Solar PV – Financial Benefits

Of course, we all want to ‘do our bit’ to reduce our impact on the environment, but we also want it to make sense financially. Installing PV is not only an astute move financially, it is also an extremely attractive way of saving money in a tax efficient way.

The Basics

The Feed-In Tariff guarantees fantastic returns from a PV system on your roof.

• Revenue is tax-free
• Main generation payment to you is guaranteed for 25 years and index-linked
• A system costing £10,000 fully installed will leave an average UK customer over £900 better off per year
• Taking into account inflation (and index-linking) it will payback in under 10 years and give a Return on Investment of 6-12% per year

Better than any normal investment!

How does PV make you money?

Solar PV changes the relationship you have with you electricity supplier.

Instead of paying the supplier for all the electricity you use to power your home you receive an income from them for all the electricity that you generate and what you export. If the Solar PV array you have installed provides a big enough proportion of your overall electricity requirements, then you will in fact receive a cheque rather than a bill from your supplier.

The financial benefits have improved significantly since 1^st April 2010 in the UK with new ‘feed-in tariff’ (FIT) incentives being available for private households and businesses.

Feed-In Tariffs begin to level the playing-field

As a responsible business we feel we must acknowledge the fact that the cost to produce a unit of electricity using PV systems is still greater than, say, by burning natural gas in a power station. However, the game has changed significantly in recent months because of the provision of Feed-In Tariffs  (also know as “Clean Energy Cashbacks”) to reward individual householders and companies for the renewable energy they generate themselves.

Now, Feed-In Tariffs (FITs) sound an easy concept to grasp, but we have found them fiendishly difficult to explain clearly to our own friends and family.

FITs for beginners

Under the FIT scheme in the UK, you get paid in 2 stages:

Stage 1: Your PV installation produces units (kWhs) of electricity. You would currently receive 21.1p per unit or kWh of electricity (from 3rd March 2012) that you produce, if your system is less than 4 kWp in size.

Stage 2:

If you are producing more electricity than you are using in your home at that moment, then your electricity will be exported (or simply ‘sold’) to your electricity supplier at a fixed price of 3.1p per unit.

So overall, you would have received 21.1p + 3.1p = 24.2p in total.

But, if you are using electricity in your house (running washing machine or tumble dryer, watching TV, working on the computer, or just the fridge and freezer running as usual), then your home-produced PV electricity will be used first – so you stop buying from the electricity company. So you don’t get paid any more, but you stop buying other electricity at, say, 12p per unit.

So, effectively, each unit in this scenario is worth 21.1p + 12p = 33.1p

In summary, every unit of electricity you produce will be worth 24.2p (if you export/sell it) or 33.1p if you use it yourself.

Remember though, you don’t exactly choose which of these occurs – if you are using electricity, your PV electricity will be used at home first. But if you are away, or being frugal with electricity usage at that moment, then it is exported. As you will see below, your overall average ‘export %’ becomes significant in calculating the expected return you might make.

What on earth are kWh’s and kWp’s and why are they important?

kWh is the measurement of power produced or used and stands for ‘KiloWatt Hours’

kWp describes the amount of power any form of generating equipment (eg solar panels on your roof or indeed the Drax Power Station) will produce when operating at it’s peak capacity.

If you look at your latest electricity bill you will see that you are being charged according to the number of kWh’s you have used in the last period (usually 3 months). You’re probably being charged somewhere between 10p & 14p per kWh. The average household in the UK uses about 3,500kWh of electricity per year, meaning an average annual bill currently of £420 (3,500kWh x £0.12p).

So, what difference would my solar PV installation make?

Well, let’s assume that you have the roof space and budget for a 2kWp PV solar system (please see our survey). This means that in ideal conditions (on your roof and meteorologically) your system would produce 2 kW of power at any given moment.

In Central UK, a 2kWp system would produce approximately 1,600 kWh per year, so just over half of the average household’s needs per year (3,500 kWh – are you still with us?).

What would you get for those 1,600kWh you produce yourself?

Well, firstly we must make an assumption about how much of the electricity you generate you will use yourself and how much you will export as this will significantly affect the outcome. For the sake of simplicity, and a good average situation, we’ll say that you will use 50% yourself and 50% will be exported.

On that basis:

BUT THAT’S NOT THE END OF THE STORY!

To really understand the full impact on your finances, we also need to factor in that for the 800kWh used by the household appliances (in this example) you would normally have had to pay your electricity provider £96.00p (800 kWh x £0.12p). So effectively, you have earned 12p for each of these units as well.

To summarize:

Before:

You use 3,500kWh over the year, all taken from the grid, for which you would have paid £420.00

After:

You still use 3,500kWh, but instead of paying £420.00 you will be paid £362.40p and only pay £228.00 for the extra electricity you still buy.  Nett, you will receive £134.40 – an advantage to you of £554.40 pa.

Some further information about FITs

The arrival of Feed-in Tariffs in April 2010 greatly improved the incentives available for PV – but how secure is this income?

Well, the FITs are guaranteed by the government to last 25 years from the date you install your renewable energy system and not only that but the payments will be index-linked (to RPI) and therefore protected from rises in inflation.

But the good news does not end there: the money your PV system generates is also tax-free. In many ways this makes investing in a PV system more attractive than investing in a pension. However, in order to benefit from the highest possible FIT payments, it is important to get your installation done sooner rather than later. Why?

Because, until 1st April 2012, the current rate of 21p/kWh applies without the need to prove the existing energy efficiency of the property. After April 1st, an EPC of level D or better will need to be submitted with the FIT application. If not the householder receives 9p/kWh instead (see below*).

Latest FIT rates (as from March 3rd 2012).

What about the upfront installation cost?

Solar PV systems are generally quoted in prices according to kWp output as this determines the number and type of components involved as well as the amount of work required to install the system.

Every installation will vary according to the specificities of the site, the number of panels, their layout and the size of the inverter required. As a rough guide though, for our 2 kWp system used in the example above, the fully installed price would be in the region of £6,000 to £8,000  inclusive of VAT.

So, what about ‘Payback’?

As you may have seen elsewhere on this site, we don’t think the concept of ‘payback’ is necessarily most useful for micro-generation systems. Return on Investment may be more applicable.

But for a 2 kWp system, the notional payback would be about 11 years. On the way though you would be receiving between 6% and 10% ROI, tax free and index linked.

Selling your house

We also believe that you don’t have to be staying put in your house for 25 years to see the full benefit of a Solar PV installation. Simply put, if you had the choice of living in a house where you will receive a cheque from your electricity company rather than having to pay them, you would probably jump at the chance.

In the same way that high speed broadband is starting to impact house prices, renewable energy installations will too. Therefore, if and when you come to sell your house, we think you will be able to charge a premium over other similar properties on the market – and It Won’t Cost The Earth install documentation will ensure there is no doubt about the quality of your install.

*Energy Performance Certificates

From April 1st 2012 an EPC will be required for a home to become eligible for FITs. In order to receive the full FIT rate (currently 21p/kWh for a system <4kWp) the householder will need to submit a copy of their EPC with the FIT application. The householder will only receive the full rate if the energy efficiency part of the EPC is rated level D or higher. If it is E or lower then at current rates then current the householder will receive 9p/kWh.

It is important therefore that you have an EPC carried out for your property. Currently online EPC providers are charging from £36 and generally committing to a 48 -72 hour turnaround. As part of the EPC production process you will also receive advice on house your property can be improved and how any improvements would affect your EPC ‘rating’. Installing Solar PV itself would typically contribute to a rise in the EPC rating. It may be that this rise takes the property from level E to level D, in which case the full FIT rate (currently 21p/kWh) would apply.