UK Domestic Solar Panel Costs and Returns 2014 - 2017

UK Domestic Solar Panel
Costs and Returns
2014 – 2017


Key Findings

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

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.

4kW Rate of Return

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. View comparison with pre-tax nominal investment returns.

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.

Solar PV Cost Over Time

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.

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

Electricity Savings vs FIT IncomeSolar 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.

Contents

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 2017.

Returns from solar are a balance of the cost of solar panel installations, the Feed in Tariff rate available and electricity savings. On two occasions since the start of the scheme the Government has intervened to dramatically reduce tariffs. These large scale reductions happened in March 2012 and again in the first quarter of 2016. In both cases the cuts caused considerable shock to the market.

The tariff rate for solar panels has fallen from 41.3p/kWh at the launch of the scheme in 2010 to 4.00p/kWh today (October 2017). This report considers costs, tariff rates and potential savings in order to outline current expected rates of return for domestic solar panel installations and to compare them with costs and returns available since 2010.

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 BEIC have published cost data for systems from April 2013 to March 2017. We have compared costs and returns at 8 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 2010 – 2017

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 responsive approach to tariff reduction called degression. Solar PV tariff rates reduced each quarter, provided that deployment targets were met. If deployment levels in any given band were low, then the degression cuts were skipped but not for more than 2 quarters in a row.

This degression system stayed in place until the first quarter of 2016 when major changes were made to the solar Feed in Tariff. At that time, the tariff rate reduced from 12.47 p/kWh to 4.39 p/kWh and a new degression system came into place. At publication of this report in October 2017, the FIT rate for solar PV up to and including 4kW is 4.00p/kWh.

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. The rate reduction in early 2016 repeated the same process with a clear chilling effect on the market. The effects can be seen in dramatically reduced installation numbers and with solar panel installers leaving the market in droves. For the consumer, one telling impact is that installation prices seem to have stopped coming down.

With the solar Feed in Tariff now a fraction of its original 41.3p/kWh, the question is whether reductions in the cost of installing solar PV have continued at a pace to offset cuts in government support? What are current savings and returns from domestic solar PV and how do they match up with costs?

Solar Panel Installation Cost Reductions Since 2010

In 2010, when the Feed in Tariff scheme was launched, a 4kW solar PV installation cost approximately £20,000. The most recent cost estimates from BEIS put the median cost for the same installation in March 2017 at £6,668. This represents a 67% drop in the median installation cost for a 4kW system since 2010.

Solar PV Cost Over Time

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.

This is a worrying development. Continued reductions in installation costs are important if domestic solar is to continue to survive and progress towards being subsidy free. With tariff rates set to fall further over the coming years, a healthy market will depend on continuing to provide a return on investment for homeowners.

Solar Cost and FIT Rate 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:

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

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 2017?

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. Here we compare costs and returns for a 4kW system. 4kW would have been a huge investment in 2010 but has become increasingly typical over the course of the scheme.

2010 (Apr) 2011 (Sep) 2012 (Mar) 2013 (Apr) 2014 (Mar) 2015 (Mar) 2016 (Mar) 2017 (Oct)
Cost of System £20,000 £13,846 £10,252 £7,440 £7,520 £7,336 £6,668 £6,668
Annual Operating Costs £70 £70 £70 £70 £70 £70 £70 £70
FIT Tariff Rate 41.3 p/kWh 43.3 p/kWh 21 p/kWh 15.44 p/kWh 14.90 p/kWh 13.88 p/kWh 4.39 p/kWh 4.00 p/kWh
Export Tariff 3 p/kWh 3.1 p/kWh 3.2 p/kWh 4.64 p/kWh 4.64 p/kWh 4.77 p/kWh 4.85 p/kWh 5.03 p/kWh
Electricity Price 12.5 p/kWh 13.5 p/kWh 14.3 p/kWh 15.2 p/kWh 15.6 p/kWh 15.3 p/kWh 15.4 p/kWh 16.7 p/kWh
FIT Income / Year £1,404.20 £1,472.20 £714 £524.96 £506.60 £471.92 £149.26 £136.00
Export Income / Year £51 £52.70 £54.40 £78.88 £78.88 £81.09 £82.45 £85.51
Electricity Bill Savings £212.50 £229.50 £243.10 £258.40 £265.20 £260.10 £261.80 £283.90
Total Annual Income & Savings – Costs £1,597.70 £1,684.40 £941.50 £792.24 £780.68 £743.11 £423.51 £435.41
System Payback Time 12.5 years 8.2 years 10.9 years 9.4 years 9.6 years 9.9 years 15.7 years 15.2 years
Rate of Return 4.38% 8.78% 6.07% 8.34% 8.11% 7.90% 4.44% 4.90%

4kW Rate of Return

Overall Effect on Rate of Return

Since the Government’s changes to the scheme in 2016, the solar tariff rates are the same from 0 to 10kW which opens up the prospect of installing more than 4kW where the space and the usage are there to justify it.

Comparing Returns on £7,500: 2010 vs 2014 vs 2017

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. If you had £7,500 to invest in 2010 you would only have been able to afford a £1.5kW system. In 2014, £7,500 would have bought you a 4kW install and in 2017 it could potentially pay for 5kW.

2010 2014 2017
Cost of System £7,500 £7,520 £7,516
Capacity 1.5kW 4kW 5kW
FIT Rate 41.3p/kWh 14.9p/kWh 4.0p/kWh
FIT Income / Year £526.58 £506.6 £170.00
Export Income / Year £19.13 £78.88 £106.89
Electricity Bill Savings / Year £80.33 £265.20 £354.88
System Payback Time 13.5 years 9.6 years 13.4 years
Rate of Return 3.57% 8.11% 6.38%

Real, Post Tax Returns and Comparing With Other Investment Options

Feed in Tariff payments are index linked and are not taxable. Index linking of FIT means that the tariff 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 several years out of date and should not be assumed to reflect returns available currently. It does, however, 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%.

Appendix A: Data Sources

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

  • “Quarterly Energy Prices, June 2017″ – BEIS
  • “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 “Quarterly Energy Prices” publications published by the Department for Business, Energy & Industrial Strategy (formerly DECC). 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 3,800 kWh per year.

  • Consumer Price Index datasets – ONS
  • “Quarterly Energy Prices, June 2017″ – BEIS
  • “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.