are solar panels a good investment? a year in review

Oct12
by TFS on October 12, 2015 at 10:51 am
Posted In: Investing, Life Hacks, Money Saving Ideas

solar panels on our house!

 

We’ve been our “new” house a year tomorrow!

Some of you may remember me mentioning one of the things that attracted us to the house was that it had a Solar Panel or Solar PV (Photo Voltaic) installation, so I thought it was high time I did a write up on how those bad boys have been performing over the year.

(Update: For more information on solar panels, please see my Solar Panels FAQ here!)

 

tl;dr – did it save us money!?

For those of you who just want to know how much much they’ve made/saved us here is the simplified spreadsheet you want to look at:

A year of Solar PV Usage compared to our electricity bill

As you can see our electricity bill was £291.57 for the year while we received £566.05 in payments. So as well reducing and easily covering our electricity bill, we netted an extra £274.48 on top of that. Not bad!

 

calculating the ROI of solar panels

Update 27/10/2015: I calculated the ROI wrong the first time I wrote this post. This following section is updated to reflect more accurate calculations!!!

To work out the ROI is quite hard as we never actually paid for the install ourselves, and there are many things to consider. Before I give you the figures here is my method along with any assumptions I’ve made:

  • To work out install cost I got some quotes from an online solar panel quoting service 1 which says a similar install would cost me £4,800 right now.
  • I’ll also calculate the ROI of what I’d estimate the original install cost which I reckon was around the £8,000 mark.
  • I will also calculate the ROI of what a new install today might be with the current FIT and export tariffs (see below for more info on what that means if you don’t already know).
  • Finally I will calculate the projected ROI of a system after the government cuts to the FIT payments take place in January 2016.
  • Another thing to consider when considering the ROI of solar panels is that they will depreciate in value over time to the point where they will not function any more, at which point you will just have to ditch them 2. So you won’t get your original money back, unlike, say, sticking £5K into your bank account for 20 years at 3% interest, where you get the interest and your money back! To calculate this I have used google spreadsheets XIRR function which according to google: “Calculates the internal rate of return of an investment based on a specified series of potentially irregularly spaced cash flows”. What this means in laymans terms is that I simply have to write down costs and payments projected over 20 years and it will spit out a rate of return for us. Hurrah! 3
  • I will assume that I am saving £104 per year on my electricity bill for the purposes of these calculations. This is less than the average touted which is £130.
  • All ROI and profit figures are ignoring inflation because generation payments are index linked so all of the returns in the table are real.
  • As well as the £4,800 or £8,000 for the install, I am also assuming a cost of £800 for a new inverter half way through the life of the solar panels, because that is usually the only thing that gives out over that time span. This applies to all scenarios.
  • ROI and profit figures are over a 20 year lifespan.

And with the explanations all done here is the ROI of each scenario as described above:

What is the ROI of a solar panel install

The key takeaways from this table are:

  • The price of the install matters far more than the FIT rate… to a certain extent of course. As you can see in scenario C) where the FIT rate is lower than in A) and B), the ROI is still much higher than in B) simply because the cost of install is lower.
  • Obviously when you get to the ridiculously low level of the proposed FIT rate which is due to come into effect in January 2016 then bad things happen and you would be projected to not even recoup your initial investment!!! The only hope here is that install costs continue to plummet, although I can’t see that happening in the immediate future.
  • 9.51% is the figure those of you who might be considering getting some solar panels installed before the end of the year should be focusing on. A decent return on investment I am sure you will agree!

It is probably also worth noting that the guarantee on most solar panels is that they will still output 80% of their starting output after 20 years. I don’t know how quickly the efficiency levels are predicted to drop off after that but I would assume they will still produce a worthwhile amount of electricity for you after the 20 years are up, and you should in theory still get paid for any exported to the grid. I would look at anything extra being a bonus, especially over such a long time period where anything could happen!

 

if this sounds like a good deal to you, get in there quick!

I’m sure you’ve already heard the news about the cutting of the FIT (Feed In Tariff) payments coming up. According to the BBC:

the amount to be paid from next year will fall to 1.63p per kilowatt hour from a current level of 12.92p for a new residential solar system

I believe this is absolutely fucking ridiculous.

Check out what this would do to the ROI of my system if I were to install it just after the cuts took place:

New generated payments: £49.99

Deemed payments*: £74.04

New ROI = ( £124.03 / £4,800 ) = 2.58%!!!

*I am assuming the export tariffs are not being cut!!! See below for more info on deemed/export tariffs

These cuts will clearly destroy the uptake on Solar PV systems, and therefore seriously set back the carbon reduction targets the government has committed to. Considering they were set to miss them under the coalition anyway, there is not exactly any wiggle room to slow down progress in this area! The reasons stated for the cuts are that Solar PV installations have dramatically reduced in cost over the last few years. While this is undoubtedly true, they haven’t reduced that much,  as evidenced by the quotes I received when working out the ROI in the section above. I mean, I am not saying don’t cut the payments at all but cutting them by 87% is ridiculous. It is clear that Solar PV installs have not reduced in cost by 87%.

Anyway, my views aside, there are two things you can do based on this news.

  1. If you agree with me, then you can click on this link here to petition the government to rethink the cuts: Re-think the cuts, please, Mr Cameron and Amber Rudd!!!
  2. If you want to make a decent ROI, and have the cash spare, regardless of your political or environmental views, the clear path of action is to just sign up and get some Solar PV panels installed ASAP 🙂

 

a more detailed breakdown

For the geeks out there, or if you just want to know a bit more about how exactly the whole FIT scheme and payments work before you sign up to get your Solar PVs, here is a more detailed break down:

Solar PV one year detailed breakdown

Click for full scale image

To explain what’s going on here, the first two sections are the same as the first table above and should be fairly self explanatory, the rest of the columns are…

  • Meter Reading – The reading of our solar panel meter. It is what I read and submit to the EDF FIT website every 3 months.
  • kWh Meter – The difference between the current reading and the last reading. I did this to check against the next column which is…
  • kWh Statement Generated – This is what they’ve told us we’d generated on the quarterly statements. It should obviously match the previous column but for some reason in the first quarter it didn’t. This was probably just because of the swap over from the old owners to us, so nothing really to worry about.
  • Payments Generated – This is how much we received for those kWh figures in the previous column. We are receiving a rate of 16.11p/kWh currently. This is index linked and it went up in April this year (it’s updated every 1st April).
  • kWh Statement Deemed – I have to admit I had no idea what this meant until I came to write this post! It’s quite simple though. This is the excess energy your panels have generated. This means the energy you have exported back to the grid. This is paid at a much lower rate, currently 4.85p/kWh. This may seem stingy but you’ve already been paid 16.11p for each kWh so this is an extra payment on top, so it seems fair enough when you look at it that way. Obviously people who use less electricity and have more energy efficient homes will export more energy so will get bigger payments in this section. However… Unless you have a smart solar meter (which most homes don’t right now) they assume that you export 50% of the energy generated and just pay you for that. That is why the payment is “deemed” and not an accurate figure. If you look at the row for July for example we generated 1266kWh and the deemed amount was 633kWh, exactly half.
  • Payments Deemed – Payments for the deemed energy exported back to the grid. These are also index linked, see here for more info and how the payments have increased over the years.

 

why is our electricity bill so low?

Our bill in terms of energy usage came in at 1828kWh for a whole year which is surprisingly low. A house of our size would normally be using at least 3000kWh and even our old energy suppliers EDF were billing us on an estimate of around 3500kWh, even though they must have known we have Solar PVs as that is who we send our readings to. Great estimation algorithm you have there, EDF software engineers! 🙂

I am struggling to find 100% confirmation of this but I am 99% sure that this low usage bill is because our electricity meter stops going up while the Solar PVs are generating more electricity than we are using (as I mentioned in the first section). This does make perfect sense when you think about it, why would the meter go up if there is no electricity flowing into the house via the meter?!!

So that is why our energy bill/usage seems low. If we used the deemed rate of 50% exported energy then it would mean that our actual usage would have been 3,518kWh which is about in line for a house of our size. If you compare that to our total generated which is 3,067kWh this means we are nearly “energy neutral” in terms of electricity at least. Maybe if we had a more accurate read on the energy exported we might actually be fully energy neutral, but until we get a smart solar meter we’ll never know (they are expensive to install and the ROI is very small which means it’s probably not worth it for the foreseeable)

Interestingly enough some owners with old analogue meters got away with having their meters going in reverse when generating excess energy for while! I think most of those have been replaced by digital meters now which can detect the reverse energy flow and simply freeze the meter instead of going backwards 🙂

 

any other questions?

I’ve tried to explain as much as I can here but I am sure I’ve missed something out. If you have any questions on the performance, usage, metering/billing/payment methods or anything about Solar PV Panels please leave me a question below and I will try my best to answer them. Unfortunately I can’t tell you much about the installing process or recommend any particular installer as, like I say, they were already on the roof when we moved in.

I hope I’ve given you enough ammo to get going if you we’re considering getting some solar panels though and don’t forget to get your skates on, before the FIT generation rate drops like a rock!!!

Update: For more information on solar panels, please see my Solar Panels FAQ here!

I’ll leave you with one final picture of the installation which sits in our loft 🙂

 

solar panels - another meter type thing

No, I have no idea what it’s for either 🙂

solar panels - another meter type thing

This reading has “Today” on it which is quite useful. The one downstairs doesn’t have that reading on it though, rather annoyingly!

Notes:

  1. It’s called compare my solar if you are interested and it seems pretty easy to use. I would be wary of the ROI they are quoting though as they are quoting around £900 payback in year one. Either they are making the figures look overly rosy (which would be a massive shock, not!) or I’ve selected a slightly higher power install than I actually have, or a bit of both). For the record our install has 12 panels, but I am not 100% sure of the exact power rating of the system. The one I was quoted for was 4kWp. ↩
  2. Disregarding any money reclaimed for scrap metal in the Mad Max style world we’ll be living in, 20 years from now 🙂 ↩
  3. Thanks to comments from Jonathan and Andrew for kicking me up the bum / helping me out to get a proper ROI calculation sorted. Thanks guys! I will note however that my initial back of the envelope calculation of 11.79% was spookily close to the far more accurate calculation which was 11.81%. Freaky! I managed this by omitting both the electricity savings (which bumps up the ROI) and the depreciation costs (which pulls it back down again) so I guess those two things balance each other out roughly over 20 years! Irrefutable proof if you ever needed it that two wrongs do make a right 🙂 ↩
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