How to buy solar panels Is solar PV a good investment?
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 can get paid for the electricity that your solar panels produce.
In this guide you will find out what to consider before using solar panels as an investment, and discover when your solar system will pay back.
Solar panel profit and payback time
The government's Feed-in Tariff (FIT) basically pays you in return for having solar panels on your roof. It guarantees cash payments to households that generate their own electricity using renewable technology.
The government is proposing to cut the feed-in-tariff for small domestic solar PV installations by 87% from 1 January 2016. That means you will now only get 1.63p for electricity generated instead of 12.92p. So if you are considering getting solar PV panels, we recommend you get them now.
We calculated what an average solar PV panel installation (3.5kWp for £7,000) positioned on an optimum roof (south-facing and with a 30-degree tilt) on a house in Birmingham, with an EPC of band D or higher and registered for FIT between 1 April and 30 June 2015, could receive and save.
We found that the typical payback time would then be about 12-13 years and a net profit of about £4,000 could be made.
This is what the earnings and savings would be for the above examples from the FIT and savings on bills:
- Annual generation tariff income: £408
- Annual export tariff income: £70 (based on a deemed export rate of 50%)
- Annual fuel-bill savings: £81
- Total: £559 a year
Expected net profit over 20 years: £11,180 (-£7,000 installation cost = £4,180)
Expected payback time: 12-13 years for a £7,000 3.5kWp system
Find out more about how the FIT works and what the rates are in our dedicated guide to the Feed-in Tariff.
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 (such as savings and investments) and purchasing and installing a solar PV system.
Under the government's FIT scheme, you receive cash in return for generating your own electricity using renewable energy.
Payments are guaranteed for between 20 and 25 years (depending on when you had the panels installed), the price per kilowatt (kWh) of energy is index-linked, meaning that it will rise with the Retail Price Index (RPI) measure of inflation annually, and all proceeds you make are free from tax.
Be wary of claims made in sales pitches
Before the last proposed cuts to the FIT, Which? investigated the way solar panels are sold to consumers. We 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 how much money you make. This is very different from the factors that affect the growth of your money in a cash or stocks and shares Isa.
Factors that affect your solar panel investment
There are many variables that will affect the returns that you receive from the FIT.
- Inflation will increase the generation and export tariffs each year. The Bank of England's target rate of inflation is 2%, and this may be a useful figure to use when calculating what future tariffs may be.
- Electricity price increases will impact on your level of savings on your electricity bills. The higher electricity prices go, the greater your savings. The Department for Energy & Climate Change (DECC) forecasts this at 2.6% a year until 2030.
- Cost of solar panel installation has fallen swiftly since the launch of the FIT scheme. 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 as it takes less time to repay your initial outlay.
- Lost interest - remember that the money you make from the FIT can only be considered as profit when you have recouped the amount that you have spent installing the solar panels. Think about how much interest you are missing out on by not putting the cost of panels into a savings account, and make sure that you factor this to your calculations of your overall returns.
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 FIT into a cash Isa.
This means that if you put the cash you make from producing electricity and bill savings, you could receive interest on your earnings and build up a decent savings nest egg.
Cash Isa rates vary on an annual basis, so make sure you check to ensure you're in a best rate cash Isa.
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 we advise caution here. You can find out more by reading about free solar panels.
Will solar panels affect the value of my home?
Solar panels and the FIT 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 assume 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.
Also, remember 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.