Market News

 August 30, 2009
The pros and cons of investing in solar panels

 PRODUCING your own electricity can offer returns that are almost three times better than the top savings accounts, according to analysts.

From this month, until April 2010, homeowners who invest in equipment such as solar panels and wind turbines will be able to benefit from a £2,500 government grant, as well as a new "feed in tariff", which pays for the electricity they produce --- whether they use it or not.

The new tariffs will come into effect in April but by then the government grants --- under the Low Carbon Building Programme --- will come to an end. During this eight-month transitional period, therefore, homeowners can benefit from both.

Derry Newman, head of Solarcentury, a solar panels retailer, said: "With these government incentives overlapping, there's never been a better time to take your energy supply into your own hands and invest in solar."

Under the plans, which were announced in a consultation document in July, homeowners will be paid up to 36.5p for every kilowatt hour (kWh) of electricity produced using solar panels. If electricity is exported back to the grid --- when the homeowner is away, for example --- an additional 5p per kWh is paid, while savings are still being made on electricity bills.

Analysts at Solarcentury suggest an average return of £825 a year is expected with the panels, which typically cost £11,000 to install. If the £2,500 grant is factored in, their cost could be recouped in just over a decade.

The return on an £8,500 investment is 9.7%. As it is tax free, this is equivalent to 16.1% for a higher-rate taxpayer. The best savings rate now offers just 5.4% gross.

However, critics suggest that the comparison is unfair. Michelle Slade of Moneyfacts, the personal finance site, said: "You cannot withdraw the money used to buy solar panels."

There are also many hurdles before qualifying for the government grant. The home must be as energy efficient as possible before it will be considered. It has to be fully insulated --- both roof and wall cavities --- as well as fully double glazed, for example.

The level of funding is also limited. There is about £15m remaining, so 6,000 homes can still potentially receive support.

Today, if you already have solar panels, you will not be paid anything unless you are with a "green energy" supplier such as Good Energy. It pays 15p per kWh of electricity produced. You can apply online for the grant via the Low Carbon Buildings Programme (lowcarbonbuildings.org.uk).

The savings work out like this: a typical home will require about 3,300 kWh of electricity a year and a typical solar panel set-up, capable of producing up to 1,700 kWh a year, would cost about £11,000 to install.

Assuming you used half the electricity produced (850 kWh), you would earn £310 a year --- 36.5p per kWh from the government. You would also save by reducing the amount of electricity you had to buy from your supplier. As suppliers typically charge about 13p per kWh, that's an additional saving of £110 a year. By exporting the other 850 kWh, you would earn 41.5p, totalling £353. Your total return therefore would be £773 a year.

Assuming electricity bills per unit increase by about 5% a year, you would make larger savings each year. Over the next 25 years, the average annual saving is £825, according to Solarcentury.

This assumes that the government maintains the same level of payment over the period