Feed-in Tariff subsidies fall in April – but it’s not the end of the world
Dr Chris Jardine gives his opinion on Ofgem’s recent announcement on Feed in Tariffs
Ofgem recently announced that Feed-in Tariff (FiT) rates for new domestic PV installations would fall from 13.88p/kWh to 13.39p/kWh from April 1st. So how does this change affect the incentives to householders for installing solar PV?
It is first worth remembering why the government is reducing the FiT. Clearly, they want to incentivise the uptake of solar PV on residential properties. But it is also important that solar is not over-subsidised – with FiTs financed from a small levy on everyone’s electricity bills, we don’t want to put people’s bills up unnecessarily. With costs for solar PV continuing to decline as mass production, technological advancement and a more efficient installation service are streamlining the industry, it right that the FiTgoes down to avoid any over-subsidy.
With this in mind, tariffs for PV reduce by 3.5% every three months if national installation targets are met, and it is this so-called degression that is occurring in April 2015. If national targets are not met, then rates only go down every nine months.
It is important to realise that not all the benefits of solar PV come from the FiT. Householders also benefit from bill savings for the electricity they are no longer buying from their supplier. So a 3.5% cut in tariff is not a 3.5% reduction in income; overall this will be nearer a 2.5% drop.
The difference to your investment before and after 1st April 2015
For a typical 2.5kW PV system, we expect a cost of £5,500, and a 25 year profit of £15,400. This equates to a rate of return on investment of 12.5% per year. From April with the lower tariffs we are expecting a 25 year profit of £15,000; that is to say a 12.2% rate of return on investment.
So it can be seen that there is a small advantage to installing PV before the end of March. Over its lifetime, you’d be £16 / year better off installing before the FiT cuts. However, it’s not the end of the world if you don’t, as rates of return will still be high after the tariff cut. If you were to compare either of these investments to the tiny returns available from banks or ISAs, solar PV is still one of the best places to put your savings.
Over time, as costs continue to reduce, rates of return will creep up again. The rates of return therefore follow a saw tooth pattern, dropping to roughly 12% at tariff degression points, and creeping up slowly to 12.5%, as costs continue to decline. If you’re really trying to maximise your benefits, then you should look to time your install around tariff points. But you should always be aware that, even at the lowest point of the saw tooth, solar PV is still one of the best financial investments you can make.
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