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Will your solar panels bring sunshine to your savings?

Solar panels and sunflowers

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.

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.

Comments
Member

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.

Member

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

Member

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.

Member
Bridge_Coach says:
16 October 2012

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 !!

Member
Jim Kenney says:
16 October 2012

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.

Member

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”)

Member
Scubaman says:
24 September 2012

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.

Member
Jim Kenney says:
26 September 2012

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 sa