Posted by: Nigel Collins
There has become a general increase in awareness with regards to renewable energy, especially as energy suppliers are passing through the costs of subsidizing installations through government schemes to end users’ bills.
Last month in my article, Lean and Mean Before You Go Green, I described how you should, before embarking on any renewable energy scheme, first ensure that you have followed the hierarchy of reducing your energy costs. This month, we look at electricity generation from Solar PV.
The Financial Case for Solar PV
Clearly, if this is not attractive enough, there is no point in reading the remainder of this article as this addresses the more technical issues. Basically, there are three options available and we will typically offer to evaluate each one:
- Self funded – in which case the ROI is typically about 7 years
- Financed – still an outright purchase but with a loan which can be sourced via the Carbon Trust
- ‘Free’ System (funded by investors)
Option 3 offers the least financial risk but may require an assignable lease agreement to be put in place and an agreement to purchase electricity. This will of course be at a significantly lower unit price than your current unit price but the days of ‘free’ electricity have gone for new installations since the Feed In Tariff was stepped down.
The ROI in the case of options 1 and 2 will be based on a number of assumptions. These are:
- the FIT rate in place at the time of becoming eligible;
- the percentage increase per annum in electricity prices from the supplier;
- the percentage increase in the RPI as the Export Tariff and Feed In Tariff (FIT), (after eligibility), are indexed to this;
- that the building has an EPC (Energy Performance Certificate) energy efficiency rating of A to D, qualifying it for higher FIT;
- that the percentage of unused electricity exported back to the grid has not been under-estimated;
- that the correct electricity unit prices are known as some suppliers will assume a figure and a 2 or 3 year contract might be in place;
- whether climate change levy is applicable;
- what rate of VAT is applicable to energy costs if not reclaimable
It can be seen that there are some fairly complex calculations involved and a number of variables. One of Auditel’s key roles in this situation can include (as independent advisors) to challenge some of the assumptions being made, especially as over-estimated energy price rises can result in an over optimistic ROI.
What is Solar PV and How Does It Work?
Photovoltaic (PV) modules are panels of solar cells, which convert sunlight into DC electricity. This is then converted into the AC electricity used in buildings using an inverter.
PV cells are made from layers of semi-conducting material, usually silicon. When light shines on the cell it creates an electric field across the layers. The stronger the sunshine, the more electricity is produced. Groups of cells are mounted together in panels or modules that can be mounted on your roof.
The power of a PV cell is measured in kilowatts peak (kWp). That’s the rate at which it generates energy at peak performance in full direct sunlight during the summer. PV cells come in a variety of shapes and sizes. Most PV systems are made up of panels that fit on top of an existing roof, but you can also fit solar tiles.
Solar PV needs little maintenance – the panels just need to be kept relatively clean and trees must not begin to overshadow them. In the UK panels that are tilted at 15° or more have the additional benefit of being cleaned by rainfall to ensure optimal performance. Debris is more likely to accumulate if you have ground mounted panels.
Financial Benefits and Incentives
Electricity generated reduces the quantity of electricity purchased from the grid. As generated electricity cannot be stored, any unused electricity can be fed back into the grid and will attract income from the electricity supplier based on the Export Tariff. In addition, payment is received in the form of the Feed-in Tariff (FIT).
FITs were introduced to encourage the use of small-scale electricity generation from renewables to help meet the Government’s renewable energy generation targets.
When calculating financial benefits, 20 year projections are made as this is the guaranteed number of years for which the FIT will be paid. The life of a PV system is estimated as 25 years, (although the inverter may need replacing during this time).
The FIT for any given installation will depend on the size of the installation and the eligibility date. The eligibility date is the date from which an installation becomes eligible for FITs payments. FIT rates are reviewed every quarter and depending on the level of take up and how close the government is to meeting its targets, degression is applied to rates. If take up targets are not met, degression may be skipped for up to two quarters but then in the third quarter, default degression of 3.5% will be applied. The cost of solar panels has reduced over time and the expectation is that degressions will encourage costs to reduce further.
Once the FIT has been locked in, rates are guaranteed for 20 years and are index linked. Further information can be found on the Energy Saving Trust Site
The Feed In Tariff is paid on all electricity generated, regardless of whether it is used or fed back to the grid.
It is essential to use an installer who is certified through the Microgeneration Certification Scheme (MCS). MCS regulations govern how MCS-certified installers must install solar PV. This will cover, for example bracketry and how roof penetrations are sealed; pretty essential as no one wants to introduce roof leak problems, either now or in the next 20 years!
Other Issues to be Addressed
Survey – a desktop survey is usually undertaken which takes into account location, roof angle and direction but a detailed site survey may reveal that the roof is not suitable without reinforcement.
Planning Approval – may be required
DNO Application (normally obtained by the supplier) – this is to ensure that the grid has the capacity to handle the installation.
If opting for a funded system, legal advice should be sought before signing an assignable lease agreement or power purchase agreement.
Insurance – the presence of PV panels should be disclosed to your insurers as a material fact.