UK Domestic Solar Panel Costs and Returns: 2010 - 2014

UK Domestic Solar Panel Costs and Returns: 2010 – 2014


Introduction

This report compares UK domestic solar panel costs and returns over the period from the launch of the Feed in Tariff in 2010, through to 2014. Although consistent cost data is not available for the whole period, a number of reports give snapshots of mid-range installation costs at various points in time. Together with the Feed in Tariff rates and prevailing electricity costs we have compared costs, returns and system payback times for 2 typical installation sizes at various points from 2010 to 2014.

March 2012 saw a huge reduction in the Feed in Tariff for solar PV. The rate for a system up to 4kW went from 43.3p/kWh to 21p/kWh, causing a considerable shock to the market. Anticipation of the huge fall in tariff rates contributed to a massive spike in installs prior to the rate drop but also to a perception of a lack of value in investing in solar PV thereafter. FIT rates have since fallen in more gradual steps to the current 14.38p/kWh and are due to fall to 13.88p/kWh in January 2015. Over the same time period, however, there have been dramatic drops in the cost of installing solar PV.

We thought it useful in 2014 to look at changes to FIT rates, installation costs and savings and consider whether solar panels still present an attractive investment. This assessment takes place in the context of installation costs that have dropped considerably since the introduction of FIT in 2010 and an environment of increasing electricity bills. It seems that falling FIT rates have generated more awareness among consumers than the falling costs have. As a result, we feel it is useful to quantify and illustrate the dramatic fall in solar panel installation costs since the launch of FIT and try to determine the effect on rate of return.

Methodology

We have sourced cost data for solar panel installations (up to 4kW ) providing snapshots in time of typical, mid-range, solar PV installation costs. This data is taken from one-off studies conducted by Parsons Brinkerhoff and Cambridge Economic Policy Associates for DECC as part of various reviews, consultations and modelling exercises relating to the solar PV Feed in Tariff. Since April 2013 solar cost data has been gathered through the Microgeneration Certificate Scheme (MCS) database and DECC have published cost data for systems from April 2013 to March 2014. As a result of the availability of cost data to work with, we have compared costs and returns at 5 points in time since April 2010. Details of sources, assumptions and methods used are included in the appendices.

Solar Panel Feed in Tariff Rate Reductions Since 2010

The Feed in Tariff was launched in April 2010 and was initially set at a rate of 41.3p/kWh. The early years of the scheme saw uptake of solar PV run far ahead of expectations which went hand in hand with large reductions in the cost of installation. As a result, in March 2012 the tariff rate for solar PV was reduced to 21p/kWh and in August 2012 it reduced further to 16p/kWh. August 2012 also saw the introduction of a more responsive approach to degression, which is still in place today. Solar PV tariff rates reduce each quarter, provided that deployment targets are met. If deployment levels in any given band are low, then the degression cuts can be skipped but not for more than 2 quarters in a row. The current higher rate Feed in Tariff for solar PV with a capacity of 4kW or less is 14.38p/kWh. It will reduce to 13.88p/kWh from January 1st, 2015.

Solar PV FIT Rate Changes Over Time

Cuts to the FIT rate in 2012 caused quite a shock to the market and left a lingering question in the minds of some consumers. There seems to be more awareness of cuts to the FIT rate than there is of other factors such as the massive reductions in the cost of installing solar PV. Having heard about the cuts to the FIT rate the obvious question is whether investing in solar PV is still worth it? The answer lies in considering not just the tariff rate but also the cost of installation and the savings produced.

Solar Panel Installation Cost Reductions Since 2010

In 2010, when the Feed in Tariff scheme was launched, a 2.6kW solar PV installation cost approximately £13,000. The most recent cost estimates from DECC put the median cost for the same installation in 2014 at £4,888. This represents a 62% drop in the median installation cost for a 2.6kW system since 2010.

Solar PV Cost Over Time

Domestic Electricity Cost Increases Since 2010

Domestic electricity bills are on the increase. This is important because income from solar panel installations comes from a combination of three sources:

  • FIT generation income
  • Export income
  • Savings on electricity costs

Electricity Cost Over Time

Solar Panel Rate of Return and System Payback Times Since 2010

With all these changes since the introduction of FIT, what is the overall impact? Or, to put it another way, with all the cuts to the FIT rates, is solar PV still a worthwhile investment in 2014?

Cost and Returns Comparison 2.6kW Solar PV

2010
(Apr)
2011
(Sep)
2012
(Mar)
2013
(Apr)
2014
(Apr)
Cost of System £13,000 £9,000 £6,663.8 £4,836 £4,888
Annual Operating Costs £70 £70 £70 £70 £70
FIT Tariff Rate 41.3 p/kWh 43.3 p/kWh 21 p/kWh 15.44 p/kWh 14.38 p/kWh
Export Tariff 3 p/kWh 3.1 p/kWh 3.2 p/kWh 4.64 p/kWh 4.77 p/kWh
Electricity Price 12.6 p/kWh 13.8 p/kWh 14.5 p/kWh 15.5 p/kWh 17.5 p/kWh
FIT Income / Year £912.73 £956.93 £464.10 £341.22 £317.80
Export Income / Year £33.15 £34.26 £35.36 £51.27 £52.71
Electricity Bill Savings £139.23 £152.49 £160.23 £171.28 £193.38
Total Annual Income & Savings – Costs £1,015.11 £1,073.68 £589.69 £493.77 £493.88
System Payback Time 12.8 years 8.4 years 11.3 years 9.8 years 9.9 years
Rate of Return 4.12% 8.45% 5.60% 7.58% 7.81%

2.6kW Rate of Return
When the Feed in Tariff was launched in April 2010, the target rate of return for domestic solar PV was around 4.5%. A well sited 2.6 kW system installed today should have a return considerably better than that. Although peak returns are likely to have been in late 2011 or very early 2012, just before the cut from 43.3 p/kWh, it can clearly be seen that current returns are strong in an historical context.

The decrease in cost of installation over recent years, combined with rising energy prices have been more than enough to offset decreases in the Feed in Tariff rate.

Effect on Rate of Return

Cost and Returns Comparison 4kW Solar PV

One of the consequences of the decreasing cost of solar is the ability of householders to invest in larger systems for the same or less money. As a result, larger systems have become more and more common, with 4kW providing a natural upper boundary as the upper limit of the tariff band.

2010
(Apr)
2011
(Sep)
2012
(Mar)
2013
(Apr)
2014
(Apr)
Cost of System £20,000 £13,846 £10,252 £7,440 £7,520
Annual Operating Costs £70 £70 £70 £70 £70
FIT Tariff Rate 41.3p/kWh 43.3 p/kWh 21 p/kWh 15.44 p/kWh 14.38 p/kWh
Export Tariff 3 p/kWh 3.1 p/kWh 3.2 p/kWh 4.64 p/kWh 4.77 p/kWh
Electricity Price 12.6 p/kWh 13.8 p/kWh 14.5 p/kWh 15.5 p/kWh 17.5 p/kWh
FIT Income / Year £1,404.20 £1,472.20 £714 £524.96 £488.92
Export Income / Year £51 £52.70 £54.40 £78.88 £81.09
Electricity Bill Savings £214.20 £234.60 £246.50 £263.50 £297.50
Total Annual Income & Savings – Costs £1,599.40 £1,689.50 £944.90 £797.34 £797.51
System Payback Time 12.5 years 8.2 years 10.8 years 9.3 years 9.4 years
Rate of Return 4.39% 8.83% 6.12% 8.46% 8.68%

4kW Rate of Return

Comparing Returns on £7,500: 2010 vs 2014

Reducing installation costs have not only positively impacted on the rate of return. Another consequence of falling installation costs is its effect on what you can get for your money. £7,500 today will likely get you a 4kW install, whereas if you had £7,500 to invest in 2010 you would only have been able to afford a £1.5kW system.

2010
(Apr)
2014
(Apr)
Cost of System £7,500 £7,520
Capacity 1.5kW 4kW
FIT Rate 41.3p/kWh 14.38p/kWh
FIT Income / Year £526.58 £488.92
Export Income / Year £19.13 £81.09
Electricity Bill Savings / Year £80.33 £297.50
System Payback Time 13.5 years 9.4 years
Rate of Return 3.57% 8.68%

Real, Post Tax Returns and Comparing With Other Investment Options

Feed in Tariff payments are index linked and are not taxable. Index linking of the FIT tariff means that the tariff that is locked in when you start on the scheme rises over the 20 year period in line with the retail price index. This is what is known as a real return. An 8% return from FIT is an 8% return over and above the rate of inflation. To compare the real return from FIT with an investment providing a nominal return, you would need to subtract the rise in the RPI from the alternative investment or add it to the FIT return.

a real, post-tax return from solar panels of 5% – 8% is the equivalent of a pre-tax nominal return of 12.8% – 17.8%

Feed in Tariff payments are also not subject to tax. To compare returns from FIT with returns from investments that are taxable as income you would need to decrease the pre-tax investment by the rate of tax due or alternatively, increase the FIT return.

The figures in the table below are taken from a report called “Updates to the Feed-in-Tariffs Model, Documentation of Changes for Solar PV Consultation” by Cambridge Economic Policy Associates Ltd and Parsons Brinckerhoff, October 2011. Rates for the alternative investments considered are at least 3 years out of date and should not be assumed to reflect returns available currently. It does give an indication of the effects of pre-tax and post-tax, real and nominal returns. Specifically, a real, post-tax return from solar panels of 5% – 8% is the equivalent of a pre-tax nominal return of 12.8% – 17.8%.

Investment Tax free Return Equivalent Rates
Pre-tax nominal Post-tax nominal Post-tax real
Pensions Yes 4%-8% (post-tax, nominal) 6.7%-13.3% 4%-8% 1.3%-5.3%
Index-linked National Savings Bonds Yes 0.5% (post-tax, real) 5.3% 3.2% 0.5%
Buy to Let No 9% (pretax, nominal) 9.0% 5.4% 2.7%
Repayment of mortgage Yes 4.8% (post-tax, nominal) 8.0% 4.8% 2.1%
Small-scale FITs Yes 5%-8% (real post-tax) 12.8%-17.8% 7.7%- 10.7% 5%-8%

The figures above assume inflation at 2.7% and tax at 40%.

Other Impacts of Falling Installation Costs

The dramatic drop in installation costs over the last few years has the added impact of making solar panels an affordable option for more and more people. The Feed in Tariff has come under criticism from time to time as being only for the rich and 2013 saw considerable controversy over renewable subsidies and their effects on people’s bills. We commented in detail at the time of the “green crap” controversy, pointing out that the net effect of “green levies” is to decrease our average dual fuel bills, rather than increase them.

In 2010, if you wanted to put a 4kW system on your roof you needed to have £20,000 to invest (or get a loan). To install a similar system in 2014, you only need around £7,500.

As long as solar panels are only an option for the rich and the costs are paid by everyone, however, there is a case to be made that the poor are subsidising the better off. In 2010, if you wanted to put a 4kW system on your roof you needed to have £20,000 to invest (or get a loan). To install a similar system in 2014, you only need around £7,500. That in itself widens the availability of the scheme and brings the investment within reach of more households.

Additionally, the lower investment must make finance an option where it may not have been at the higher cost. It also makes a difference when you consider part funding through the Government’s Green Deal. The Green Deal is a loan provided for the up front costs of energy efficiency improvements and renewables. It is paid back in installments on your energy bill and is designed to be paid back from the savings made by the measures that were funded. Funding is available through the Green Deal for Solar PV, but only part funding. Repayments for any measure cannot be more than the associated savings. Since solar PV does not yet save enough to pay for itself without FIT, only a portion of the installation cost can be funded through the Green Deal.

As costs drop and energy prices increase, the proportion of a solar panel installation fundable under the Green Deal increases. Dropping costs mean there is less overall investment to fund and rising energy prices mean more savings.

One thing that is clear from the cost and return figures above is that the proportion of income coming from export and savings rather than the FIT generation tariff is increasing over time. If costs continue to fall and / or electricity continues to rise, then this will continue. What all of this means, in effect, is that the costs and returns from solar PV are progressing towards a situation where installing solar panels will make sense, even without the tariff support. Which is a good thing and largely the point of the scheme in the first place. The government will hope that these trends continue and that solar PV can eventually stand on its own feet. In the meantime, with the support of FIT, solar PV remains an attractive investment option and returns available today look to be significantly better than when the scheme was designed and launched.

Appendix A: Data Sources

Data used in the compilation of this report was gathered from the following sources:

  • “Quarterly Energy Prices, September 2014″ – DECC
  • “Quarterly Energy Prices, December 2013″ – DECC
  • “Quarterly Energy Prices, December 2012″ – DECC
  • “Quarterly Energy Prices, December 2011″ – DECC
  • “Quarterly Energy Prices, December 2010″ – DECC
  • Feed in Tariff Tables – Ofgem
  • “Feed-in tariffs scheme: consultation on Comprehensive Review Phase 1 – tariffs for solar PV” – DECC
  • “Solar PV cost update”- Parsons Brinkerhoff, May 2012
  • “Solar PV Cost Data” – DECC, April 2014
  • “Updates To The Feed-in Tariffs Model Documentation Of Changes For Solar Pv Consultation” – Cambridge Economic Policy Associates Ltd
    and Parsons Brinckerhoff, 26 October 2011
  • “Small scale solar PV cost data” – DECC, December 2013
  • “Review Of Ro Banding For Small-scale Renewables A Report For The Department Of Enterprise Trade And Investment” – Cambridge Economic Policy Associates and Parsons Brinckerhoff, JANUARY 2014

Appendix B: Installation Cost Data

A consistent source of installation cost data was not available covering the whole period from the launch of the Feed in Tariff. Cost data is available from DECC for a period beginning in April 2013 and running up to March 2014. This data is sourced from the Microgeneration Certificate Scheme (MCS) database. Cost data prior to April 2013 was gleaned, where available, from various studies and modelling exercises undertaken on behalf of DECC by Parsons Brinkerhoff.

As a result of the limited availability of cost data we can only compare costs and returns at irregular snapshot intervals. Data was available for April 2010, September 2011, March 2012, April 2013 and March 2014.

The figures in this report represent the median installation cost from the relevant study. In all cases they include VAT and represent an estimated installed cost. Although both DECC’s “Solar PV Cost Data” and the previous studies are gathered from installers they are from different studies and may not be strictly comparable. It is important to note that a wide range of costs were encountered in the 0kW – 4kW data and that quotes for specific installations will vary widely from those presented here.

Appendix C: Electricity Price Data and Assumptions

Electricity price data was gathered from the DECC “Quarterly Energy Prices” publications. Figures used for the electricity cost per unit in this report are based on the average annual electricity bill for the year in question. Assumed usage was 3,300 kWh per year.

  • “Quarterly Energy Prices, September 2014″ – DECC
  • “Quarterly Energy Prices, December 2013″ – DECC
  • “Quarterly Energy Prices, December 2012″ – DECC
  • “Quarterly Energy Prices, December 2011″ – DECC
  • “Quarterly Energy Prices, December 2010″ – DECC

Appendix D: Calculating Rate of Return

There are a number of assumptions involved in calculating the Rate of Return. Details on cost and electricity price data are included in the preceding appendices. Other assumptions used in the calculation for this report are included below:

Metric Assumption
Annual Operating Cost £70
Load Factor 850 kWh/kW/year
Technology Lifetime 35 years
Assumed Use 50% on-site, 50% export

Just about every assumption made in the calculation has an effect on the earnings or savings and therefore the rate of return. These assumptions were chosen based on the DECC publication “Explanation of rate of return calculation for domestic PV” which is available as part of Feed in Tariff Comprehensive Review Phase I.

This should provide some consistency between the comparisons made in this report and the modelling and predictions behind the setting of the solar tariffs.

The Feed in Tariff had a duration of 25 years when launched, which reduced to 20 years after August 2012.  As per the explanation of rate of return document referenced above, both the costs and the post FIT income and savings for the years between the end of FIT and the expected lifetime of the system are “squeezed” into the timeframe of the FIT term and annualised when we calculate rate of return.