It’s taken longer than I’d hoped, but here we go:
These are the IRRs assuming no bank financing. I included the reference prices for Sainsbury and Tesco in the context of a previous post.
Using the Tesco installed price of £5k/kWp for small retrofit, an IRR of 5.5% from your investment might not seem too bad at the moment, given current interest rates. Sure, it might not set the world alight (and certainly won’t attract much in the way of private finance) but it’s not too abysmal.
However even this 5.5% is provisional: the IRR is very sensitive to how much of the electricity generated by the PV is used on site. This is because the “on site” value of the electricity is the same as the price of the grid electricity that you’re offsetting. In other words, if you pay 14p/kWh of grid electricity but instead you generate and use a kWh on site, this has a value of 14p in addition to the FiT payment.
On the other hand if the electricity from your PV panels is surplus to on site requirements at any given moment, the electricity will be exported… and attract a measly 3p/kWh. So it’s clear that consuming electricity on site is worth a heck of a lot more to exporting to the grid. For a small retrofit at £5k/kWp, here’s how the on site proportion affects the IRR:
The 50% on site figure comes from DECC, but lots of people (though obviously, not people in the PV industry) feel it’s overcooked. My own doubts were strongly reinforced recently when I put an energy display unit in my house. I was genuinely surprised by how spiky our electricity load is.
Typically during the day, our load is a steady 80W or so, occasionally punctuated with spikes of between 2 and 5kW for a minute or two while the kettle and microwave do their thing. Not a good match if you’re looking to use all your PV electricity on site. I reckon for our house it would be around 10 – 15% for a 2kW array. Suddenly my 5.5% has become 4.3%. Then again, everyone is different and the loads in another house might be a tighter fit. Just the same 50% feels way too high.
So what’s the headline verdict on the IRR from the PV FiT? Giving DECC the benefit of the doubt on the 50% figure, capital cost for small domestic retrofit needs to drop well below £4k before an ESCO would be able to come along and take the cost away. And even then they wouldn’t be offering much in the way of rent or value share.
For small new build and medium installations, you’d need to be nearer £3k/kWp to attract private finance. For larger installations you need to be well under £3k.
In some cases it’s probably doable… in a very mature market like Germany or Italy. But if part of the point behind the FiT is to hurry the development of our immature PV market (we’re talking about supply chain and installers rather than PV manufacture), we appear to be demanding that our industry run before it can walk. It’s not clear yet what the effect of this will be over the next couple of years. But I’d expect to hear a lot more hype from salespeople while ESCO offers remain thin on the ground (and watch that small print!).
Here are the assumptions behind the graphs above:
| Type | FiT (p/kWh) | Proportion used on site | OPEX (£/yr) | Retail elec price (p/kWh) |
| up to 4 kW (new build) | 31.6 | 50% | -£60 | 14 |
| up to 4 kW (retrofit) | 41.3 | 50% | -£60 | 14 |
| 4 – 10 kW | 36.1 | 50% | -£60 | 14 |
| 10 – 100 kW | 31.4 | 50% | -£55 | 12 |
| 100 kW – 5 MW | 29.3 | 50% | -£50 | 10 |
| Useful AC output (kWh/kWp) | 750 |
| Panel degradation (% pa) | 1% |
| RPI | 2.0% |
| Energy inflation | 3.5% |
carbon limited 
Casey
Good to see my spreadsheet pretty much matches yours. With AC output of 850 (optimistic), degradation of 0.5%, RPI of 2.4% and total energy inflation (inc RPI) of 5%, I am finding an AER of 3.15% over 25 years performs the same (if you are sitting on £10k and want to lock it up for 25 years – unlikely).
Is the 50% figure not fixed though? My understanding is that there won’t be meters on the exported electricity. Do you know if there are plans to adjust the 50% export figure (I agree it is unlikely to reflect reality)?
Good to hear we’re in the same neighbourhood, Mel. Re the 50%, the FiT response says export may be deemed for small systems but only as an “interim measure”. On page 33:
Worth keeping an eye on then. Reading para 132 (pg 36), the export arrangements are interim only. I hadn’t fully picked this up before – the middle paragraph points to adjusting the 50% figure in the future. I’m thinking the 50% was chosen to prevent paralysis, so at least something started to move:
“We therefore propose that, strictly as an interim measure, that at the very
small scale, the amount of exports for the payment of export tariffs can be
deemed, subject to the following conditions:
• these arrangements will only apply until the finalising of specifications
for smart meters;
• the payment of export tariffs for deemed exports will be included in the
levelisation process, but the total payments to and from suppliers will
be adjusted to reflect the benefit that they receive from the spilling of
these unmetered exports onto distribution networks through GSP
correction factors;
• these arrangements do not apply if export meters exist already, or are
provided at the generator’s expense.”
Excellent work. So, our sub £4K/KWp quotation for our house is looking quite fine… hope all is well.
Casey,
As far as i understand, householder gets an additional 3p i.e, 41.3p + 3P/kWh for any export as per pg 33 fig 2 and pg 34 para 121 of the Govt. response to FiT.
So would that not mean its better to export?
Hi Minhaj,
It’s better to use it on site (if you were going to consume it anyway) since this means you don’t have to buy it from the grid. The value comes in savings rather than in cash. HTH.
I admire your patience with all this Casey!
I hope people reading this don’t quote the rate of return out of context and use it to compare with say large scale wind or insulation since this is the rate of return including a massive subsidy.
Interesting that a zero carbon school is planned that will use PV for heating! Improves the onsite use so that’s good 🙂 Obviously budget blown on this so will be electric resistance but, perversely, a heat pump for hot water (with trace heating on the long dead legs).
On the plus side it would be cheap to improve the carbon savings even further – fit an oil boiler!
From a different angle, we are having problems connecting PV into grid.
We currently have 60kwp going in on one Code 6 project in Staines and are in detailed discussions with Scottish and Southern.
They have to carry out some network upgrades at our cost, fortunately it is not as bad as it could have been as we had not allowed any cost for this.
Unsurprisingly the grid was conceived to distribute power in one direction and if feeding micro generation into local networks this can cause increased spikes which will burn out everyone’s fridge compressors etc…
We also have a terrace of Code 5 houses in Hatfield for a housing association the Electric supplier wants 3 phase supply for a 5kwp installation.
I will be more conscious in the future when specifying large installations and engage with the local electricity network at the earliest opportunity to avoid a nasty shock.
Casey/Mel,
The main difference in opinion between most of us looking at these projections is of course assumptions about RPI and energy inflation.
Your 3.5% seems very low. How have you come to that figure?
Also, what are you doing with the cash value on energy savings? Is that just being spent? We’ve also looked at the possibility of investing this too.
What you have to remember guys is that inflation is now more like 4.5% (RPI) – see recent Telegraph article by their editor. As you may know, applying the rule of 72, we get 72/4.5 = 16 years for money to halve in value. Tesco currently sell 3.96 kWp systems – the biggest size. If south facing, no shading, under SAP it would make over £54,000 by year 25. (I’ve assumed 2.5% RPI, and 5% price rises in electricity, with deemed amounts being used i.e. 50% is exported, 50% is used.) A bank account paying 2% interest would on the same amount you spend on this system will only get you £24,000.
Gold is of course an alternative to PV. But gold is reaching an upper price limit, perhaps it’s even topped. Stock markets are up and down with rumours of wars, financial recessions, bail outs, debt, bank problems, countries going bust. So by contrast, Tesco PV is a sure bet.
You would have to be pretty stupid not to want to take advantage of something that rises with inflation. The only other thing I can think of is gilt bonds but they are very expensive and nowadays one might consider them uncertain as well because govts are going bust left right and centre.
The main thing is that you will get a payback after 8 years and for the next 27 years you make a packet.
I believe M&S are now also selling these systems! Amazing! Fab-u-lous!