Can DECC keep the FiTs scheme open?

[TedM]

My analysis of data recently published by DECC and OFGEM shows that the spend for currently installed PV systems will run to around £450 million in the current year (April 2012 - March 2013).

This is against DECC's adjusted 'budget' for FiTs of £235 million and doesn't include any allowance for new systems being added over and above whatever was installed as at 31st March.

How will DECC react to this once they figure out what has happened? Will they be able to find another £200 million plus down the back of the sofa?

This is the breakdown:

			kWh	Tariff payments
kW range	TIC kW	Year total		year total
0-4 (pre 3/12)	797,356	717,620,400	0.47	337,281,588
0-4 (post 3/12)	49,266	44,339,400	0.226	10,020,704
4-10 (pre 3/12)	51,070	45,963,000	0.412	18,936,756
4-10 (post 3/12)	2,029	1,826,100	0.328	598,961
10-50 (pre 3/12)	148,985	134,086,500	0.345	46,259,842
10-50 (post 3/12)	10,660	9,594,000	0.152	1,458,288
50-100		7,353	6,617,700	0.345	2,283,107
100-250		8,332	7,498,800	0.322	2,414,614
>250 (pre 8/11)	101,897	91,707,300	0.322	29,529,751
>250 (post 8/11)	349	314,100	0.089	27,955
Total		1,177,297	1,059,567,300		448,811,565

(Tariffs include 50% deemed export for <10kW systems only)

 

[SRE]

Will this generate the start of the final solar rush to install before July 1st?

Can the CRC budget be used to offset the excess?

 

[jerriais]

Isn't there still a good chance that the Office For National Statistics could rule that as FITs is not part of Govt spending it should not be subject to the budget/levy control framework anyway? This is how I understand the ruling went in Germany based on EU law. I also seem to remember that their meeting to decide this was to be some time in April.

 

[Gavin A]

I do believe they#re already reacted to it by postponing RHI for domestic until the next financial year.

 

[Gavin A]

but I think we may well have to be preparing for July FIT cuts definitely happening.

 

[SRE]

At the lower end ...

 

[TedM]

DECC proposed 3 trigger levels for the various possible tariffs from 1st July. These all relate to the capacity installed between 3rd March and the end of April 2012.

A. Less than 150 MW - 16.5p
B. 150 to 200 MW - 15.7p
C. Over 200 MW - 13.6p

Installations from 3rd March to 1st April are at the 62 MW level so well under the lowest trigger point, but OFGEM data for >50kW systems does lag so there may be more installed capacity waiting to be registered.

 

[The Solar King]

Ted
Are you not being a little pessimistic basing your calculations on 900kW Hrs production per kW installed. Is this not higher than the figures generally used?

Not trying to split hairs here as the figures do beg several questions. We could yet be subject to yet further Government by cock up.

 

[SolarCity]

Judging by real world figures, 900kWh per kW installed is actually on the conservative side.

 

[Ian-LS]

DECC proposed 3 trigger levels for the various possible tariffs from 1st July. These all relate to the capacity installed between 3rd March and the end of April 2012.

A. Less than 150 MW - 16.5p
B. 150 to 200 MW - 15.7p
C. Over 200 MW - 13.6p

Installations from 3rd March to 1st April are at the 62 MW level so well under the lowest trigger point, but OFGEM data for >50kW systems does lag so there may be more installed capacity waiting to be registered.

When I was registering systems on the MCS database it did look like in March that things had slowed down to about 2-3,000 installs a week. Therefore I am confident that less than 150 MW will be installed before the end of April and therefore a rate of 16.5p wouild be introduced from July 1st 2012 which I think most companies will be able to cope with relatively easily. I am not at all keen on another reduction in October though as after July I think the industry needs a good 6 months at the new feed in tariff level before any reduction, obviously if prices of PV do drop further then the tariff has to be reduced further but I would be more keen on another reduction in December rather than October.

 

[SRE]

Not sure what your definition of "easily" is it's difficult enough at 21p and my discussions with wholesalers don't look too promising about reduced prices in July. I'm not sure we can survive the 16.5p cut - we want to maintain the quality of installation.

I agree about the timescale though, one of the points I made when I responded to the consultation - along with the difficulties with D rating in off gas grid areas. None of this meets my definition of easily

 

[Ian-LS]

ok at 16.5p it reduces a 4 kWp quote I have just done from 10.8% to 9% and adds one 1-1.5 years to the payback. This is with Hyundai panels and SMA Sunny Boy inverter so still getting a very good return imo

Admittidly its not ideal but still think at 16.5p the rate will still give good returns for domestic installations.

 

[Gavin A]

a point to note on this being that the lower the FIT rate drops, the greater the proportion of the payback is made up by the offset electricity side of things, and to a lesser extent the export payments.

So I can well envisage it becoming far more the case that it will make financial sense for high daytime electricity users, but not so much for lower daytime energy users, particularly if electricity prices rise again.

I'm hoping they'll take notice of the consultation and at least leave this reduction until October, as I think the industry needs to have 6 solid months of stability to get ourselves properly sorted out again after the last 7 months of utter chaos.

I'm also really annoyed that they've moved domestic RHI back by 6 months again, as I was working on the basis that the solar water heating side of things would pick up over the next few months to take some of the pressure off the solar PV side to cover all our running costs. Luckily this happened just before I actually took on a plumber in anticipation of that side of things building up, and before we spent money on getting accredited for heat pumps etc. Stupid thing is that my solar water heating training ticket runs out in October next year, which will be 5 years since I trained in it in anticipation of RHI...

 

[SRE]

ok at 16.5p it reduces a 4 kWp quote I have just done from 10.8% to 9% and adds one 1-1.5 years to the payback.

Does the 10.8/9% take into account the cost of the system and replacement inverter? After all once it's installed you can't get it out of the bank again. I can't get my payback to anything like that - I don't know what I'm doing wrong.

 

[Ian-LS]

Does the 10.8/9% take into account the cost of the system and replacement inverter? After all once it's installed you can't get it out of the bank again. I can't get my payback to anything like that - I don't know what I'm doing wrong.

It takes into account the cost of the system yes. We include inverter replacement costs in year 15 so it is not included in the ROI as this is based on year 1 income. Its based on PV GIS data, 40 % of the PV being used within the house as he is retired at 14.4p/kWh. I'm not going to give away exactly how much the installation was but the cost was less than £9,000.

 

[TedM]

Ted
Are you not being a little pessimistic basing your calculations on 900kW Hrs production per kW installed. Is this not higher than the figures generally used?

Not trying to split hairs here as the figures do beg several questions. We could yet be subject to yet further Government by cock up.

The SAP figure is 850 kWh/kWp/yr which is based on average insolation for the north of England and is widely recognised as being too low with most owners reporting actual generation that beats their predicted figures.

I have some very rough figures which suggest that actual average generation for all PV systems in the first year of FiTs was over 1000 kWh/kWp. This is a part of my FiTs model that I still need to spend some time on. FiTs payments are reported by OFGEM as a lump sum so I have to find a way of spreading that across the different FiTs technologies. My present method is based purely on TIC which I know isn't good enough. But PV is such a large part of FiTs that I believe the error is small.

As a reality check the 212 UK PV systems registered with BDPV website have an average of 1109 kWh/kWp/yr. If applied to all UK systems that would represent an extra £100 million a year in FiT payments.

So I think 900 kWh/kWp/yr is arguably on the low side.

 

[FB.]

Does the 10.8/9% take into account the cost of the system and replacement inverter? After all once it's installed you can't get it out of the bank again. I can't get my payback to anything like that - I don't know what I'm doing wrong.

I agree.

As I've mentioned a few times - and supported by evidence of German power prices declining due to solar production - it would be prudent to assume that electricity prices rise in-line with inflation, to take the middle ground between rises or falls.

So.....

£9500 for a 4kWp system.
3500kWh per year is realistic for part-shaded South, or for SouthEast or SouthWest - which covers a lot ofmaxium-size installations.

43p FiT-eligible
£1650 FiT and export tariff.
£200 bill savings (40% utilisation)
£380 depreciation.
Annual "profit": £1470 = 15.5% plus inflation on top, making probably 18.5% if inflation hits the bank's target of 3%.

21p FiT-eligible
£800 FiT and export tariff.
£200 bill savings (40% of generation used in-house)
£380 depreciation.
Annual "profit": £620 = 6.5% plus inflation on top, making probably 9.5% if inflation hits the bank's target of 3%.

16.5p FiT-eligible
£650 FiT and export tariff.
£200 bill savings (40% utilisation)
£380 depreciation.
Annual "profit": £470 = 5% plus inflation on top, making probably 8% if inflation hits the bank's target of 3%.


For a 2.5kW installation (£6500) (2200kWh annual production):

43p FiT-eligible
£1000 FiT and export tariff.
£130 bill savings (40% utilisation)
£260 depreciation.
Annual "profit": £870 = 13.5% plus inflation on top, making probably 16.5% if inflation hits the bank's target of 3%.

21p FiT-eligible
£500 FiT and export tariff.
£130 bill savings (40% of generation used in-house)
£260 depreciation.
Annual "profit": £370 = 5.5% plus inflation on top, making probably 8.5% if inflation hits the bank's target of 3%.

16.5p FiT-eligible
£400 FiT and export tariff.
£130 bill savings (40% utilisation)
£260 depreciation.
Annual "profit": £270 = 4% plus inflation on top, making probably 7% if inflation hits the bank's target of 3%.

 

[saint]

Stupid thing is that my solar water heating training ticket runs out in October next year, which will be 5 years since I trained in it in anticipation of RHI...

Gavin A..... what training did you do for this? i want to get ready for the RHI. Thanks

 

[SRE]

Gavin A..... what training did you do for this? i want to get ready for the RHI. Thanks

Well you've got plenty of time lol

 

[Gavin A]

I agree.

As I've mentioned a few times - and supported by evidence of German power prices declining due to solar production - it would be prudent to assume that electricity prices rise in-line with inflation, to take the middle ground between rises or falls.

German domestic electricity prices for the last 3 years are

2010 | 0.228
2011 | 0.238 | 4.3% rise
2012 | 0.253 | 6.3% rise
[source]

the data you refer to relates to spot prices on the wholesale market only, consumer prices include the cost of the feed in tariff payments for all that solar generation, plus everything else.

The price rises involved in the UK electricity market over the next few years are largely dominated by gas price rises as the North sea gas fields are in rapid decline (25% reduction in output last year) and must be replaced with far more expensive imported LNG, which has to be bought on the world market competing against every other country with an LNG terminal. Gas now makes up around 50% of the UK generation mix, and much of the rest of it is increasingly coming from renewables sources, which for the foreseeable future are going to be more expensive than the current average generation prices.

electricity prices have gone up by something along the lines of 9% a year over the last 6-7 years since the north sea gas started declining, and I see no reason at all to think that this rate is going to reduce in the next few years.

 

[Gavin A]

£9500 for a 4kWp system.

this price is a large part of the reason your figures don't end up with reasonable rates of returns.

 

[Gavin A]

£380 depreciation.

ah.. also this. Why are you assuming the system will be worthless after 25 years?

the panels are still guarateed to be capable of producing 80% of their initial rated output at that point, and given the likely price of electricity by that stage, solar PV systems should retain a significant level of value.

plus in actual cash terms, the person invests eg £9500 in a solar system, at that point effectively that money is gone, replaced by an annual payment. The payment they actually receive each year shouldn't then also have £380 taken off it as you're then basically double counting for this side of things in your estimates.

It's really most comparable IMO to a pension or something similar that makes annual cash payments, but has a much lower value if someone tries to cash it in.

 

[FB.]

this price is a large part of the reason your figures don't end up with reasonable rates of returns.

Well, that figure is taken from a couple of companies which I asked for a guide price in recent days, on behalf of a relative (see the following topic):
http://www.electriciansforums.net/p...green-energy-forum/54676-split-pv-arrays.html

Needless to say, my relative has not hurried to proceed at that kind of price/payback for 4kWp systems in the £9000 range, but is awaiting another two guideline quotes from local-ish companies.

I am a professional investor, so I make sure that any investment has a generous margin of safety to allow for unforseen events which only time will tell were risk factors which were not taken into consideration.
With a comfortable margin of safety, or slightly pessimistic assumptions, it then virtually guarantees a very impressive rate of return on the investment.

.

 

[FB.]

ah.. also this. Why are you assuming the system will be worthless after 25 years?

the panels are still guarateed to be capable of producing 80% of their initial rated output at that point, and given the likely price of electricity by that stage, solar PV systems should retain a significant level of value.

plus in actual cash terms, the person invests eg £9500 in a solar system, at that point effectively that money is gone, replaced by an annual payment. The payment they actually receive each year shouldn't then also have £380 taken off it as you're then basically double counting for this side of things in your estimates.

It's really most comparable IMO to a pension or something similar that makes annual cash payments, but has a much lower value if someone tries to cash it in.

The depreciation charge is because if I put money in the bank (or into shares of high-quality companies), I can expect to get it back at some point in time (and the shares may well have paid cash dividends along the way).
Once I spend money on solar panels, they cannot be re-sold.

 

[FB.]

North sea gas fields are in rapid decline

That doesn't have to be the case.
As I understand it, it's largely because the government slapped a big tax hike on the oil/gas producers, so they abandoned or mothballed oil and gas fields to wait and hope for a better environment in which to operate.
Only recently, two of the big six permanently scrapped any nuclear plans due to government dithering and lack of clarity (much like the confusion and inconsistencies with solar PV and now RHI).

 

[Gavin A]

That doesn't have to be the case.
As I understand it, it's largely because the government slapped a big tax hike on the oil/gas producers, so they abandoned or mothballed oil and gas fields to wait and hope for a better environment in which to operate.

nothing to do with that, they're in decline because the fields are nearing exhaustion and they've been using every trick in the book to keep them pumping as fast as possible for as long as possible, so the decline will be even faster than it otherwise would have been.

Any new fields would barely touch the sides of the decline in the big old fields

Only recently, two of the big six permanently scrapped any nuclear plans due to government dithering and lack of clarity (much like the confusion and inconsistencies with solar PV and now RHI).

By government dithering, do you mean government refusal to sanction further massive subsidy of 4th or 5th generation nuclear?

If it can't cover it's own costs by now, 60 years down the line, then it never will. Never mind the massive hidden subsidies that would have been in place anyway in terms of the government underwriting the insurance costs to limit the companies liabilities to £120 million (iirc) in the event of an accident.

the nail in the coffin actually being the German governments decision to close german nuclear plants early, which meant the German companies no longer had the funds available to build these new plants in the UK. Not really much to do with UK government policies at all tbf.

 

[Gavin A]

The depreciation charge is because if I put money in the bank (or into shares of high-quality companies), I can expect to get it back at some point in time (and the shares may well have paid cash dividends along the way).

Whatever works for you I guess, for most people that'd confuse the hell out of them, and they prefer a simple - if I give you this much money, how much money will I get back each year, what will that be in total after 25 years, and what's the total profit over that period? Basically they're well aware they've spent the £8k or whatever up front.

Once I spend money on solar panels, they cannot be re-sold.

arguable, but even if true, then they'd still have a value as something that saves you a signficant amount of money each year.

 

[FB.]

they'd still have a value as something that saves you a signficant amount of money each year.

Yes, on that basis I would certainly ask a higher price for my house if I ever wanted to sell it, given the 3.75kWp (43pFiT).
It'll be interesting to hear what estate agents are estimating as the "value-added" by a well-designed PV solar array which didn't detract from the looks of the house.

.

 

[series530]

Yes, on that basis I would certainly ask a higher price for my house if I ever wanted to sell it, given the 3.75kWp (43pFiT).
It'll be interesting to hear what estate agents are estimating as the "value-added" by a well-designed PV solar array which didn't detract from the looks of the house.

.

I suspect that the added value is no where near as much as most would hope.

Beauty is in the eye of the beholder but so many systems are badly designed and detract from the kerb or brochure appeal of the house. With ours, we tried to add something that is sympathetic - well, as sympathetic as 14 solar panels can be. Heavens forbid if you have a rent a roof scheme!

On better designed systems it probably adds about 50% of the annual FIT payment for as long as the average home owner stays in a home. For cheaper properties the duration of ownership is probably lower as people trade up. For middle aged buyers the tennure is probably longer so the panels may add a little more.

At the end of the day though, the panels, if installed well, are probably more of a differentiator than a source of extra revenue. We certaily didn't buy them on the basis that they would be worth much come house resale time.

 

[The Solar King]

Having no standard method for calculating the worth of an installation is difficult. It also puts you in danger of mis-selling.

I extracted the Net Present Value / Internal Rate of Return model from PVSol so I could play around with it further. There are a lot of variables that should be taken into account: Assessment period (not necessarily the same as life of system) Capital Cost, , Interest Rate, Cost of Grid Electricity, Annual Consumption of electricity, output of PV system, panel degradation, level of FIT payment, export tariff, level of self use of generated electricity, inflation rate (RPI or CPI prediction), fuel price inflation (historic or DECC prediction low, high or medium), annual running cost (to include inverter replacement spread over life of system).

These are all the figures you would be using to make an investment decision in business. You can argue that this may not be the case in a domestic environment, but not taking them in to account when providing any financial calculation to a customer leaves you exposed. There is also the risk of you being in breach of the Financial Services Act if you are not a registered financial advisor.

If you honestly put all this in to a calculation you will not get the kind of returns some are mentioning in this thread. You are better providing all the variables to a customer and let them work out what they think it is worth to them. At least in that way you will not leave yourself exposed. Self use is a mine field. 40% for an average householder with a 4kW system is wishful thinking. Go in to PVSol and create a load profile that reflects this - it just isn't real.

If you think about it, it is the same reason that a SAP calculation is given in a quote; at least it is comparable. If each quote a customer receives comes with a different rate of return and payback period for basically the same system who should they believe?

 

[SRE]

Self use is a mine field. 40% for an average householder with a 4kW system is wishful thinking.

I totally agree, we advise our customers, based on our experience that 25% can be achieved with some hard work, anything over that extremely optimistic, unless your meter is going backwards ;-)

 

[Gavin A]

I extracted the Net Present Value

the problem with the Net Present Value method of calculating rates of return is that for probably 95% of customers they will simply take the NPV rate you give them and compare it to the bank interest rates they're currently getting without realising that NPV has already done that comparison and is giving them the additional value on top of the bank rates they could be getting.

While I do see the argument for using it, I really don't think it's appropriate in these circumstances for this reason.

I am contemplating using it for professional investors, buy to let types and businesses, but would still only do it alongside the simple annual rate of return, with an explanatory note.


eta - as well as the headline figure, we also supply 25 year payback sheets with each quote showing the anticipated rates of return for each year of the next 25 years for FIT, Export and self consumption along with the assumed rates of payment, incorporating losses from the panels. With that we also show the total 25 year income / savings, as well as this figure minus the initial system cost to give the actual profit made on the investment. We're currently reviewing this side of things, and I may add a NPV column to this more detailed section, but don't want to risk confusing customers too much.

 

[Gavin A]

I totally agree, we advise our customers, based on our experience that 25% can be achieved with some hard work, anything over that extremely optimistic, unless your meter is going backwards ;-)

we tend to use 30% for 4kWp systems unless we have data showing they're heavy daytime energy users.

 

[FB.]

Self use is a mine field. 40% for an average householder with a 4kW system is wishful thinking.

For an average householder who isn't at home during the day that may be true.

But in the first quarter of this year, I will have generated about 750kWh.
My usual power usage would be around the same amount as my first quarter generation - maybe a bit more due to winter (I pay £36 per month DD to Scottish Power).
I have actually dropped my electricity import by about 325kWh in the most recent quarter (i.e. a 40% reduction, or, by extension, 40% usage in-house) so it's dropped my monthly consumption from £36 to £21.
I am, however, in the fortunate position of working from home, so I'm able to take advantage of sunny days.

 

[Gavin A]

it's also early in the year, so generation is lower. Your consumption to generation ratio will drop come summer.

 

[SRE]

I have the advantage of 18 months with a 4kwp system, working from home, using as many electrical appliances as possible during sunny periods. Our consumption has reduced from 5000kwh pa to 3800 pa give or take an odd kwh. In my book that makes 24% and I work hard at it.

FB you too will become as frustrated as me when you're system is generating 27kwh in a day and you've only managed to use 5 or 6

 

[The Solar King]

Gavin is right about net present value. The problem is the number of people out there quoting this. I suspect that most of them do not understand it themselves. This is where the danger lies and also makes it difficult when talking to prospective customers. If some numpty has told them they will get 9 or 10% and I tell them no they will not, what does the customer think then? It gets worse when the best some of the double glazing salesmen can accurately work out is their commission.

 

[FB.]

.......I am contemplating using <NPV> for professional investors, buy to let types and businesses......

Any professional investor who deserves to hold onto his wealth should have done most of the sums and research in advance.

..... don't want to risk confusing <ordinary> customers too much......

Yes, I think that most people's eyes will glaze over if you get too complicated and you may end up losing a sale to someone who has been less thorough in providing the investment case.

 

[Gavin A]

It's worse than that solar King, as some companies are actually using the annualised average returns to give them their percentage figures, which then include all the assumptions about RPI and fuel cost rises.

IMO it would only be OK to use annualised average figures is you were using NPV methodology, not doing this is IMO a dishonest way of supplying the figures unless you're really up front about how you've calculated them, which none of these companies generally are. It's how companies can get away with still charging over the odds, while claiming 10% returns.

We prefer a happy medium, that our customers can easily and simply understand... ie pay £8,000, get £800 back in year one, and that would be a 10% return on investment.

If you're going to get as complex as NPV, then really IMO you probably need to have your workings verified by a qualified financial advisor, and realistically you ought to also be able to incorporate into those figures factors such as the tax benefits from the none income taxable status of FIT's etc. Personally, I'm happy that our method is simple, and easy to understand, with no danger of sounding like some sort of dodgy financial advisor when trying to explain the methodology used - even when with NPV you're actually trying to present a more honest picture for your customer.

 

[Earthstore]

At the end of the day you can make your figures whatever you ,want them to be, they are just nunbers on a piece of paper, it all depends on how honest you are really, and if you want to meet that customer in the street who tells you how pleased they are with the system that you installed and it is performing better than you said it would.
As for a 25 year projection, IMO there are just too many assumptions, so you really could make the final figure whatever you want it to be, just by changing things slightly then compounding that by 25 years.

The best explanation I heard from a customer was "I now do my washing etc in the day time, my meter is stationary, and then every three months the electricty company put a load of money in my bank account".
But then I like things to be simple...