Is Solar PV still worth considering in 2012?

Here's the table of the original tariffs and the new ones.

The current DECC consultation paper on solar PV proposes a further cut to these new tariffs on 1st July 2012.

With these tariffs is it still a sensible investment?

As all the installers will tell you, the prices of the solar PV panels have dropped significantly over the last 12 months, perhaps by as much as 30%.  The evidence is that panel prices should continue to fall.  So your up-front cost will be significantly lower now than 12 months ago for the same  system.  There is also a lot more competition in the market.   However, FiT levels have been cut by around 50% for household scale systems (under 4kWp).  So, there is no hiding the fact that a solar PV project registered in April 2012 is likely to be significantly less attractive.

Based on the proposed new FiT levels above, we've done a BEFORE and AFTER comparison table below for 2 common scales of PV project below - both are based on utilising 25% of the energy generated and a location in 'Middle England' (rather than often quoted South-West to make the figures look better):

These figures are derived from the Solar Guide Calulator (the best and most flexible online calculator we've found) using our own conservative settings for modelling likely returns.  As one Solar PV installer has pointed out below, it may be possible to get quotes that are significantly lower than the costs quoted above, thereby improving your returns.  For example, the Solar Guide calculator points out that (at the time of writing - Feb 2012) quotes for a 2.6kWp domestic-scale system can vary between £5,500 and £11,000.  So it is very important to shop round for quotes, bearing in mind that you do tend to get what you pay for and the quality of solar PV panels does vary!

The table clearly shows that profit levels for both scales are likely to fall by 50-60% and the payback period increases significantly.  The annual return on investment also drops sharply.  If you are looking for a significant positive outcome by year 15 (a perfectly reasonable investment outcome) then the new FiT tariff does not provide it.  Indeed there is a substantial drop in potential profit at Year 15 compared with the original tariffs.

We have deliberately provided figures for 15, 20 and 25 years to show how returns might change should you decide move house (or property) before the 25 year term.  We have not factored in any uplift or 'solar PV premium' on property price as this is remains an unknown right now.  See our "Guide to selling your house with Solar PV".

We're well aware that DECC would say the returns we quote here using the original tariff levels are significantly higher than the 5% figure they used originally as the basis to create their tariffs  - the higher returns now reflect the significant falls in solar PV module prices (and therefore up-front installation costs) over the last 12 months.  It is certainly true the returns are significantly better than those achievable with the same tariff levels when the FiT was launched and there is a valid case for some reduction in tariffs to reflect this fall in module prices.

So, after 3rd March 2012, is it worth doing at all?

It is going to depend on your own circumstances.  Overall the picture is far from rosy if you are looking to base your decisions purely on financial returns rather than building in broader environmental benefits.  To compare it with other places you could put your money, there are currently financial institutions offering you 4%+ AER if you are prepared to lock your cash away for 2 or more years (Nb. you should be comparing based on AER rates not annual returns). This has little risk attached - you are not spending your money on anything, you're just investing it and generating interest.

There are still situations where PV is more attractive.  For example, the benefits of solar PV will be greatest for homeowners that:-

1. Live in the south of England (particularly the South-West) where they get more continuous hours of sunshine; and
2. Are very likely to remain in their family home for 25 years or plan to pass on their house (and its FiT payments) on within the family; and
3. Have at least 20-30 square metres of unshaded roof space to get close to the 4kW 'sweet-spot';
4. Are in a position to use at least 25% of their home-made energy - by increasing consumption during daylight hours and decreasing it during darkness; and
5. Are motivated by the idea of greening their energy consumption.

For example, with the proposed new tariffs, an optimal sized system at 3.9kWp system in the optimal location of Cornwall offers:

• Total 25 year profit: £21,400  (7.3% annual return, 4.1% AER)
• Payback period: 11 years

Solar PV solutions should also continue to be attractive at a scale of 50kW to farms and businesses that have high energy bills and daytime demand (eg. dairy farms) where the solar PV array can be connected into the meter where energy  demand is high.  This enables maximum offsetting of energy use and should cut electricity bills significantly.

For example, if as a farmer you are able to use 70% of your 'home-made energy' from a 50kWp PV system on your barn roof based on the proposed new tariffs this offers:

• Total 25 year profit: £250,000  (9.6% annual return, 4.9% AER)
• Payback period: 9 years

We would still contend that, given the substantial risks, the Government should be aiming to generate AER rates of closer to 6% to make these investments attractive.  Even businesses with long-term outlooks are likely to be looking for payback periods of under 10 years - for many others it will be nearer 5 or less.  Obviously DECC disagree with this.  They appear to overlook the "substantial risks" that those investing in PV are taking (see our earlier article).

Government policy is now to cut the tariffs regularly as prices of the kit fall.  They claim this is to retain a constant return (of close to 5%) on investment.  So even if the solar PV industry makes significant cuts in the price of PV modules, the  Government is likely to act quickly to cut the tariffs further.  At GEN we have consistently argued that customers need better returns to motivate them to take action and offset the risks involved in such long-term investments.

Should you install your PV system in early April 2012?

Right now solar PV panel prices are coming down rapidly - it might be better to purchase your system in May for it to be installed and fully registered with OfGem before 1st July 2012 (likely to be the next tariff cut deadline).

DECC are now proposing to keep cutting the tariff rates for solar PV every 6 months - or even sooner if demand takes off. 

This Government appears to be relatively unenthusiastic about solar PV.  The latest DECC consultation is considering the introduction of additional disincentives like cutting the tariff to 20 years - see our blog post for more. Solar PV is not designated as one of the Government's four high priority renewable energy technologies.

Although the flagship 'Green Deal' programme (to be introduced from October 2012) is aimed primarily at  energy efficiency measures rather than microgeneration, it is feasible this could change.   Instead of homeowners receiving FiT payments as they do now, the 'Green Deal' could offer access to a low interest loan to purchase their 'kit' up-front.  This could be a PV system which is  then paid back through savings on their energy bills.  If the owner moves house, the loan stays with the property (ie. the new owner takes up the loan) which gets round the whole problem of house moving.  This could make sense and would incentivise households to use as much 'home-made energy' as they can.  

Adoption of Solar PV by large numbers of households is a sensible policy goal where the objective is to offset a significant proportion of energy usage and encourage greener behaviour.  More questionable, at least in the UK, is whether solar PV is a suitable method to generate significant amounts of power, especially in such a highly devolved style!  Our preferred solution is for DECC to make clear their support for solar PV as part of their Green Deal programme in a way that promotes less financially focused incentives in favour of greater off-setting and energy bill reduction through 'in-house use'.

One thing is for sure - things are continuing to move quickly!  So watch this space to see whether any of the suggested changes raised in the current consultation make it into the final FiT regulations.