Domestic Solar Panel Returns Surprisingly Strong at 4.9% Despite Tariff Reductions

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  Posted by: electime      15th December 2017

Despite a reduction in tariff rates from 41.4 p/kWh in 2010 to 4.00 p/kWh in October 2017 it is absolutely possible to achieve a higher return today than if you went in at the launch of the scheme, are the findings from a report from Green Business Watch.

The online resource, which puts prospective solar purchasers in contact with installers, said typical returns for a well sited 4kW solar panel installation in 2017 came in at a surprising 4.90%. While down considerably from the peak, returns are still pretty impressive when you consider they are post tax and index linked.

At the launch of the feed-in tariff in 2010, the target rate of return for solar PV was 4.5%. A 2.6kW installation at that time would have cost £13,000 and the estimated rate of return was 4.11%.

As the solar market has developed and costs have come down, the typical size of installations has risen. A typical 4kW installation in 2017 comes in with a median cost of £6,668 and at time of publication delivers an estimated rate of return at 4.90%.

Installation costs at record low but seem to be levelling off
The median cost of a 4kW installation has reduced from £20,000 in 2010 to £6,668 in 2017. This represents a 67% drop in median installation cost since 2010.

Over the course of the feed-in tariff, reductions in the installed cost of solar panels have been a main driver in achieving positive rates of return for householders. Despite many tariff reductions over the years, the estimated returns today are actually above where they were at the launch of the scheme, according to Green Business Watch.

As can be seen from the graph above, however, these cost reductions have slowed considerably over time. From 2010 to 2012, installation costs dropped from £20,000 to £10,252, a reduction of 49%. By 2014 they had fallen a further £2,732 to £7,520. From 2014 to 2016 costs fell again but by only £852 and in the last year, costs have stayed pretty much static.

Savings from solar panels outstrip income from FIT
Solar panel returns are a balance of income from the feed-in tariff and savings on electricity bills. As feed-in tariff levels have reduced and electricity bills have risen over the years, this balance has shifted. Since the tariff cuts in February 2016, savings are now a larger part of the return from solar PV than tariff income.

Payback from domestic solar panels is now primarily about savings ahead of subsidy and this would seem like a good sign for the maturity of the technology.

Looking forward, solar panel returns are going to be highly dependent on electricity costs. Retail electricity costs seem to have resumed their long term rising trend. While this is not good news for consumers, it has a positive impact on the economics of solar panels.

For the householder considering solar panels, their actual usage profile will have a huge impact on their expected returns. It is very important to get a clear picture of your household’s electricity use and how it will affect your returns. This is a standard part of the assessment installers will undertake for you before you decide to buy.

The increasing importance of electricity savings also means that maximising savings by using as much free solar electricity as you can is likely to have a big impact on your return on investment. This has implications for battery storage and other add-on technologies that aim to maximise the productive use of your free solar electricity on-site, thereby increasing your returns.

Larger installs now offer householders the potential for greater returns
Until February 2016, the smallest band of the feed-in tariff topped out at 4kW and provided the highest tariff level. This effectively set a maximum size for domestic installations. Since 2016 however, tariff structures have changed. The two lowest bands were combined and the tariff rate is now the same from 0 to 10kW. This opens the prospect of installing systems larger than 4kW. Doing so, where space and usage levels make sense, offers the potential of even higher savings and rates of return.