Combining the incentives of feed-in-tariff, electricity savings and export tariff can result in measures of financial attractiveness of solar energy. For all solar systems on our website we use the following financial metrics:
- Year 1 return: how much do I receive in the first year? Given uncertainty in factors like future inflation and future energy prices the most reliable financial calculation regards the first year of financial returns. For example, for a 4.0 kWp system that costs around 6.000 pounds and generates 4000 kWh per year you will receive 4000 * 15 pence = 600 pounds due to the Feed-in-tariff. Assuming you’d use 50% of the electricity yourself, you will receive a further 2000 * 15 pence = 300 pounds of electricity savings plus 2000 * 4.5 pence = 90 pounds of export tariff. This results in a year one return of 990 pounds, which is a 18% return on your investment.
- Payback time: after how many years has your initial investment paid back itself? We can use a similar calculation as described in Year 1 return for all future years. Each year there are the following small changes: 1) your system outputs will decrease slightly over time due to panel degradation. 2) Feed-in-tariff and export tariff payments are increased with inflation. 3) electricity price savings are corrected for any electricity price changes. These factors are assumptions; hence there is uncertainty in this payback time estimate. On average, a payback time of around 7-8 years is realistic, after which it is expected that you can enjoy another 15 to 20 years of financial benefits!
- Return after 20 years: how much does the solar system return over the lifetime? For the total return we use a conservative time period of 20 years, as it has been shown panels are capable of still performing well after 30 years of life, albeit with a slight drop in performance. Total return can be interpreted as a multiple of initial investment, and returns of 3-4 times the original investment are possible.
The financial returns of solar systems in the UK depend on the system price and output as discussed in the previous chapter. Returns are often viewed as more attractive than bonds or ISA’s given their tax-free and inflation adjusted status.
Financial returns are always an estimate, but you can be confident of a very good return if you:
- Have a near optimal roof with 90% or more solar potential
- Live in a place with reasonable solar irradiation like England or Wales
- Decide to buy solar panels at a good market price after comparison
- Find a reputable installer that uses quality products and provides a long warranty
Compared to putting your money on the bank and receiving interest, solar systems can provide a return of more than 5% AER