Will your solar panels bring sunshine to your savings?

by , Money Editor Energy & Home 20 September 2012
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If you were asked to find a tax-free investment, which could rise with inflation and save you money on your bills, would you look to your roof? Installing solar panels could do just that.

Solar panels and sunflowers

Since the launch of the government’s Feed-In Tariff (FIT) scheme in 2010, some 300,000 households have had solar panels installed. And those who have signed up to the scheme have also seen some very healthy returns.

You get paid for every unit of electricity you generate, in addition to the power you export back to the grid. And the more efficiently you use electricity in your home, the bigger the savings on your bills.

But as the cost of installing solar panels has fallen over the past two years, so have the rates you get paid for generating electricity and the length of the scheme. So, with a new round of cuts coming from 1 November, does pinning your investment hopes on the sunshine still make financial sense?

The generation game

Which? Money has done some number crunching, looking at forecasts for electricity price rises (at 2.6% a year) and for inflation (at 2.01% a year) over the next two decades. We assumed 50% of electricity generated is used in the home and 50% is exported back to the grid and combined the earnings from generation, export and bill savings into one big annual profit figure. To try and be as accurate as possible, we even factored in degradation in the quality of panels (at 0.7% a year) and their ability to produce electricity.

For a three kilowatt peak (kWp) solar panel system in Birmingham, we found that you could make a net profit of around £28,000 if you had installed panels in April last year, when the FIT was at its highest. This figure takes into account installation and maintenance costs of around £11,000.

That’s quite a tidy profit – you’d need to find a savings account paying 5.2% a year after tax to meet that kind of return.

But fast forward to August 2012 and the cuts in the FIT have really affected potential profits. Although panel costs have fallen (to around £7,500 for the 3kWp system according to the government), so have potential profits. That same system in Birmingham would only pay around £6,500 in profit over 20 years. If you’d simply put the money spent on panels (and maintenance) into a savings account, you’d only need around 3.4% a year to match – which is pretty achievable, even in this climate.

‘FIT’ for purpose

Installation costs for solar panels keep falling – the solar panel industry says that costs are quite a bit lower than the government’s figures, which could obviously boost your profits. And if electricity prices are higher than forecast – last year they rose by 4.7% – that could mean much higher savings in the future.

The real profit boost comes from reinvestment of revenues – we found that you could near double your profits if you reinvested all of your earnings into a tax-free cash Isa paying 4%.

Making the most from solar panels is dependent on a lot of factors, beyond the financials – mainly changing the way you use appliances, as well as the climate. I don’t think it’s fair to write the FIT off as an investment – but if you’re thinking about spending your savings on a solar panel system, it’s important to see whether they really are going to make financial sense.

Have you had solar panels installed – how are your returns shaping up? Has the current economic climate (or British weather!) put you off the scheme?

[UPDATE 16/10/2012] - When we carried out this study, our modelling used solar panel cost data from a report published by the Department of Energy and Climate Change (DECC) at the end of May 2012 – the latest DECC figures available when we went to press. The solar panel market can fluctuate significantly over short periods and since the publication of the DECC report, the cost of installing solar panels appears to have fallen dramatically. Falling installation costs could result in higher potential profits than those shown.

However, it is still important to compare potential future returns alongside the quotes for panels provided to you by an installer and weigh up the investment alongside other alternatives, such as the return you could get from a savings account.

70 comments

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brianac

We had solar (2.6 kW PV) panels installed this July, just before the tarif was reduced. It all looks pretty good, but we have yet to start receiving the payments, so too early to crunch the final figures. The first real benifit was seen straight away in the form of reduced daytime metered usage, I can now leave the computer on all day for free! We have yet to start utilising all our day time production but do boost the freezer for example so that reduces the overnight usage (which is cheap rate anyway). The real figures are rather complex, but look pretty good so far. We are South facing in the South of England, so get a good supply of sun. I will come back to this later.

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bridge_coach

We are roughly South facing, in the Midlands. We are both retired, living on pensions and ISA interest. We had solar PV (3.96pkW) fitted in July 2011, costing just under £14,000.
FIT Results to date are :
1st quarter : £498, 2nd quarter: £181, 3rd quarter : £394 & 4th quarter : £530
Giving a total of £1,603 for the first year – £658 of it replaces lost interest (on capital invested) and £945 goes towards replacing the original £14,000 savings.
2nd year (65 days so far) £438 earned so far. . . . . .
HOWEVER, savings on metered usage are around 30%, NOT 50% as quoted.
SECONDLY, the company that fitted the system has gone belly up, so future maintenance might be a problem

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Chris, Gloucester

Firstly, it’s good to see that “which” is making a comparison by looking at deposit interest rates rather than return on investment figures. The later being the standard sales approach clearly designed to make the proposition look far more attractive.
As regards whether solar PV is a good investment or not in general, well I’ve been looking carefully at this for a while.
My conclusions for what they’re worth are that there are so many variables that it is impossible to say with any degree of absolute certainty if solar is a good idea (like many things in life).

However, on the plus side these things do work, they do seem to produce good levels of energy. The feed in tariff is index linked and guarenteed for 20 years. Electricity cost to the consumer will not be reducing anytime soon so savings are likely to gradually increase.
On the negative side deposit interst rates won’t always be as low as they are now, as the economic cycle turns they’ll go up. Buy solar and you’re locked in, the things are on your roof and you cannot just withdraw the investment. The inverter may not last 20 years so you should budget about £1000 for a replacement sometime within the 20 year deal.
There are other factors. If you were to sell up and move you may find your house’s saleability is affected. Some people hate the look of solar panels and won’t buy, some people love them and will pay more. It depends on the preferences of any potential buyer.
All in all my best guess is that over the 20 year deal solar will do a bit better than just leaving the money on deposit (as it should you’re locked in afterall) but certainly not as well as the sales people would have you believe.
So should you go for it?
It really depends on your circumstances. If you’ve already insulated you home as well as practical (always the biggest and best “bang for your buck”) and you have the cash sitting there currently earning little. If you are unlikely to move house and expect to live for at least the next 20 years (if you’re in your 70′s you might not see the end of the deal). If you’re happy to wait about 8 to 10 years to get your initial investment back and be locked into a 20 year deal then why not you’ll probably do ok. Anything you get after 20 years will be a bonus (assuming you’re still around of course)

On the other hand if you prefer your cash fluid and you don’t like the idea of a 20 year deal or if you think you might move then perhaps not.
But whatever you do don’t borrow to fund solar, you’ll definately lose.

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Bridge_Coach

In his last paragraph, Chris of Gloucester says that “if you prefer your cash fluid and you don’t like the idea of a 20 year deal …..” HOWEVER, he also points out that after 8-10 years you have recovered your initial investment. This would mean that further years are pure profit – for a 4pkW system in the midlands this means FREE income of over £2,000 pa. (I am basing this on the ACTUAL returns on my system since July 2011.)

I have assumed that the capital that I have invested in my system would otherwise have been earning 3% net of tax in a savings/deposit account. The payback period, taking into account the foregone interest on outstanding capital will be just under SEVEN years (assuming inflation of just 2%).
The inverter has a 5-year manufacturer’s warranty and an expected life of 10 years, so I don’t expect to have to replace it during the “payback” period.

Finally, if I amortize the original cost over 20 years rather than 7 years and allowing for a £1,000 inverter replacement, the income that I will get on my original investment is equivalent to 13.3% NET of tax – show me a bank account that will do that !!

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Jim Kenney

Bridge Coach – I completely agree but I would add that inverters genearlly have a 12-15 year mean time to failure and you should be able to get an exchange one for under £500 fitted. £1,000 for an inverter is an urban myth – it is the cost of a new one if you dont have an old (broken) one to exchange.
Additionaly, if you factor in that electricity inflation has been running at over 6% (around twice RPI & CPI) then your 13.3% maybe a little under estimated.

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bridge_coach

I agree Jim – I hadn’t taken account of the fact that electricity price increases seem to be much higher than inflation – closer to 8%pa at the moment. Our figures so far indicate that we have been able to use just 35% of the generated power, rather than the 50% assumed by HMG and by Which?. This saved us 1200 units in the first 12 months – approx £140. An extra 5% (8% – CPI) on this amount would be £7, thus raising my amortized yield to 13.7% (as you say, “a little under-estimated”)

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Scubaman

Solar Panels was one of those things we really got right in the Spring of 2010 – even managing to get grants for the installation!! However, these comments are about what has happened subsequently.

Our original system comprised 8 panels as these were all we could fit on the southwest facing roof area available connected to a SunnyBoy Inverter. In the first year we generated about 1.2MW of energy against a forecast of 1.5MW which was good but not as good as expected. As a result of careful monitoring it became apparent that the system was under-performing during the summer months. Discussing this with the installer Solar Green/Chelmsford the problem was diagnosed as summer tree-shading of a single panel at one end of the panel string – it seems that as panels are connected in series shading of one panel can affect the output of the rest. The related technical problem of having panels joined in series but some of them in a different plane (ie at right angles to the main array) was why the original system was limited to 8 (all in the same plane on the roof) when we could have accommodated 3 more panels facing southeast.

The shading problem together with the ability to have additional panels were solved in February this year with the installation of a SolarEdge Inverter together with Power Optimisers fitted to each of the original 8 panels and 3 new SE facing panels. It’s now looking like we are heading for over 2MW during the current 12 month period which is a significant improvement over and above the energy produced by the 3 additional panels. The SolarEdge system also monitors the performance of the system down to the individual panel on-line – an excellent party-piece demonstration!!

All in all I cannot recommend SolarEdge and Solar Green more highly.

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Jim Kenney

I found this article to be complete junk – £7,500 for 3kWp? That is cloud cuckoo land – £6,500 or less is reality. And as for electricity rising by 2% that is out there with the fairies. It has gone up 9% this year and an article in the guardian today says a lot of tariffs are about to go up 30%. Sooo… if which? isn’t being remotely accurate on either PV costs or electricity inflation, what is the point of reading & discussing it if the maths is all wrong? where is the research? what are we subscribing for? what is all this tosh about ‘the government says’ – how about, what did the which researchers find? or is research too much trouble for a consumer organisation?

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Nick

Just wondering if anyone knows the solution to this solar PV problem.
I am the end of a terrace of 3 small houses. The title deeds state that the roof is communally repairable. How do I indemnify my 2 neighbours from any future problems that may occur to the roof due to my installation of solar panels only on the area above my property. Future buyers of my house or their houses may want to see some ‘permission’ or indemnity.

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Jim Kenney

Nick
in principle it will be no different to any other type of roofwork and if you use a reputable installer there should be a very low risk of any problems. However I guess there are principally 2 things that could go wrong – either the roof could get overloaded and sag a bit or it might leak. Either way if you use a decent installer that knows how to calculate loads and then do a proper job then this shouldnt be a problem. For your own peace of mind I’d recommend using an installer with a decent track record and has insurance, in which case there is no difference to maybe getting a chimney or a leak fixed.

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Nick

Jim,
Yes I would certainly go with a reputable installer (in fact they won the Industry award for 2011) and the risk would be very low but conveyancing, solicitors and title deeds are another matter entirely. My justifiable concern is to cover the eventuality of being asked by a buyer’s solicitor (either of my own property or one or both of my 2 neighbour’s) or even a future owner who sees what the title deeds say and is the type who goes by the letter (as opposed to the spirit) of the law for paperwork given that the roof is a party repairable roof.
I have a solicitor looking into it but who hadn’t yet come across this issue before but I also have an estimate sitting on my desk with the prospect of another 3% coming off the FIT on 1st Nov. Nick

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Jim Kenney

Nick
I see your problem and I’d be grateful to hear the outcome.
With regards to your award winning installer, I dont know which award they have but my only caution would be to generally only take independent commendations as credible. A lot of the so-called trade awards operate in a way where companies get to nominate and vote for themselves. Hence these questionable ‘awards’ can make a low cost but potent marketing tool though, alternatively, well commended businesses such as Solarcentury (if I am allowed to name them?) have shelves full of genuine 3rd party business and ethical awards.
Good luck with the legal stuff and I hope you beat the FiT drop. Jim

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Nick

Thanks Jim. Yes I’ll let you know what the solution is. I can’t be the first person to have this problem. Good points about awards. They state they are recommended by Which? and moneysavingsexpert. They say won 3 awards last year.at various Renewable functions.
Nick

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Jim Kenney

Gareth, as you know, I challenge your figures and I thought you were going to add something to this page to correct them. Firstly the £7500 for a 3kW system is inaccurate in the current market but some of the other numbers are a little questionable too. Your piece prompted me to do some of our own analysis. Consequently I believe that if you bought, say, a 4kW system for £7,800 and it was somewhere in middle England on a South facing unshaded pitched roof that you could get an annual return of around 10% based on reasonable figures on electricity inflation, maintenance, degradation, etc. And if you reinvested the benefits from the feed in tariff, export tariff and electricity savings back into a high interest account you could push the return up to around 16 or 17% – but you’d have to be pretty disciplined to do this, of course. Now if you were a tax payer, especially a high rate tax payer then it would be quite difficult to match this.
At this point I should declare my interest as a PV specialist but I’m happy to support these numbers if anyone wants?

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bridge_coach

Jim, I agree with the first part of your comments.
However, ” And if you reinvested the benefits . . . . .” is misleading – I have calculated that with a starting return of 10%, the 16% or17% rates would not be reached until years 10 and 12 respectively (assuming notional amortization of 99 years).
On the other hand, if you amortize over the 25 year term of the government payment, the 16-17% rates are not reached until year 18/19.
The big caveat here is that these rates will ONLY apply if there is no degradation of the system performance – most unlikely.

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Jim Kenney

Hi Bridge Coach. You didn’t comment whether your amended figures take into account the reduced inverter replacement cost?
Amortising & capex write off is always a personal view but I dont think my figures are misleading & are certainly not intended to be. I simply added up the 20 year benefits, subtracted the capex and divided the result by 20. I applied some reasonable figures for degradation, inflation, etc but I kept the energy inflation way below this year’s 13% (which? figures out today).
BTW performance degradation from high quality panels is virtually zero but an ‘average’ is 0.4% per year over 20 years although it isn’t linear. The average is also dragged down by poorly constructed panels that let moisture in after a few years.
One more point is that good quality panels have a positive output tolerance which means that the initial output is actually slightly higher than the rated output. This means that it can take several years for the degradation to reduce the output to the rated value. In other words, buyers of good quality systems can get a ‘freebie’ of higher than expected initial output (and bad systems can be lower). My figures didn’t take this into account. The magnitude of this is that a ‘good’ system may have an initial output 5% higher than rated. And at 0.4% degradation it will take 12 years to drop to the rated output. I was about to say it is an interesting subject, but that might sound a little geeky…

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anmar

Can anyone tell me if they have insurance on their solar pv system? The company that installed mine didn’t factor in the cost of insurance when they worked out the investment figures. They want £240 a year to insure my 21 panels, is this a good deal?

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Jim Kenney

Anmar. This is a situation that I haven’t heard of before. Do you mean your houshold insurance wants £240 to insure the PV? I believe they normally just include it on the bricks & mortar insurance – I haven’t heard of that kind of premium before. I have had pv for over 8 years and have had cover on household insurance at very little extra cost. I think it just counts as a fixed electrical appliance?
did you buy your PV or is it a rent a roof scheme? I bought my PV so that might possibly be the difference?

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anmar

I bought the panels from Ideal Home Group who informed me that my warranty would need to be extended yearly at a cost of £240. They persuaded me to take it out saying if certain parts were to fail i would have to pay out lots of money and that under their guarantee (?) they were the only ones authorised to service the equipment. I have just received a letter asking for the next years premium but i am not sure what to do.

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Jim Kenney

Anmar. on the face of it this sounds like a blatant scam. they are obliged to warrantee their workmanship, and the manufacturers are obliged to warrantee their equipment. the panels are extremely unlikely to fail but the cost may well be covered by your household insurance after the warrantees elapse. the inverter may fail (standard warrantee = 5 years) but this is only likely to be once or twice in 20 years at a maximum cost of maybe £500 per time..
I have owned pv for 10 years and havent had it fail in that time so the maintenance cost has been zero. this compares to your annual premium of £240 totalling £2,400 over an equivalent period.
If you are in doubt i strongly recommend that you contact REAL before paying. or give Which? a call to discuss your consumer rights.
BTW, once their warrantee elapses I believe any qualified technician would be OK to service your equipment without invalidating manufacturers warrantees. good luck

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Rob Roy

I went into “solar” investigations with some enthusiasm at the end of last year, but have had increasing doubts since then. The much-hyped protection from fuel price rises is way over-stated: The system goes to sleep at sundown, just when my energy consumption rises, and there is no electricity storage. I guesstimate my daytime solar consumption would be somewhere between 10 and 25%. The FIT is linked to inflation generally, not directly to the cost of fuel.
A 4 kW system in my northern location would generate just over 3 kW “SAP” with possibly an extra 10-15% in reality. It would take 8 1/2 years to break even on £5 – £5.5 K installation costs. It would take 12 1/2 – 13 years for the returns to equal what an ISA or other account @ (say) 4% net would yield. Scary.
The big mistake is to compare a solar investment with a savings account. Once you have made the investment there is no access to your money – it’s gone! – and you are totally dependent on the returns that it generates. An ISA you can cash in at any time. The benchmark for comparison should therefore be with a long-term investment yielding way over 4%, and you need the capacity to wait until then to begin to be in pocket. I wish someone could paint a rosier but still realistic picture to contradict my conclusions!

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Jim Kenney

Rob Roy. I dont know how far North you are but your figures dont look a million miles out. and I believe the EST figures are that the average home only uses 20% of the generated energy unless you modify the way use electricity (e.g. I put dishwasher/washing machine on when I leave for work in the morning). Some people use EMMA type immersion heater controls?
However, as Which? (Richard Lloyd) have said, energy inflation is at around 13% and this links to the export tariff and also to bill savings, and I am unsure if you have taken this into account?
and also as Which? suggest, you can take your PV income and reinvest it in a savings account for further benefits. so in other words, I think that good earnings can be made but payback is normally around 7 years. and of course, the money comes trickling back in as soon as the PV is installed so you do start getting access to it before year 7.
So it is possible to get double digit returns with PV but if you have other ways to get better returns then it makes sense to do that.

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Rob Roy

Jim. I won’t argue with your 20% but what you said about the linking contradicts what I was told. There is an inflation factor built into the spreadsheet which I was given for the purpose of calculating the long-term returns.
From a financial perspective I take the (simplistic?) view that until I have recouped my initial investment – after 8 1/2 years – it is premature to talk about investing savings. Otherwise gift me £50 K and I’ll give you a return that will better anything you are getting from an ISA! You can get double digit returns eventually, if you are around long enough to enjoy them, but they are “negative” in the early years.

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Jim Kenney

I havent seen your spreadsheet but it needs to factor in the bill savings and export tariff at energy inflation, and the FiT at RPI. Then if you pay your installer, say £5,500 for 4kWp, you should then have around £800(ish) back at the end of your first year. so if you chose to invest that £800, you would get a (say 4%) return at the end of year 2.
So, no, I dont think it is premature to talk about investing savings before year 8. but clearly it is a matter of personal circumstances and perspective. And did you see British Gas & Ofgem are preparing us for another round of energy price increases?

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Rob Roy

Sorry Jim we are on different planets. If the investment generates £5500 + 800 = £6300 after one year you’re a genius and I can save or invest the £800. If not then I’m still out of pocket to the bank and the “saving” is smoke and mirrors. To me this is how such schemes are being mis-marketed. The £800 goes towards paying off the £5500 and only after 8 1/2 years can you begin to talk about genuine savings and investments.

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Jim Kenney

Ahh. I think I get it. I think we are talking at cross purposes on 2 levels. firstly, I am assuming that you have £5,500 sitting in a bank account earning very little interest (the bank of England is talking about negative interest rates!!). If you were to spend it on PV, you would have some lucre in your hand at end of year 1 that you could reinvest.
If, however, you plan to borrow off the bank to finance the deal, it is not going to work.
My view is based on you having the £5.5k and you can either put it in a bank or spend it on PV.
For clarity, I am not suggesting that the PV would generate £5,500 + £800 at end of year 1. And if you were to have a FiT cheque in your hand and smaller fuel bills it wouldnt seem like smoke & mirrors.

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Luke Dyson

What I don’t understand is; why should I pay another company to sell me solar panels when I can easily fit all this myself at a fraction of the cost.

I have a building which I know will generate a fair amount of electricity, albeit in a conservation area, but also in an area promoting sustainable living.

Why should I pay £10k+ when I can source and install the panels and associated equipment myself for less than £4k? These come with a far longer guarantee than any of the FIT scheme companies provide themselves, plus I know that doing it myself I will ultimately provide a lot more care and consideration to my building.

Is there a way of installing the panels myself and also benefit from the FIT scheme?

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Rob Roy

Jim: It’s much simpler regardless of whether I’m in hock to RBS or sitting on cash:

Fact: If I put £5.5K into a savings account I can withdraw my funds, and more (with interest), at any time.
Question: Can I do that with a PVC investment?
Answer: No.

I am struggling to find a realistic comparison: It is something like a non-tradeable index-linked junk bond without a redemption date (!!). Or a kind of reverse mortgage. Whatever PV is, the “savings” don’t equate to (and should be far superior to) the returns from a savings account. Echoes of Tesco and co: “Spend more and save more..”

I might, or might not, succeed in the end with mastering the technicalities and convincing myself that the “returns” (in my situation) from investing in PV justify the long timescales involved. If I do then it will be with my eyes open and hopefully not on the basis that I suspect that PV was sold to many others.

If I could do a DIY install (unlikely) and still get the tariff benefit that would of course swing things.

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Jim Kenney

Agreed. If you need access to the money then dont tie it up in PV.

For myself, I figured there are 3 certainties in life; death, taxes and rising fuel bills. When I put solar on my roof, my combined fuel bills dropped to £30/month for my 4 bed house. the feed in tariff pays me just about the same so I no longer have to worry about household energy bills. So for me it was a no brainer. But I do live in SE England and have an unshaded south facing roof.

And if I’d left it with my ISA or NS&I? I’d have just a few quid more than I started with but I would have easy access to the pot that was, in reality, dwindling in relation to the RPI.

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Rob Roy

Jim: If this gets too detailed for this forum we can do it outside / by email. I would be interested to know, bearing in mind your favourable location, how many kWh and £ you get from your own annual solar consumption, and what proportion this is of your total annual solar generation, assuming that you have daytime consumption in the first place. If this is not classified information …

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Jim Kenney

It isnt classified info but I havent kept a record since I happily realised the FiT covered my energy bills. But I should point out that my energy consumption is low and my house is fairly modern and low cost to heat.

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Rob Roy

Jim: Precisely my point! I suspect one size doesn’t fit all, without a struggle, and what makes economic sense for you may not for other mortals in less favourable situations. Hence the need for homework before taking the plunge. If any other readers can contribute with their own figures then perhaps a picture for the good of all might begin to emerge. I am trying to track down a low cost energy meter that will tell me my daytime consumption – the one I’ve got has only got “bars” so it’s guesswork.

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bridge_coach

Jim – I have a simple remote meter that I got free from EON – it shows:

Energy now in watts or kW (i.e.instantaneous usage)
Cost per day/month/year (cycles through the 3 amounts in about 10 secs)
Energy usage yesterday (bar charts for night, day & evening)
Usage in kW for last day/last 7 days/last 30 days (cycles round every 20 secs)
Time of day & temperature
________________________________________________________________________
As far as the discussion about the financial merits of Solar PV is concerned, my experience since fitting the system in July 2011 is absolutely clear – it’s the best investment that I ever made.

A lot of people seem concerned with the “pay-back” period. Using thast basis, in my case it will be about 7 years, after which I shall be receiving a COST-FREE income of over £2,000 p.a

Furthermore, if we assume that my original £13,500 capital would have earned 4% gross over the 7 year period (3.2% after tax) then the lost interest over that 7-year period would be about £1,650

In other words, after the end of year 8, I would not only have replaced my original capital and the “lost” interest, but would have an income of over £2,000 p.a for another 17 years. Thus I would be £34,000 better off at the end of the 25 year term than if I had just invested in a savings account !!

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Rob Roy

To Bridge Coach. I emailed Eon to ask how to translate bars of daytime (grid) usage displayed on my / their Energy Monitor into a meaningful daytime kWH equivalent. The query seems to have defeated them. Perhaps you are more clued up than they are?

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Bridge_Coach

To Rob Roy:

My EON meter displays three sets of bars, headed
Night Day Eve

One of the numerical fields displayed shows the total usage over the preceding 1 day, 7 days and 30 days, cycling round the 3 values every 30 secs. To find a very crude measure of daylight usage, I count the total no of bars over the 3 columns, multiply by the 1 day usage and divide by the no of bars in the Day column. Imported usage I take from the supplier’s (Economy 7) meter.

As an added fillip to PV, as we are on Economy 7, although we don’t generate anything overnight, we can still use low-cost electricity to run dish-washer, washing machine etc overnight if there’s been insufficient sunlight in the daytime.

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Rob Roy

I think that is similar but not identical to the methodology which I came round to in the end: Take the number of “day bars” as a proportion of “total bars” and apply this fraction to the kwh shown for the last day recorded. But I came to doubt this logic when the no of bars for evening hit the 5 bar limit on by no means excessive usage. When is a bar not a bar? I’d hoped Eon would shed some light on my daytime usage but so far no joy.
It must be quite some hassle to work out if you have generated sufficient solar kwh’s to merit switching to Economy 7 or not, except in cases of full sunshine or total cloud cover.

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Rob Roy

To Bridge Coach: I think you most likely have the same Eon meter as I have. I have however yet to sus out how to convert “bars” of daytime usage into kWh and £. And then to compare that with what I would have generated if I’d gone solar!!

I suspect the reason your calculations and mine are so far out is because you got in at the earlier FIT (but paid more for your system and for all I know live in the sunny south). I’ve been quoted £5 – 5.5 K for an installation in the north which should in theory deliver £600 rising to £750 annual returns over a 12 year period. These returns will go on increasing with inflation but short of global meltdown I can’t see them ever getting anywhere near £2 K p.a. – and I suspect that I would need the full 25 years or more to achieve the advertised £17 K profit. I’m not sure if considering how long your “capital” is tied up this kind of scenario would turn the financial gurus on – perhaps if any are reading this they’d like to give us a “detached”.analysis.from a financial viewpoint.

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bridge_coach

To Rob Roy: This is quite a long reply, but I have tried to give a detailed breakdown of costs/benefits of a Solar PV system.

You’re quite right, I do get the earlier FIT, but I live in the midlands rather than the sunny South.
As far as cost is concerned, although we took it out of “savings”, the savings had been earmarked to repay (some of) the capital on our offset interest-only mortgage. Thus you could say that it was equivalent to increasing the outstanding capital amount of our mortgage, which is what we would have done if such “savings” had not been available.

We are in the lucky position of having an offset tracker mortgage, which means that we can pay off as much or as little as we want and the interest rate is currently extremely low – the annual interest on the £13,500 is currently around £200. This means that in 2011/12, after allowing for the interest cost, we have applied the other £1,470 of the FIT towards repaying the extra mortgage. On top of this, we saved about £135 on our annual electricity bill and expect this figure to rise year on year.
Assuming that sunlight remains about the same from year to year and using the government’s forward figure for inflation of 3%, not only will my electricity bills be lower each year, but we shall have repaid the extra mortgage in about 7 years. Obviously, one cannot guarantee that Bank Rate will stay at 0.5% for the next 7 years, but even if it rises to its historic average of 5%, this would just triple my interest costs.

The table at the bottom shows one possible (pessimistic) scenario, where the Bank Rate rises over a 4 year period to 5%, starting in 2014 and RPI is a constant 3%. As can be seen the debt will still be extinguished by 2020, after which I will have an extra (rising) income in excess of £2,000 for the next 15 years.

As far as I can see, for anyone whose roof faces the right direction & has a normal slope and who expects to stay in the same house for the next 10 years or so, PV is an excellent investment. Even for those who move frequently, the increase in value of the house due to the Solar PV should more than offset its original cost.

Year Outstanding Mortgage Bank Rate Interest FIT
2011/12 £13,500 0.50% £202.50 £1,670.00
2012/13 £12,033 0.50% £180.49 £1,720.10
2013/14 £10,493 0.50% £157.39 £1,771.70
2014/15 £8,879 1.50% £221.96 £1,824.85
2015/16 £7,276 2.50% £254.65 £1,879.60
2016/17 £5,651 3.50% £254.28 £1,935.99
2017/18 £3,969 5.00% £238.14 £1,994.07
2018/19 £2,213 5.00% £132.79 £2,053.89
2019/20 £292 5.00% £17.52 £2,115.51

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Jim Kenney

Bridge Coach. you must be pleased!
if it is of interest, Sheffield Uni do a lot of work on PV and have a database of around 2000 PV homeowners that show 98% of PV systems are generating as per predictions. I dont know if you can copy & paste this link:
http://www.shef.ac.uk/news/nr/microgen-sheffield-solar-farm-alastair-buckley-photovoltaic-1.223530

and if you want to join the database:
http://www.microgen-database.org.uk./home

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bridge_coach

Jim Kenney – thanks for the heads-up. My (daily) data contributions to the Sheffield project (URN 124) were started 20th July 2011.

I found it heartening that the generation graphs for so many people in the Midlands were almost identical – it demonstrates that no-one seems to have been ripped off.

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Rob Roy

Reply to Bridge Coach: Offsetting a mortgage adds an extra dimension to the calculations ..
I think the nearest “pure” comparison would be with an index-linked SIPP pension annuity lump sum investment, except that the tax relief is removed from the initial investment and transferred to the pay-outs. Seen against the ‘orrible level of annuities at present, even my modest presumed c. 11 – 12% annual return from a PV would seem to have some attractions.
The point is however that in this respect it is similar to the gamble you take with the annuity provider over life expectancy. Putting it bluntly, if you shell out on day 1 and snuff it a week, a month or anything less than 7 1/2 – 8 years later you lose out proportionately. At present tariff and cost levels you only really start to make a net gain in the longer term, 12 – 15 years. Seems to me that comparisons with nearly all other types of savings and investments, where there is access to and a payback of capital at some point, are totally misleading. (I would regard the effect on the value of the house as debateable, and over time declining. There are those who I hear would downgrade a PV house for aesthetic reasons!)
I will be very interested to examine the Sheffield Uni data and see what people are achieving from own generation. Has anyone come up with a “solar PV battery” which if feasible would have obvious attractions (whilst no doubt adding to the cost)?

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Jack.

Erm…pardon. What did you all say?

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brat673

Our local electrical firm are pushing solar sales hard and I’ve not heard a bad word. I have oil for water and central heating and this firm says they have an interrupter system to feed directly into the immersion heater during the summer when normally we use oil. Does anybody have any opinions or facts on this twist please?

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Bridge_Coach

First of all, the “interrupter” system is totally unnecessary as any electricity you produce from your PV system will first go towards powering whatever electrical appliances you are using (INCLUDING your immersion heater) – whatever is left is exported to the grid. I think that if you were to install a 4kwh system, you would still only get a comparatively small proportion of your gain from electricity used by you. The major gain will still be from the FIT.

If your major concern is to provide hot water for usage & central heating, then you might consider the newer “Solar” heating system that is actually an air-driven heat pump which can be installed on your roof and plumbed to provide both hot water and heat for your central heating system. It has the advantage that, at air temperatures above freezing, it works whether there is any sunlight or not. (i.e. Summer AND Winter)

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Jim Kenney

I’m not usually a fan of these ‘interrupters’ when used with gas heating but when used with oil I’d say it would be a worthwhile investment as the cost/kWh is so much higher with oil, not to mention the reduction in hassle if you have less ‘fill-ups’. I’d suggest going for an ‘interrupter’ that senses the level of export and then modulates the immersion heater accordingly rather than a simple on/off device.

However, I would also suggest that a conventional solar thermal system would be better still if you have the roof area & funds at your disposal. it is miles better for the planet too, if you have environmental concerns.

with regards to a lot of the newer solar panel with heat pumps, often called solar thermodynamic panels, I wouldn’t touch them with a very long barge pole. Though if you are a which? member I guess you’d be savvy enough to recognise the type of sharks trying to sell them and stay well clear. Smoke & mirrors.

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mike

advice please
Although I have the required ‘D’ eco rating on my property it is an exposed position of the south coast and as such is not suitable for cavity wall insulation- apart from the fact that the cavity may not be wide enough to make it viable. (1937 build)
It is just off south facing and completely clear of any obstruction
I read that solar panels should only be considered after all other insulation has been done -i.e. cavity wall.
I would appreciate any views for or against please.

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Jim Kenney

Mike, I assume you mean D ‘EPC’ rather than ‘eco’ rating? The answer will depend on your objective; solar panels might pay the highest return – approx. £7k capital to return £950 back per year but if you don’t have £7k it may be immaterial. loft insulation is very important but if you have EPC D then it looks like your place is already pretty well insulated? but maybe £250 on increasing loft insulation would be well spent? Insulation is always a good thing for reducing heating bills but there isn’t the same financial incentive as there is for generating low carbon energy.
My only advice is to be wary of the ‘green deal’ – it is the green deal that says the order in which you should do things based on questionable assumptions made on your energy bills. If your EPC is a recent one you may have inadvertently had a green deal assessment carried out at the same time. and don’t forget that the green deal is an arrangement to lend you money at fairly high interest rates. I hope this helps?

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mike

Jim
many thanks. sorry for the delay but I have been away.
I will be paying cash and have been quoted £6,000 for a 16 panel 4 K installation.
I live on the south coast south facing unshaded.
My concern is that with just the two of us of frugal age!! we will not use much electricity as we are gas central heated/cooking.
Can we sell all that we do not use?
we have the option to heat our water by emersion heater- would that help?
Appreciate any views please.
Mike

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Rob Roy

Your situation has many similarities with my own, except that I was able to get my installation for around £5 K, but have to weigh this against lower sunshine generation in the North. My gut feel, in retrospect, is to take the technical hype with a large pinch of salt and regard cash-funded PV somewhere near the bottom of the list of priorities for savings investment, considering how many years it will be before you break even and the fact that your (my) money once spent is “gone”. Unless I have misunderstood the mechanics the vast bulk (not all) of the return comes from what the state pays you under the FIT scheme which is linked to what you generate not what you consume. Much less comes from a reduction in your energy consumption – but this depends on you having your emersion on when the sun is shining! [more logical would be to invest in air conditioning ...]. There is a case for PV – but buyer beware!

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Bridge_Coach

Rob Roy:
Your comment about a “pay-back” period of 8-9 years is quite true; however, you, like many others have chosen to ignore the fact that using the “pay-back” scenario results in a COST-FREE rising income for the next 10-15 years.

PV, for me is (mainly) another income asset class in my investments – I put it at the same level as 25-year Income shares in a Split-Capital Investment Trust. As you know, with this type of investment, you would get a higher income for 25 years, but lose your capital.

If I amortise my PV investment over the 25 year period that the government guarantees my FIT, after allowing for a replacement Inverter about year 10 and inflation of 3%, the rate of return is 12.7% NET of tax – equivalent to a GROSS return of 15.9% for standard rate tax payers. I don’t know of any other almost risk-free investment that would provide a return anywhere near this.

Finally, if you cannot afford to lock up your capital in ANY specific investment (whether PV or a financial instrument of some kind) for the term of that investment, then it is not for you.

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Rob Roy

I think the idea of comparing PV with your split capital IT is a huge leap forward compared with the usual comparisons with instant access bank accounts and ISA’s. The nearest I got was to compare it with an annuity but with the tax relief removed.
Provided we compare like with like – “schemes” where you sink your initial investment in return for seeking better returns in the longer term (only) – then there is a case for PV, at least up to 23 / 25 (?) years. But in my view only as a fairly minor complementary part of one’s total savings portfolio once higher priority avenues have been fully exploited. Your quoted rate of return will vary hugely depending on the time period – if it was 15.9%, net, from year one then the combined British Military would be incapable of controlling the stampede!

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Jim Kenney

Mike.
£6k sounds like a bargain so I might suggest you check out the make of the PV panel & inverter to make sure the manufacturers are reputable – if you don’t know anyone in the industry to give advice it is quite easy to Google the makers name with the word ‘news’ to see if they are in financial problems. However, there are some real bargains available at the moment due to some unusual market conditions.
if you live on the south coast you should get a very good yield worth at least £1,000 year.
it is also clear that your PV supplier hasn’t explained the financial benefit very well else they should have explained clearer about selling back to the grid. The financial benefit is comprised of 3 elements:
1. You get the feed-in tariff for generating the electricity whether you use it or not. this is effectively a reward for producing low carbon energy. This is the largest part of the benefit.
2. You will also receive a smaller payment based on the assumption that 50% of the generated electricity will be exported back to the grid. this is assumed because it is too difficult to measure.
3. The 3rd (and last) benefit is that if you can use the energy then you will get a saving on your energy bill. This is where buying a gadget such as an iboost will make savings by diverting energy that would have been exported to the immersion heater. but don’t be mistaken that you can simply use the immersion without an iboost (or similar) as it will cost you money.
I hope this helps.

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Rob Roy

Before deciding to go solar I concluded that the only sensible financial comparison was with a pension (forget instant and limited access investment savings accounts) though even that has its limits (no up front tax relief); The following was published in last weekend’s FT and summarises some of the points:

“Solar panels can yield “8 per cent or more”, said the Dept for Energy and Climate Change.
The comparison has been largely dismissed by the pension providers, who noted that panels generate variable returns, do not come with tax relief or employer contributions, only enjoy subsidised “feed in” tariffs for 20 years, and are not portable.
Although annuity rates are currently poor, they do guarantee an income for life. One adviser also pointed out that you never have to clean bird poo off your pension.”

I have no allegiance to the pensions industry, nor indeed to the DECC, but speak as someone who has gone solar but has yet to be convinced that it was financially the right thing to do despite the hype.

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Jim Kenney

I think the point is that it is generally wise to spread your eggs over a number of baskets and it seems clear that PV pays out well for 20 years (and saves on energy bills) whereas most pensions/savings appear to perform less well in the short (20 year) term but will (hopefully) continue to perform for a longer duration.
On a separate note, has anyone got experience of the iboost gadgets that increase the savings by diverting surplus PV energy to the immersion heater?

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Bridge_Coach

Jim Kenney is quite right in saying that you should diversify your investments.
I invested in PV when it was expensive (£14,000 for 4pKv) and the TAX FREE return was guaranteed for 25 years. I regard it as just another asset class – it is a wasting asset, but it provided an income (FIT) of over £1,500 in the first year, just under £1,600 in the second year. On top of this, we have saved about 25% of our daytime electricity charges – about £160 p.a.

£14,000 in an ISA would have yielded about 3% over this period – £420 a year. Using that yield as a benchmark, not only have I received the same income on the capital as if it had been in a cash ISA, my original investment cost has been reduced by about £3,000 over the 2.5 years since it was installed (it now “owes” me £11,000).
On this basis, assuming that RPI stays at the 3% level, the installation cost will have been extinguished within another 7 years and my COST-FREE income of £2,000+ p.a. will continue for another 15 years.

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Rob Roy

Sorry to keep blethering on about this: A [cash] ISA is NOT an appropriate benchmark!!

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Jim Kenney

Agreed. My ISA is depressingly worth less in real terms than 5 years ago whereas my PV brings me £500/year. Chalk and cheese

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Jim Kenney

Rob Roy/Bridge Coach. what are your thoughts on the principle of taking your earnings from the PV and reinvesting it into an ISA. That just has to make a lot of sense?

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Rob Roy

It’s the filling the bath with the plug unplugged scenario. I don’t “earn” enough from PV to make an ISA make sense – in isolation – and being philosophical about it it will still be many years (8 – 9?) before I have “earned” enough to amortize the PV investment, even longer to catch up with putting the same amount into an ISA at the outset. I use the piggy bank to budget for when I have to replace the inverter!

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Bridge_Coach

Rob Roy
I’m puzzled by your comment “It’s the filling the bath with the plug unplugged scenario”. Can you elucidate please ?

I use the FIT payments to supplement my income (I’m retired), I add them to an instant-access cash ISA when I receive them and withdraw from it if & when I need to do so. (I haven’t touched the last 5 payments so far, so I still have a £2,000 buffer available).

As you alluded to previously, the return from an annuity would be less than half of what I get from PV. It’s true that if I live more than another 23 years, my income will drop, but if I felt that it would be a problem then I could leave an amount equivalent to the excess of PV income over annuity income in my ISA every year for 12 years and still be better off than if i’d put the money into an annuity.

Jim Kenney:
In answer to your query about investing the FIT payments in an ISA – if you don’t need to spend the FIT, then a cash ISA will give you a safe tax-free home for your money. Apart from inflation, what have you got to lose ?

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Rob Roy

If you have found a way to both add to and withdraw from a cash ISA (presumably without losing the tax benefits) then that put’s you in a financial league way beyond mine!

Re your second para I think it would be helpful to differentiate between % and absolute return. If I had to exist on the absolute income that my 16 panels produce, even though percentually way ahead of an annuity, I’d have to sell up and move out from here!

The danger throughout comes from comparing the returns from an accessible cash ISA with those from PV. In the latter case the returns over the initial 8 – 9 years or so (in my case) will represent no more than repayment of my capital. Only after this does a PV investment begin to catch up with an ISA – which in time it should outstrip, if I stay here long enough to benefit.

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Bridge_Coach

I only use the cash ISA for storing my FIT payments – these total about £1,600 p.a., so there isn’t any problem with Tax benefits. Excess income (from all sources) is invested in my Stocks & Share ISA.

Re my second para, that is just considering the equivalent pension available for £14,000 (cost of my PV system) with the FIT payments!

Assuming a “pay-back” period of 9 years, as far as “no more than repayment of my capital” is concerned, don’t forget to take into account that a REAL comparison should include the amount of interest that the “repaid capital” would earn in an ISA. In other words, after 3 years, the annual amount of interest on “repaid capital” in the ISA will be 33% of what it would have been if you hadn’t invested in PV and after 6 years it would be 66%. Average interest over the whole 9 years would be very close to 50% of what you would have earned with no PV. AND, after 9.5 years, not only would your cash ISA contain more money than it would otherwise have done, but you will still be getting an income (FAR in excess of your ISA interest) from what would then be a zero cost asset.

As far as an “accessible cash ISA” point, this should only be of concern if you regard the original capital as short-term savings. However, if it’s your “rainy day” pot of money, you should probably not invest it in PV.

P.S. I’m still puzzled by your previous comment “It’s the filling the bath with the plug unplugged scenario”. What did you mean by this ?

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Rob Roy

The mathematics risk getting rather complex and the assumptions inevitably more risky. I think however that I am agreeing with your main point – that if you allow for interest to accumulate in your ISA then this puts back the point at which you will have earned an equivalent – net – from your PV quite some way beyond “my” 8 – 9 years.
Great if your crystal ball says that you are going to stay put for (say) 12 – 25 years, you are laughing, but not if you up sticks before then. To me PV is on a par with long term investment (in a “wasting” asset) with the risks that that involves in return for which the returns should be correspondingly greater. Not something that is generally emphasized in the hype.

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Bridge_Coach

I don’t agree with “quite some way beyond “my” 8 – 9 years”; for us, it’s actually 8 years.

To make the maths easier, let’s just look at 2 examples of a cash ISA:

1) A £14,000 deposit at the start of year 1, with a 3.2% interest rate compounded over 8 years (same rate as 10-year Money Market rate). Value after 8 years = £18,012

2) An empty ISA into which all FIT payments (starting at £1,600 p.a and increasing annually by 2.75% RPI) are made for 8 years, same interest rate compounded would result in a value of £18,206 – £194 more than the “pure” ISA.

I do accept your point that if you move house frequently then PV is probably not the best investment for you. However, as we don’t, with our break-even point at just under 8 years, we expect several years free money beyond that.

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Rob Roy

No real contradictions as I see it. You can prove anything with statistics (depending on the assumptions). I compared how long it would take a PV investment to “net” me the same as putting the same investment into a cash ISA, and the number crunching came to something in excess of 12 years depending on the inputs. Reality will inevitably be different and your situation different from mine. The basic point remains the same: PV is not risk-free as is widely promoted, it is highly dependent on timescales for its profitability

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Jim Kenney

Bridge-Coach, if you are only saving 25% of daytime electricity, have you looked into ways of improving on this? I guess this depends on lifestyle (we put appliances such as dishwasher, washing machine, etc) on when we leave for work so they use daytime energy whereas previously we put them on at night. I imagine you have already looked into this?
The immersion heater controllers seem to work well but the good ones seem to be too new to get detailed feedback. Any thoughts?

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Bridge_Coach

We are still on economy-7, so to make life easy, we run dish-washer & washing machine between 2:00am and 4:00 am – essential during the Winter and we’re too lazy to change that regime during the Summer. (Apart from which, during the first year, we found that by running dish-washer followed by washing machine during the day only brought our overall usage up to 35%)

As we have extremely reliable gas (condensing boiler) heating, we have not used the immersion heater for over 20 years, so I cannot comment on the controllers now available for using PV energy.

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phil

I live in the north(PRESTON) my house is west to east I have be quote £6000 for 12 panels + 1free 4kw. with a £900 pa is this right

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Rob Roy

If you have been quoted £6000 for a 4 kW installation (?) then this tallies more or less with my experience in June 2013. On the other hand £9 K FIT income strikes me as distinctly rosy – 40% above my first year return. I am north and east from you (Newcastle) and my panels face due south with minimal shade. A pinch of salt would not come amiss.
Bear in mind that whatever return you use for your calculations, not to compare this with ISA’s and the like. In the early years the system is using your / my money to pay us back, and it is only after about 8 or more years that any return is “net”. Solar is in this sense a high risk investment – we are taking a gamble on remaining in our house for at least this kind of a timescale in order to begin to reap the benefits. The nominal returns should therefore be compared with those (much higher) from the kind of investment where you lose out if you try to cash in early. I think of my investment as a kind of mortgage in reverse.

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phil

Thanks for you time on my post .I will have to do some more research thanks again Phil

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