technologies and smaller installations get higher rates. This encourages householders to get involved as well as corporations.

We had our panels installed in October 2010 and we paid £7800 including VAT for a 1.7kWp system. The Transition Cambridge website has a spreadsheet I put together for you to calculate your return (see here). Using this I calculated our expected return was 8.25%. You can now get solar panel installations for as little as £3000 per kWp (plus VAT at 5%), so a 2kWp installation should cost you around £6300. At 21p generator tariff, the expected return is 7.25%. Given the interest rates on savings accounts these days, and that this is tax free, this is still a good rate.

The second sheet of the spreadsheet shows you a more complex calculation where the cost of the panels is amortised over 25 years, their efficiency degrades and the tariff benefits rise with inflation. Guessing a conservative 3% for RPI and 4% for energy inflation gives you a return starting at 3.25% rising to nearly 10%, before tax. If you pay tax as well the benefits are even higher.

If you were considering PV but have been put off by the drop in tariff, do think again. Just because your neighbour was lucky enough to get their panels at an even better time, that doesn't mean that PV isn't still a good investment.

NB. These calculations assume you use about half the electricity you generate. Beware illustrative returns which rely on you using all of it - you are unlikely to be using more than 1kW for more than a few minutes at a time when the kettle is on so most of your peak output in summer will go onto the grid and you won't save another 12p/kWh (or whatever your price is) from not buying it from your electricity company.

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