Is solar PV still worth it?

The Feed in Tariff is out, the Smart Export Guarantee is in. But does solar PV remain a viable investment? Jamie Green explains that in certain scenarios PV remains a technology to consider

Renewable energy is central to rapid decarbonisation of UK energy supplies. While any number of energy mix scenarios could be considered, solar PV is currently the second cheapest source of renewable energy in the UK after onshore wind and is likely to be a key component. The Centre for Alternative Energy’s Zero Carbon Britain scenario calls for 75GW covering 10-15 per cent of Britain’s roof area. The government’s own Committee on Climate Change (CCC) modelled between 23 and 43GW of Solar PV capacity by 2030 across several scenarios in their 2018 Progress Report to Parliament.

Yet as of 1st April 2019, the government has removed the Feed in Tariff (FiT) scheme. Since 2010, this had paid owners of registered PV systems for each kWh of electricity generated, and an additional tariff per kWh for electricity exported to the national grid. By the closure of the scheme, the generation tariff element had been reduced from over 40p/kWh to less than 4p/kWh for the smallest systems. System installation costs have fallen by over 75 per cent.

Ofgem installation reports reveal the impact key policy changes had on uptake throughout the scheme’s duration. While drastic cuts in 2012 curtailed uptake in the short term, the coalition-led policy from late 2012 of small quarterly tariff cuts, or ‘regression’, managed to deliver long-term growth with ever reducing levels of subsidy. Key to both customer and supply chain was the relative certainty this provided to enable long term planning.

By contrast, the drastic cuts enacted by the Conservatives in January 2016 caused a significant reduction in uptake. The two years following these cuts saw a 39 per cent reduction in new capacity compared with the preceding two years. Since at least April 2017, installation costs have remained more or less constant. This illustrates the continued reliance of solar PV on subsidy but is also indicative of the impact on customer perception of drastic tariff cuts.

Growth in total solar PV deployment has plateaued since the most drastic cuts, and eventual removal of the FiT scheme. It seems likely that the required uptake envisaged by the Committee on Climate Change to achieve net-zero emissions is dependent on further subsidy for the time being.

January 1 2020 saw the launch of the market-led Smart Export Guarantee (SEG), which requires electricity suppliers to offer a tariff and make payment to small-scale, low-carbon generators for electricity exported to the grid. This replaces the export tariff element of the FiT scheme, but there are no current plans to reinstate the generation tariff. Given that current deployment rates have all but stalled, such a reinstatement is clearly required to meet long-term carbon reduction targets. But until that happens, is solar PV still worth it?

Aside from the usual system performance factors such as shading and orientation, this depends on whether the energy is used on site or exported to the grid. Let’s assume a 20kWp system installed on a pitched roof with optimal orientation, roof pitch and no shading. In the Midlands this system might generate 18,600kWh each year and would cost around £23,700 to install according to government figures for mean £/kWp installed in March 2019.

Now let’s compare two scenarios, one with no export (100 per cent on site use) and one with 50 per cent export to the grid, both with an average daytime grid electricity price of 14p/kWh. We will assume that new installations will be able to access SEG rates for export at 5p/kWh.

Scenario 1 – no export
Bill saving = 18,600 x 0.14 = £2,604 per year
Simple payback = £23,700/£2,604 = 9.1 years

Scenario 2 – 50 per cent export
Bill saving = 18,600 x 50 per cent x 0.14 = £1,302 per year
Export income = 18600 x 50 per cent x 0.05 = £465
Simple payback = £23,700/(£1302+£465) = 13.4 years

So the payback is almost 50 per cent longer with 50 per cent export compared with no export. Once maintenance, inflation, degradation and typical cashflow discounting is considered, this may be the difference between a positive negative and negative cashflow over 20 years. Assuming panel performance degradation in line with warranty, inverter replacement costs at 10 per cent of capex in year 12, a discount rate of 6 per cent, electricity price inflation of 5 per cent p.a. and Retail Price Index inflation of 2.5 per cent p.a, Scenario 1 would yield an Net Present Value (NPV) of around £13,000 and an Internal Rate of Return (IRR) of 11 per cent, while Scenario 2 gives a negative NPV.

Clearly then, the key is to size systems appropriately to daytime building loads, such that on-site use of solar generation is maximised. Under these scenarios, solar PV can make an attractive investment, even without subsidy from the Feed in Tariff.

System sizing must always be carried out by the installer. However, installers may be tempted to maximise system size to roof dimensions, requiring an element of trust by the customer. Given the significant impact to the investment, this justifies increased scrutiny of sizing calculations. It’s our view that independent, expert guidance is vital if businesses want to really gain from investing in solar PV.

Jamie Green is consultant at Concept Energy Solutions