Another tariff degression?  Why it doesn’t really matter

So here we go again.  Government has announced that feed-in tariff levels for solar PV installations are to be reduced again effective from the August 1.  Residential tariffs will decrease from 21p/kWh to 16p, and typical commercial tariffs at the 50kW scale will reduce from 15.9p/kWh to 13.5p.  At first sight, this would appear to make installation of a solar roof unviable.  But that isn’t the case, for two key reasons.

First, as the tariffs are coming down, so is the price of a fully installed solar PV system.  Over the last three years we have seen the price of PV modules reduce by a factor of 4.  Additional components are also reducing in price – inverters and solar mounting systems have benefitted from manufacturing improvements and a more competitive wholesale market in the UK.  On top of that, the installation companies themselves are much more experienced and streamlined at delivering projects than a couple of years back.  Add this all together and installed costs have come down by more than half.  Which is pretty much what the feed-in tariff has done as well.

However, the feed-in tariff is only one of the benefits of a solar roof.  Any electricity generated means you do not have to buy electricity from your supplier.  These ‘avoided imports’ are now becoming the most important benefit of a solar roof.  The value of avoided imports is not going down (in fact it’s expected go up), so if the feed-in tariffs go down by 20 percent, the project benefits only go down by 10 percent.  So although the cuts in feed-in-tariffs grab headlines, they actually mask the real story which is that there are remarkable savings to be made from putting solar on your roof.

According to DECC, the price of electricity will rise by 33 percent in real terms by 2020, and commercial tariffs will rise by 43 percent.  Importantly, this is the impact of energy policy measures (EU ETS, Renewables Obligation etc.), and does not include any price rises that might occur due to an increase in the wholesale price of gas (gas fired power stations are the majority of our generation in UK).  Factor all this in and the value of fixing your energy costs by installing PV becomes clear.

At the commercial scale, we would expect a 50kW installation to cost £85k.  However, we’d estimate the savings off electricity bills to be over £200,000, making PV by far the cheapest way of supplying electricity to the building.  Throw in the additional feed-in tariff payment of £150,000 over 20 years, and is immediately apparent that solar is extremely cost effective despite the tariff cuts, with returns on investment of 13-15 percent possible.

At the residential scale the picture is similar.  A 2kW system costing £5,500 would give savings of £5,000 and a feed in tariff of £9,500.  The avoided imports are lower here as it is harder for householders to use all the electricity generated in the middle of the day, especially if they are working.  Nonetheless returns on investment are still extremely attractive, around the 10 percent mark, which is stronger and more secure than any other form of household investment, such as ISAs, stocks or bonds etc.

So despite the negative publicity the feed-in tariff cuts have generated, the big picture remains the same.  That is to say – at the commercial scale, PV is the cheapest way of supplying electricity to a building.  Returns on investment are still excellent and remain the soundest householder investment in the marketplace.  And let’s not forget CO2 – this is clean green energy produced from the asset of unused roofspace, which has got to be good for everyone.