Residential Solar Panels - Return on investment.

Written-by

Richard Burdett

Reviewed-by

Richard Burdett

Updated on

Sep 04, 2024

Residential Solar Panels - Return on investment.

Solar Panels PayBack Period

One of the benefits of choosing a renewable energy source such as solar panels to power your home is the prospect of making a profit from it. Not only is this seen in a reduction of your electricity bill because you are producing energy yourself, but you can also sell your excess production to a power company via the Feed in Tariff. Deciding on what your return on investment will be for residential solar panels depends on a number of factors, not least what it costs you to set up and purchase it but also the quality and standard of the system components that are installed. Your roof size and the direction it faces will dictate the number of panels you can have placed there and the amount of energy you generate, as will the quality of photovoltaic cells used in each panel. Most solar panel installations should last between 20 and 25 years and over with the right maintenance, and the initial cost can normally be off-set within the first 12-18 years. There are many factors to conisder when looking at the payback period for solar panels.

The Cost of Residential Solar Panels

The initial cost of an installation will obviously vary depending on the size and quality of panels installed. A small 1 kW system will more than likely set you back between £2-3,000 whilst a bigger, more efficient 4 kW panel array will be in the region of £6-7,500. Most people who decide to have solar panels will either fund it themselves from savings or take out a loan. There is the option to have panels installed for free but you will have to hand over your Feed in Tariff to the company which means you will not make any money from generating excess electricity, though you will benefit from cleaner energy and cheaper bills. There are other options to consider such as the Government’s Green Deal, which you may qualify for and can provide a low interest loan for solar panel installations.

Return on Investment for a 1.25 kW Solar Panel Installation

Most solar panel installations, combined with the Feed in Tariff and energy savings will provide a reasonable return on investment. Obviously, the more energy your system produces and the more of that energy you directly use yourself, the better that investment is, even with the greater cost of installation. A 1.25 kW solar panel installation is perhaps one of the smaller domestic ones you can get and will cost around £3,000. The Feed in Tariff will earn you roughly £20 a year and you may well save up to £70 on energy bills. With the export tariff included, your total investment return for a year will be approximately £80 to £120, ensuring that you pay off the initial cost within about 17 years at current prices.

Return on Investment for a 2.5 kW Solar Panel Installation

Double the size of your solar panel installation and you almost double your savings. The cost of a normal 2.5 kW array will be around £4,000 and produce an estimated Feed in Tariff of £30 per year whilst saving on your energy bills to the tune of £240. With the export tariff of about £25 you will get income and savings that amount to approximately £130 to £200 per year. This will enable you to pay off the cost of installment in around 17-18 years.

Return on Investment for a 4 kW Solar Panel Installation

If you have the roof space and finance for a large 4 kW installation, then you may benefit from even greater returns. The array will cost around £4,500 - 7,000 and will produce a Feed in Tariff return of approximately £79 a year. Combine this with energy savings of nearly £170 a year plus your export tariff, then you are looking at income and savings that equate to nearly £300. That means you may well pay off the cost of installment within fifteen years. With all installations, once you have paid off the initial investment then you head into a period of pure profit. With most installations lasting a minimum of 20 to 25 years, you will have around five to ten years where your solar panels are working just for you.

Other Things to Consider

• Generally, the larger your solar panel installation the greater the return on investment for residential properties.
• You don’t normally need planning permission to install solar panels though you may want to check first with your local council.
• Solar panels for domestic residences are available in number of different types, such as tiles or straight panels, which may affect the initial cost.
• The cost of energy bills is set to rise in the next few years so having your own supply may well provide a greater return on investment and save you more money than we have indicated here.
• More and more energy companies are beginning to see independent suppliers as vitally important for maintaining the electricity supplied to the National Grid.

When calculating the total potential savings and income offered by PV panels, it is necessary to consider a wide range of factors, including:

• PV system size, lifespan and efficiency
• geographical location of your property
• roof orientation
• roof inclination
• the amount of shade over your roof (if any)
• your property's FiT eligibility based on its Energy Performance Certificate (EPC) rating
• new battery systems are being introduced that will further extend the potential savings past daylight hours

The three main income sources associated with solar panel installations are:

• FiT generation tariff
• FiT export tariff
• Energy bill savings (around 40% per annum, although this figure can be much higher)

The table below gives you a rough idea of the potential savings and return on initial investment offered by solar panels.

*System output calculated for a rural, inland property in Southwest England. System output for an inland urban property would be 5%-10% lower. ** We have assumed a 50% export rate and 15p as the average unit price of electricity. These figures are based on the 4.39p/kWh FIT generation tariff and 4.85p/kWh export tariff for systems up to and including 4kWp. ***Figures shown include inflation. The government energy regulator Ofgem estimates that the average UK household consumes 3,300kWh of electricity per annum, which leads to an average bill of £424.^[1]

Solar panel system outputs

Depending on your energy consumption, a 4kWp solar panel system producing an estimated 3,600 kWh per annum could therefore in theory produce all of your annual energy needs. However, for an average household, it is unlikely that PV panels will produce all of the required energy; the exact proportion of the household’s energy use produced by solar panels is contingent upon energy consumption habits. With the introduction of new battery storage systems the consumption of the free solar generated electricity can be extended into the night time, furher increasing savings.

Optimise your usage of the electricity generated by your PV system

It is possible to use the excess electricity generated by your PV system to heat water and heat your property during the day, although once again the viability of this option depends on your energy consumption and efficiency. It is also possible to charge appliances that you use at night (laptops etc) during the day, at times when your PV system is generating the most energy. Another way of storing electricity generated by solar PV systems is to use lead acid batteries. This option, although more popular with off-grid properties, is rare for grid-tied systems. What’s more, in economic and environmental terms it makes little sense: the batteries are very expensive and require the use of hazardous materials, thus making them difficult to dispose of. Finding the Right Installer If you want to benefit from the Feed in Tariff and turn your solar panels into an investment for the future then you will need to employ an installer who has the right certification. You can source reputable installers through our data base and find someone who is right for the job in your area.

Here is another example for the potential saving and return on investment for solar panels:

• A household installs a 3kWp photovoltaic system costing £5500, which would generate approximately 2,700kWh of energy annually
• The annual FIT generation tariff would total £168
• Assuming you use 50% of the energy you produce and export the other 50%, the annual FiT export tariff income would total £65 (2700kWh x 4.85p)
• The electricity bill saving would total £202 (energy used in home - 1350kWh x 15p - this is the electricity that does not need to be bought from a utility company)
• The annual FiT income and electricity bill savings would therefore total £316
• The breakeven point for the initial capital outlay would come after a period of approximately 17 years, 4 months
• The income over 25 years would be £7900 (£316 p/a x 25)*

*These calculations do not take into account inflation (though the FiT payments are index-linked).  It is therefore clear that quite apart from being a clean and sustainable resource, photovoltaic panels also present a reaspnably sound investment which offers a strong return on the initial outlay, as well as high savings on energy bills.  

^[1] Ofgem Domestic energy consumption factsheet, January 2011, [accessed 13 November 2012] View here