Will your solar panels bring sunshine to your savings?

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.