Briefing

In England politicians, newspapers and dodgy and/or clueless solar panel installing companies are stating that domestic solar PV gives very high rates of return; the reality is that the present rate (with FIT tariff at 43.3p/kWh) is quite low and comparable to a cash ISA.

If politicians disseminate correct equivalent compound interest figures in percent per year over the whole term and highlight the risks then demand will fall, the present FIT tariff can be kept, the hated 12th December deadline can be scrapped and the solar industry might survive.

The FIT Tariffs

For a <4kWp domestic system not new build the most common FIT (Feed In Tariff) was in late 2011 worth 43.3p/kWh. A Government 'consultation' proposal led by Greg Barker MP due to end on 23Dec2011 wishes to retrospectively change the FIT Tariff for those with eligibility dates after 11Dec2011 to 21p/kWh.

See DECC FITs Review http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/feedin_tariff/fits_review/fits_review.aspx

Quotes

http://www.telegraph.co.uk/earth/earthnews/7129685/Solar-panels-and-other-renewables-will-be-installed-on-one-in-ten-homes.html
02 Feb 2010 Ed Miliband, the Energy and Climate Change Secretary, said "...the payments would be tax-free and a return of up to 9 per cent annually was better than any bank could provide."

http://www.spiritsolar.co.uk/solar-photovoltaic-feed-in-tariffs.php "A return of 9% - better than any bank can provide" Ed Miliband, speaking in his former role as Secretary of State for Energy and Climate Change. [Higher Tariff]

31Oct2011 Briefing note from Greg Barker, Minister of State for Climate Change to Fellow MPs. "Dear Colleague ... it [Higher Tariff] has been delivering bumper returns."

Government officials say the public "are able to benefit from rates of return well in excess of the 5% the current tariffs were intended to deliver" (Comprehensive Review Phase 1 - Consultation on Feed in Tariffs for solar PV 2/11/2011 doc)

http://www.energysavingtrust.org.uk/Generate-your-own-energy/Financial-incentives/UK-Government-proposed-changes-to-solar-PV-Feed-in-Tariffs#intro 09Dec2011
"A reduced rate of 21p/kWh [Lower Tariff] for solar PV installations of less than 4kW ....This tariff rate is designed to provide householders with a rate of return of around 4.5%."

17Dec2011 http://freeelectricity4u.co.uk "As one of the UK's biggest suppliers of PV solar panels, we can supply & install a 4kw system for only £7999 (inc. Vat)...
The typical payback is 7.5 years with 12% return on investment."

http://www.spiritsolar.co.uk "You can still get an 11% return." 13Nov2011
"Myth of Solar PV Cuts - Get 11% Returns at New 21p Rate." 20Nov2011 in an ad carried by Google [Lower tariff]
"Myth of Solar PV Cuts: - Get 10% Returns at New 21p Rate." 31Nov2011

http://www.harnessun.co.uk 12% advertised full page in The Times newspaper 12Nov2011 [Lower tariff]

http://www.awlelectricalservices.co.uk/solar-panel-installation.html 02Dec2011 "A typical return annual return on investment is 10%..." [Lower Tariff]

http://www.solarpowerpv.co.uk/faq/
"These payments are ... estimated to show healthy returns of 10% – 11% over the 25 year period." 29Dec2011 [Lower Tariff]

Simon Lambert 19Oct2011 Daily Mail "Some early adopters are currently getting a return equivalent to 10% per year on their investment in the panels"

http://uk.ibtimes.com Investing in solar panels offers better rate of return than a savings account or ISA. 14Nov2011 [Lower tariff]

http://www.guardian.co.uk/commentisfree/2010/mar/01/solar-panel-feed-in-tariff "Buying a solar panel is now the best investment a householder can make. The tariffs will deliver a return of between 5% and 8% a year, which is both index linked (making a nominal return of between 7% and 10%) and tax-free." George Monbiot 01Mar2010

The Sunday Times 06Nov2011 p3. Are solar panels still worth the investment?
The 'government' said "consumers' returns are far higher than had been anticipated - 10% instead of 5%-8%."

Terminology

AECI = Annual Equivalent Compound Interest
FIT = Feed In Tariff
C = Total Cost
G = Total Gain
EST = Energy Savings Trust
PB = Payback

Compound Interest

The formula for calculating compound interest is the same formula that applies when people deposit money into a savings account and is often used when owing money.

For a Total Cost (C) and a Total Gain (G)
Annual Equivalent Compound Interest (AECI) = (((G/C)^N) - 1) * 100 where N=1/Period
For Period=25yrs N = 0.04
AECI = (((G/C)^0.04) -1) * 100) [%/year]

Simple Payback (PB)

For period of 25 years
PB = 25 * C/G [years]

Case Studies to compare both FIT Tariffs


Case 1
University of Worcester, WR2 6AJ Tilt=30degs, Precisely South facing, 3kWp
Total Cost (C)=£11000 Note 1
EST Energy generated by panels each year=2546 kWh
Case 2
St Agnes pub TR22 0PL, Tilt=30degs, Precisely South facing, 4kWp
Total Cost (C)=£8000 Note 2
EST Energy generated by panels each year=3768 kWh

Case 1 is meant as an average middle of the UK population install but it is easy to substitute your own figures.
Case 2 is meant as a best possible case. No claim is being made that it can be achieved.
Note 1 In Oct 2011 several quotes for a 2.88kWp install gave a mean cost to install of £10,611 so this cost should not be unreasonable.
Note 2 The cost here is intentionally low to give the best return possible.

Case & Feed In Tariff
EST Total Gain (G) [£]
EST PB (25C/G) [yrs]
AECI [%/yr]
1H FIT=43.3p/kWh
27901
10 (9.86)
3.793
1L FIT=21.0p/kWh
14941
18 (18.41)
1.232
2H FIT=43.3p/kWh
40696
5 (4.91)
6.723
2L FIT=21.0p/kWh
21519
9 (9.29)
4.037

Step 3 of the EST calculator shows kWh generated per year and the Total Gain. Form this screen the assumptions pdf is available and a report containing the payback as an integer of years.

Early legacy case study

This has now been relegated to just show examples of the calculations.
Let's compare putting £11,000 stake into solar PV or into an account giving compound interest:

Case 1: Higher Tariff 43.3p/kWh

Solar PV pre 12Dec2011 scheme. £1,000/year gain (FIT+Savings+Export) assumed.
After 11 years get stake back (break even point).
Next 14 years of 25 year term gives £14,000 profit.
Sum at end £25,000

Compound interest at 3.34 %/year for 25 years gives sum at end of £25,009
(Check: 1.0334^25 x 11000 = 25,009.4)

Case 2: Lower Tariff 21p/kWh

Solar PV post 11Dec2011 scheme. £500/year gain assumed.
After 22 years get stake back (break even point). Next 3 years of 25 year term gives £1,500 profit. Sum at end £12,500

Compound interest at 0.513 %/year for 25 years gives sum at end of £12,501
(Check: 1.00513^25 x 11000 = 12,501.1)

Using an online Compound Interest Calculator e.g.
http://math.about.com/library/blcompoundinterest.htm
Put in Principal: 11000 Rate: 0.513 Years: 25
Answer is Amount: 12501.11 and Interest: 1501.11 i.e. Profit

Case conclusions

Any claims showing solar PV return rates higher than case 2H or 2L should be viewed with caution, they are likely to mislead the public and cause a rush on solar PV installs, panic applying of the brakes, contract losses and job losses. Note case 1H with the Higher Tariff is not that good an investment, there are risks. See separate page.

Solutions

Make it mandatory that anyone being quoted for solar PV is provided with the equivalent compound interest figures in percent per year and a list of risks.

The sequence to adopt, that should be part of any quote and built into solar calculators especially official ones, is:

a) Use http://www.energysavingtrust.org.uk/Generate-your-own-energy/Solar-PV-electricity-panels/Solar-Energy-Calculator The EST Solar-Calculator.
b) When results show note Total Income or Total Gain over 25 yrs from the PDF report. Also add up Total Cost i.e. the amounts Paid Out VAT, Kit, Labour, postage etc.
c) Calculate Annual Equivalent Compound Interest = (((Total Gain/Total Cost)^N) - 1) * 100 where N=1/Period i.e. for Period=25yrs N = 0.04
This can then be compared to a cash ISA for example.

Example: Taking Amount Paid Out as £12,000 and Total Income as £25,000
(25/12) to power 0.04 = 1.02979
So this solar investment is equivalent of 2.98% per annum in a bank account compounded over 25 yrs.

Check by using the Compound Interest Calculator eg http://math.about.com/library/blcompoundinterest.htm:
Principal: 12000 Rate: 2.979% Yrs: 25 Answer is 24997.58 (match up with Total Income over 25 yrs).

In addition say increased returns can be gained by banking income from the solar system in an interest bearing account. See Solar Bank System. Note these gains cannot be quantified if future banking rates of interest are unknowns.


Click on diagram to enlarge.
Solar versus Bank for two Cases

Image Hosted by ImageShack.us

IMPORTANT:

WITH SOLAR PV ONE GIVES AWAY A LOT OF MONEY. ONE ONLY STARTS TO MAKE A PROFIT WHEN ONE GETS IT ALL BACK.

Unknowns

The above does not include indexing or inflation as these are unknowns. The Energy Saving Trust does allow for 20% decline over 25 years; see their assumptions pdf.

Benefits of showing correct rates of return

Benefits are: People won't install en-mass, the government can keep the higher tariff and drop the hated 12Dec2011 deadline.
Jobs will be saved.

Actions you can take:

  1. Lobby your MP http://www.writetothem.com/ Tell us if they reiterate 'silly' rates of return.
  2. Ask the Energy Savings Trust http://www.energysavingtrust.org.uk to include in their Solar Calculator an equivalent percentage savings rate per year.
  3. Spread the word about this mis-selling scam.
  4. Take part in the consultation and say that the government and others has been responsible for over-selling solar PV returns that has fuelled over-installations.
    http://www.decc.gov.uk/en/content/cms/consultations/fits_comp_rev1/fits_comp_rev1.aspx

Conclusions

Tell people the correct return on solar PV, it will be low and they may have second thoughts. This will drop demand and the present FIT tariff can be kept.

Contact

Webmaster: peopledecide (AT) gmail.com
Last Updated: 19Jan2012

changed December 26, 2011