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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 says’ – how about, what did the which researchers find? or is research too much trouble for a consumer organisation?

Member
Nick says:
6 October 2012

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.

Member
Jim Kenney says:
6 October 2012

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.

Member
Nick says:
6 October 2012

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

Member
Jim Kenney says:
6 October 2012

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

Member
Nick says:
6 October 2012

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

Member
Jim Kenney says:
6 October 2012

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?

Member

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.

Member
Jim Kenney says:
17 October 2012

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…

Member

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?

Member
Jim Kenney says:
3 January 2013

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?

Member

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.

Member
Jim Kenney says:
4 January 2013

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

Member
Rob Roy says:
28 February 2013

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!

Member
Jim Kenney says:
28 February 2013

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.

Member
Rob Roy says:
28 February 2013

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.

Member
Jim Kenney says:
28 February 2013

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?

Member
Rob Roy says:
28 February 2013

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.

Member
Jim Kenney says:
28 February 2013

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.

Member
Luke Dyson says:
1 March 2013

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?

Member
Rob Roy says:
1 March 2013

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.

Member
Jim Kenney says:
1 March 2013

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.

Member
Rob Roy says:
1 March 2013

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 …

Member
Jim Kenney says:
2 March 2013

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.