Paybacks on solar given new 2016 tariffs (brief examples)
In August 2015, the Government warned the public that it was going to cut the existing feed in tariff. Later on 17 December, it published its decision on the new tariffs. The following examples show how the revised tariffs will affect paybacks for installations between 8 February and 1 April 2016.
First, let’s calculate the payback on a typical Surrey home which installs a 4kW system (16 panels) for £7,000. Such a 4kW system will generate about 3,500 kWh of electricity in the year (1 kWh represents 10 x 100W light bulbs turned on for an hour). This system translates to income via the following:
- The generation tariff: the rate for each kWh generated which will be 4.39p as of 8 February 2016. So assuming 3,500 kWh are generated per year, this translates to £154 per annum (3,500 x £0.0439).
- The export tariff: the rate paid by the energy supplier for electricity produced but not consumed and therefore exported to the grid and indexed to the retail price index. It is currently at 4.85p per kWh, but we can assume a rise in the index in the next few years, so a prudent average over the period could be 6p. Assuming a 50% consumption rate, this translates to ~£105 in the year (1,750 kWh x £0.06).
- Electricity savings: By producing its own electricity, the household does not need to purchase as much electricity from its provider. Thus, assuming the 50% consumption rate and average retail electricity day rates at 16p over the next twenty years, annual savings amount to £280 (1,750 kWh x £0.16).
Overall, annual income amounts to £539 (£154 + £105 + £280) meaning that the total system costs are reimbursed in 13 years (£7,000/£539). The income from the tariffs is tax free and the generation tariff is fixed for 20 years from the moment the system is installed. This means that after the ~13 years, the benefits are all profit.
For a commercial rooftop, the payback is more interesting than a residential installation since a larger proportion of the income is based on electricity savings since the building is primarily used during the day (eg a school or a factory). The generation tariff is also 20p higher for a system that is between >10 – 50kW than that of 0 - 10kW. The next example shows the revenue streams and payback of the new tariffs on a larger 11kW system (generating 9,600 kWh per year), installed on a commercial rooftop after 8 February 2016. Let’s assume the system costs £18,700 to install:
- The generation tariff: with a revised tariff at 4.59p income amounts to £441 (9,600kWh x 0.0459p).
- The export tariff: As in the residential example we will assume the same rate of 6p over the next 20 years. Instead of assuming a 50% consumption rate though, we will assume that the business utilizes 80% of the electricity generated (inversely 20% exported). This means that income from the export tariff would amount to £115 in the year (9,600kWh x 20% x £0.06).
- Electricity savings: Assuming the 80% consumption rate and average retail electricity day rates at 16p over the next twenty years, annual savings amount to £1,229 (9,600kWh x 80% x £0.16).
Overall income on the installation amounts £1,785 (441 + 115 + 1,229) and payback is 10 ½ years (£18,700/£1,785).
The final tariffs have not been cut by as much as the Department of Climate Change initially led us to believe in its August announcement. Although the cuts will hurt the industry, solar will continue to grow locally and globally as technology continues to evolve. Battery storage technology is on its way to commercialization, and this will lead to increased savings. Also, electricity prices are generally rising, so the savings should be greater in the future. Electricity price trends suggest that prices could double in the next 10 years due to increased electricity demand.
On a final note, we must keep in mind that the reason the government is cutting tariffs at a quicker than expected rate is because capacity has been installed at a rate that was quicker than expected, which in the grander scheme of things should be seen as a positive signal for solar power.