Rob Such of RS Renewables looks at the benefits of investing in solar.
The UK solar PV market has dramatically changed since the Government introduced the Feed-in Tariff in April 2010. Back then there were a few thousand solar PV installations in the UK, mainly funded by grant schemes such as Clear Skies and the Low Carbon Buildings Programme. These provided capital grants towards the cost of installing a solar PV system and were mainly claimed by householders, not for profit organisations and the public sector.
The UK caught up with the rest of the developed and developing world when a Feed-in Tariff was introduced in April 2010. Instead of a capital grant, a Feed-in Tariff pays the generator a guaranteed amount for each kWh of electricity generated from a designated renewable source such as solar PV, wind and hydro-electric systems. (Strictly speaking the Feed-in Tariff only covers electricity fed into the grid but most schemes around the world have local variations that cover total generation, local consumption only or export elements.)
When the Feed-in Tariff was introduced to the UK a domestic PV system cost as much as £5,000 per kWp of installed capacity. In less than three years, this has dropped to less than £1,500 per kWp. For larger commercial systems the installed cost is less than £1,000 per kWh. These dramatic price drops are a combination of the UK supply chain maturing and the decrease in world prices.
Both DECC (the Department for Energy and Climate Change) and Ofgem (the Office of the Gas and Electricity Markets) publish data on the number of renewable energy installations in the UK and details of the scheme. There are now more than 330,000 renewable energy systems installed, of these, more than 98% of which are solar PV. Clearly the Feed-in Tariff has succeeded in increasing the installation of solar PV in the UK.
The scheme has not been with its critics though as it is funded by a levy on the electricity bills of all users, increasing domestic electricity bills by an average of £25 per year. To address this, DECC cut the Feed-in Tariff rates for solar PV dramatically a year ago and introduced a quarterly degression of rates based on the number of installations in the previous quarter. Some in the industry predicted massive job cuts and the collapse of the solar PV industry, and whilst it is true that the market has shrunk, this is mainly because the bubble burst. Many of the companies that diversified into solar to make a quick buck withdrew once the going got tough.
I believe that the industry has come out the other side stronger and more able to weather the peaks and troughs of the market. DECC for its part has achieved its goal of market stabilisation although at a much lower level than most of us would like. Initially after the tariff cuts many customers were put off installing solar PV believing that they had missed the boat, others were unsettled by the cuts fearing that the Government might scrap the scheme altogether. Confidence has now returned to the market and installation rates are climbing slowly.
So is solar PV a good investment? Absolutely. A year ago a 50kWp roof-top PV system would have cost more than £100,000. Today the same system is around £50,000. Rates of return are in excess of 10% beating many alternative investments. Rates of return get even higher for big electricity users that can consume most of their generation on site by offsetting the cost of electricity purchased.
The Feed-in Tariff runs for 20 years, is backed by the Government and index linked. If you factor in the above inflation annual increases in electricity prices the system will pay for itself in less than 10 years. After 20 years the system will no longer be eligible for the Feed-in Tariff but will have long ago been paid for and still producing at least 80% of the electricity it did on the first day of operation continuing to reduce electricity bills and save on CO2 emissions.
So if PV system prices have halved in the last year shouldn’t I wait another year and see if they halve again? This scenario is very unlikely. The major cost reductions have come from a combination of PV module price reductions and supply chain efficiencies. Most industry experts are predicting a drop of 10% in the cost of the PV modules in 2013. As PV modules only make up at most 1/3 of the cost of a system the overall cost reductions are likely to be modest and overtaken by further reductions in the Feed-in Tariff which are due at the end of April. If the world economy picks up we may actually see a rise in prices.