The UK’s Feed in Tariff will close to new entrants from April 1st 2019. So what is next for solar in the UK?
In the analysis below, we will take a look at solar panel returns and payback times after the removal of FIT and consider the impact of the new Smart Export Guarantee at various payment levels.
What is the impact of removing FIT?
According to the most recent Solar Panel Costs and Returns report (2019), a typical, well sited 4kW solar panel installation in the UK has an estimated return of 6.5% and will pay for itself during year 13. The returns are a combination of Feed in Tariff payments, Export Tariff payments from FIT and electricity savings. With FIT closing on April 1st, those tariff payments will not be available to new entrants.
Support under the Feed in Tariff has already fallen over the years from 41.4 p/kWh in 2010 to 3.79 p/kWh at the start of 2019. Falling costs and increasing electricity prices have combined such that solar has remained viable with this tiny subsidy.
At 3.79p/kW in the first quarter of 2019, the generation tariff income on a typical 4kW install is only expected to be £128.86 per year. That doesn’t sound like too much of a gap to bridge, does it?
From April 1st, the Feed in Tariff will close and new solar installations will receive no payments. Importantly, the closure of FIT will mean an end not only to the generation tariff which is a subsidy but also to the Export Tariff. The Export Tariff pays small scale generators for the portion of their electricity that they do not use and that they supply to the grid. The government has agreed in principle that it is wrong for homeowners to go unpaid for electricity they provide to the grid. It has announced the introduction of the Smart Export Guarantee which will pay homeowners for electricity they export to the grid. It has not however set a level for these payments nor managed to have the scheme in place before it chooses to close FIT.
For at least a short time then, new installations will be without the Feed in Tariff and will receive no payment for electricity they generate for the grid. Here is how the costs and returns compare for an installation in Q1 of 2019 receiving the Feed in Tariff and an installation post Feed in Tariff.
Solar PV Returns Before and After FIT
| 2019 FIT | Post FIT no Export | |
|---|---|---|
| Capacity | 4kW | 4kW |
| Year 1 Income & Savings | £432 | £214 |
| 30 Year Income & Savings | £20,228 | £12,702 |
| System Payback Time | Year 13 | Year 21 |
| Rate of Return (30 years) | 6.50% | 2.84% |
Even without proper payment for export, domestic solar panels would still pay for themselves over their lifetime and eventually provide a return from savings but estimated payback times would stretch out to the 21st year. There are other factors that play a role in the decision to install solar but on the financials alone, that looks like a hard sell.
Solar with Smart Export Guarantee
The Smart Export Guarantee offers some hope that with fair payment for electricity exported to the grid, things might look a bit better for solar. The issue here is uncertainty. It is unclear at this stage, when the Smart Export Guarantee will start and what the level of payment will be.
Below, we have set out various levels of export payment and their impact on solar panel returns.
Export Payment Levels: Impact on Returns
| Export Payment | 3p/kWh | 4p/kWh | 5p/kWh | 6p/kWh |
|---|---|---|---|---|
| Capacity | 4kW | 4kW | 4kW | 4kW |
| Year 1 Income & Savings | £265 | £282 | £299 | £316 |
| Year 1 Income & Savings | 3.87% | 4.12% | 4.36% | 4.61% |
| 30 Year Income & Savings | £15,062 | £15,849 | £16,636 | £17,423 |
| System Payback Time | Year 18 | Year 18 | Year 17 | Year 16 |
| Rate of Return | 3.99% | 4.37% | 4.75% | 5.14% |
With a reasonable export payment through the Smart Export Guarantee, returns are bolstered considerably. Over 30 years, a typical well sited installation could generate between £15,000 and £17,500 and an annualised rate of return between 4% and 5% doesn’t sound too bad.
The only difficulty is that these returns are over 30 years and rely heavily on electricity savings. As a result of electricity price inflation those savings rise year (increasing average annualised returns). The fact that solar panels insulate homeowners from rising electricity prices is a good thing and it is reasonable to expect that those savings will mount up during the lifetime of the panels. The problem is that although electricity savings will provide long term returns they take a long time to realise. At the installation costs above, systems will not pay for themselves until year 16 to 18. That still leaves many functional (and profitable) years during which the panels will generate savings but 16 years is a long time to wait. Will it be attractive for homeowners to tie up their money in solar panels if the payback time is this long?
Over the years of the Feed in Tariff, small scale solar has seen growth during periods when payback times were around the 10 year mark. Since the last major tariff cut in 2016, payback times have been in the range between year 13 and 14 and the market has been sluggish. It seems unlikely that small scale solar will be able to maintain even 2018 levels of activity if payback times drift out beyond 16 years, as in the scenario above.
Testing the impact of lowering system costs
The calculations above all assume an installation cost of £6,856 for a 4kW solar panel system. That price is based on median installation cost data from BEIS from March 2018. There is good evidence that better prices are readily available in today’s market. The Solar Panel Costs and Returns survey was conducted in December 2018 and found a median quoted price of £5,657.50 for 4kW.
With FIT closed, the income that your solar panels can generate becomes limited. But the less money you need to spend on your solar system, the quicker you can pay it back and start making a return.
The table below shows how the situation improves as installation costs fall.
| £6,856 | £6,000 | £5,500 | £5,000 | £4,500 | |
|---|---|---|---|---|---|
| Capacity | 4kW | 4kW | 4kW | 4kW | 4kW |
| Year 1 Income & Savings | £303 | £303 | £303 | £303 | £303 |
| 30 Year Income & Savings | £16,825 | £16,825 | £16,825 | £16,825 | £16,825 |
| System Payback Time | Year 17 | Year 15 | Year 14 | Year 13 | Year 12 |
| Rate of Return | 4.85% | 6.01% | 6.86% | 7.88% | 9.13% |
* – the above assumes a Smart Export Guarantee at 5.24p/kWh (the current Export Tariff level)
With an installation cost between £5,000 and £5,500 returns begin to look healthy again and the payback time drops back between year 13 and 14. This would bring payback times roughly in line with those available since 2016.
Not all locations are equal
All of the calculations above are based on annual generation of 3,400 kWh for a 4kW domestic system. This is a fairly conservative figure used as a general estimate for well sited solar in the UK. Not all locations are equal however and if domestic solar becomes more of a marginal call without the Feed in Tariff, perhaps location will be a factor.
| Modeled Load Factor for UK | Devon | Devon at £5,500 | |
|---|---|---|---|
| Capacity | 4kW | 4kW | 4kW |
| Electricity Generated / Year | 3,400kWh | 4,105kWh | 4,105kWh |
| Year 1 Income & Savings | £303 | £381 | £381 |
| 30 Year Income & Savings | £16,825 | £20,985 | £20,985 |
| System Payback Time | Year 17 | Year 14 | Year 12 |
| Rate of Return | 4.85% | 6.87% | 9.38% |
A well sited 4kW installation in Devon significantly outperforms the “typical” load factor we use for the UK. The impact is even more stark at a system cost of £5,500 with the payback time coming down to year 12.
It is important that consumers consider their own real world situation. A South facing installation in Wiltshire is a very different proposition from an East Facing roof in Aberdeen.
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