How to buy solar panels Is solar PV a good investment?
Investing in solar panels could net you a profit as well as savings on your energy bills
Solar photovoltaic (PV) systems are often marketed as a way for you to make money, as well as save on your own electricity bills. This is because you get paid for the electricity that your solar panels produce.
Under the government's feed-in tariff (FIT) scheme, payments are guaranteed for 25 years, the price per kilowatt of energy is index-linked (meaning that it will rise with inflation annually) and all proceeds you make from the FIT are free from tax.
Remember, though, that the current rates payable from the FIT have been cut significantly and the FIT might not be as good a deal as it was when the scheme first launched in 2010.
The cuts apply for any solar PV system installed and registered after 3 March 2012 (after the government's original proposal to reduce the tariff on 12 December 2011 was deemed to be unlawful by the High Court).
If you already receive FIT payments, you can be reassured that your payments will not be dropping to the lower rate.
How much can I make from investing in solar panels?
| Solar PV vs Cash Isa - how much could you make? | ||||
|---|---|---|---|---|
 Initial investment |  Total after 25 years |  Profit after 25 years |  Annual rate of return | |
| Cash Isa | £10,000 | £22,245 | £12,245 | 3.25% |
| Solar PV before 3 March 2012 | £10,000 | £27,744 | £17,744a | 4.14% |
| Solar PV before 3 March 2012, with profits reinvested in a 3.25% Cash Isa | £10,000 | £47,152 | £37,152a | 6.40% |
| Solar PV after 3 March 2012 | £10,000 | £14,875 | £4,875a | 1.60% |
| Solar PV after 3 March 2012, with profits reinvested in a 3.25% Cash Isa | £10,000 | £25,210 | £15,210a | 3.77% |
Table notes
- After system and installation costs have been deducted
The net profit shown in this table is what you would make after 25 years, factoring in savings on your electricity bills and after deducting the cost of the solar panel system, compared with a cash Isa. These figures were calculated for a 3kWp system installed in central England, and are just an illustrative example, but £10,000 is a typical price for buying and installing a solar PV system of that size. The figures don't take account of future inflation, changes in electricity prices or future changes in the FIT.
Based on this example, with the new lower proposed FIT rate, you'd get a flat annual rate of return of 1.60% a year, which, in 2011, is significantly lower than that of a one-year fixed-rate cash Isa (these are also tax-free). The best one-year fixed-rate Isa currently pays 3.25% (as of January 2012) but only allows you to save up to £5,340 a year. It is possible to boost the returns you might make from the feed-in tariff by reinvesting your profits into a cash Isa.
Investing in solar panels: need to know
Companies market solar PV panels as an investment, but there are some significant differences between the traditional ways of growing your money (like savings and investments) and purchasing and installing a solar PV system.
Be wary of claims made in sales pitches
Before the proposed cuts to the FIT scheme, Which? investigated the way solar panels are sold to consumers and found that some companies provided projected growth rates of 8% to 10%.
We also found that their calculations often didn't present how the index-linking of the FIT, maintenance costs and panel deterioration might affect your return.This is very different from the factors that affect the growth of your money in a cash Isa or stocks and shares Isa.
Solar panels vs savings accounts: how do they compare?
If you deposited your money in a savings account, you'd get an annual interest rate of growth on top of the original capital you'd invested. Interest will build up annually on a compound basis, so in order for £10,000 of savings to grow to the same level that the solar PV investment produces in our example (on the new FIT rates, coming in on 3 March 2012), you would need an account paying interest of around 1.60% (after tax) annually. With most accounts paying over 3%, this is easily achievable, even for higher-rate taxpayers.
If you spend £10,000 upfront on the solar panels on the other hand, that's £10,000 you can't retrieve. On the new proposed FIT rates, in 25 years, you could make £14,875 in cash from the FIT and bill savings. But the first £10,000 you earn through the scheme simply repays your outlay - the remaining £4,875 is your profit and your net cash.
Maximising your solar panel investment
If you are thinking of investing in solar panels, a good way of maximising your earnings potential is to reinvest any gains you make from the feed-in tariff into a best rate cash Isa.
This means you could receive interest on your earnings and build up a decent savings nest egg. Based on our calculations above, if you were to put the cash you make from producing energy and bill savings (on the new FIT rates it's £648 a year in our example) into a cash Isa paying 3.25% every year over 25 years, you could increase your earnings to around £15,210 after system and installation costs.
In addition to this, cash Isa rates will vary on an annual basis, so you may be able to get higher interest rates and possibly earn more than what is quoted on this page (depending on the economic environment). The FIT will rise with inflation each year, and could result in higher earnings.
Evidently, with the new, lower FIT tariff rates, you won't be able to achieve significantly more growth for your investment than you would in a Best Rate savings account or Best Rate cash Isa. Therefore, using solar panels as a means of making money looks far less attractive than it did in 2010/11 when the FIT rates were higher.
One other factor to consider is that solar panel costs may continue to fall. It is not yet clear whether this trend will continue, but if it does the rates of return you receive from solar panels could be potentially higher.
Paying for your solar panels
The most cost-effective way to pay for the installation of solar PV panels is upfront and in full. However, if you don't have the cash to pay upfront, you may want to consider remortgaging or a loan. If you do decide to this, remember that you'll have to pay interest on any money that you borrow, and loan repayments may even exceed the returns you make from the solar PV system.
Entering into a 'free solar' or 'rent a roof' scheme is another option, but Which? advises caution here.
Will solar panels affect the value of my home?
Solar panels and the feed-in tariff scheme haven't been around long enough to know whether or not the installation of solar panels could increase the value of your home. Therefore, don't necessarily consider that solar PV installation will guarantee a comparable increase in the value of your property. Which? will continue to investigate the relationship between solar PV installation and property prices.
Remember also that the inverter might need changing over the 25-year period and that, over time, the panels will reduce in efficiency. These factors need to be considered if you invest in solar PV and want to sell your home later on.
Replay our solar panels live Q&A
Our team of experts were inundated with questions from homeowners considering their solar options during our live Q&A, covering everything from energy savings and feed-in tariffs to installation, inverters and maintenance.
Missed it? You can rewind and replay all the action at Which.co.uk/solarlive.
- Find out about the different types of solar panel system
- Find out more about The Big Switch - harnessing people power to get the best energy deal
- Which? advice: our guide to energy grants
