UK leading electricity companies "move the needle" on the UK case for solar PV energy | Issue 8 | Magazine

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Issue 8 - ENF SOLAR

UK leading electricity companies
"move the needle" on the UK case for solar PV energy

Published 7th December 2006

1. The UK Solar PV market moves out of its deep shadow

International Energy Agency data shows the UK in 2004 with an installed base of solar PV systems of only 8 MWp. This number is not exactly heroic compared to 500 MWp in Germany reported in the same year.

The reason is not hard to find. In September 2005 a group of well-respected UK Academics reported that the payback period for an investment in a solar PV system in the UK was 47 years! This is a hopeless economic case - even with a government grant to help offset the investment cost.

Complex markets like energy tend to exist in one of two states: a virtuous circle where there is enough incentive for industries to invest and this in turn creates a competitive market that further enhances the economic fundamentals and generates extra business. A prosperous industry creates local wealth and jobs and therefore attracts political support – a very helpful factor in regulated markets like energy.

The other state is the unvirtuous circle where the industry is fragmented and this in turn leads to inefficient marketing and distribution that in turn makes the customer proposition less compelling in the first place. Such a fragmented industry is in a weak position to lobby for the political and regulatory climate that will encourage the market to develop.

These past few years the domestic UK solar PV industry has been bumping along the bottom of an unvirtuous circle.

In spite of this gloom companies have still been selling solar PV systems in the UK. We set out to model the case for investing in a solar PV system in the UK to see just how far adrift its economic viability still was some 12 months after the report from the UK academics was published.

The very minimum a consumer would expect from an investment in a solar PV system would be at least to get their money back over the 25 year manufacturer's performance warranty period. We defined this as the threshold of viability. What emerged from our study is that in the space of 12 months - the long-term economic case for UK consumers to invest in solar PV systems has arrived at the threshold of viability.

2. What had changed over the 12 months?

• UK electricity prices have risen (significantly)

• Four large UK electricity suppliers are now offering much-improved feed-in tariffs for grid connected
domestic solar PV systems

•  There are emerging companies (including some of the UK electricity companies) willing to take on the
   complexity of consumers being paid for their Renewable Obligation Certificate's from their solar PV
   systems

• There is an expectation that electricity prices will rise over the long term

3. The economic viability of a domestic solar PV system

The two main drivers of economic viability of a domestic solar PV system are its cost and how much revenue it generates over the life of the system. We explore each in turn.

3.1 Cost of a domestic solar PV system in the UK

We did a survey of 10 UK installers in October 2006 over a range of sizes of solar PV systems from 1 kWp to 5 kWp. The results of our survey are shown in Table 1.

Table 1 – UK Prices of installed solar PV systems (October 2006)

	1 kW peak Panel	3 kW peak Panel	5 kW peak Panel
Average fully installed Price	€11,279	€28,189	€41,794
Price per kW	€11,279	€9,396.3	€8,358

The average price over the 1-5 kWp range in our UK survey was €9677 per kWp.

We compared this to a case study from the respected "Friedrich-Ebert-Stiftung" (a German Foundation) in March 2006 that reported a 6.5% return per year on a solar PV system generating €518 per year per kW of solar array. These numbers leads back to a cost of €7,969/ kWp for a fully installed and commissioned system.

On the basis of this comparison, UK consumers are paying just over 20% more for their solar PV systems than German consumers. We should not get too fixed on the precise number of 20% since the two methods of calculation were not the same and there is a 6 month gap in their timing. But purely as an indicative figure we can point out the rewards consumers get from a successful local industry that has scale and scope economies. It is a positive signal of the reward UK consumers could be enjoying if the UK solar PV market could be stimulated to a higher level of local activity.

3.2 UK Government Grant

The current UK government grant provides 50% of the installed cost of the solar PV system (including inverter and wiring but excluding any batteries) or (using an exchange rate of 1.49) a grant of €4,470 per 1kWp power output - which ever is less. With an average price of €9677 per kWp the actual level of grant turns out to be around the 45% level. This grant has been a critical umbilical chord keeping the infant UK solar PV industry alive and remains essential in the short term.

3.3 Revenue from a solar PV system

Our study gathered in the current feed-in tariffs from 6 UK electricity companies and what consumers would pay to buy electricity from those companies. As is normal when companies have to differentiate a commodity product in a competitive market – the tariffs are very complicated, so we will not try to explain them here. However it was relatively straightforward to calculate the annual yield a UK consumer could expect from their solar PV system. The yield varied according to the size of the solar PV system and a reasonable headlinefigure would be up to 2.3% for 1-3 kW systems and up to 3.3% for a 5 kW system (The figures are the average of the top 50% of propositions in the league table in our report). Domestic solar PV systems are more likely to be in the 1-3 kW range so the 2.3% figure can be compared with the interest rate a consumer would get if they invested in a government's National Savings Investment Account of 3.45%.

However the essential difference between the two investments is that the government's National Savings Investment Account is linked to the Bank of England base rate whereas our hypothesis is that the feed-in tariffs will rise over the long term with the price of electricity. If the consumer believes that electricity price inflation will be higher than general price inflation – then the yield from investing in solar PV system will eventually be better than investing in a National Savings Investment Account.

To explore this further we ran a comparison between a consumer investing their money in a solar PV system or putting the same money in a UK Building Society and using the annual interest to offset their electricity bills. Not surprisingly - if you believe electricity prices are set to go up and up – then the solar PV system is a much better bet than the 2.3% figure might suggest.

3.4 Payback Period

We have established that the payback period depends critically on assumptions on the future price of electricity. Certainly in the short term the global energy market is closely related to the price of oil and prices can go up and down with world events. Governments cannot sensibly buck the markets, particularly when global prices rise or fall very sharply.

However in a regulated market Governments can influence the long term price trends and how they will do this will hinge around the core question of what the government wants to happen, in the longer term, to the domestic consumption of electricity? How customers behave in their use of electricity will be influenced by whether prices are falling in real terms (ie relative to general inflation) or rising relative to their ability to pay (ie relative to average wages).

We have used this hypothesis to establish some boundary conditions on the likely future price of electricity. This result is very consistent with a UK government (DTI) study on future electricity prices done in 2004 as part of the Governments Fuel Poverty Action Plan that took into account the drivers of price increases including the EU Emissions Trading Scheme, Energy efficiency Commitments, the relative tightness of capacity and fossil fuel price trends.

We then put the tariffs from one of the electricity companies into our model to produce the results shown in Figure 1.

Figure 1 – Influence of electricity price inflation on the payback period

We calculated the payback periods for the feed-in tariffs of each of the 6 UK electricity companies. We also looked at the total annual electricity bills for the consumer using the average amount of electricity for a UK household. This revealed a very interesting twist to the league table of "best buy" from the consumer perspective.

The general conclusions we were able to draw from this rich data set was that the UK electricity companies had "moved the needle" with their new feed-in tariffs

4. Is the UK market set to take-off?

One of the aims of our study was to dimension the future size of the UK domestic solar PV market. Germany offered an excellent benchmark. We carefully translated the new UK economic conditions into an equivalent German market context so we could make a like for like comparison with the highly successful German EEG Law tariffs.

Our analysis points to the best of new UK feed in tariffs being much closer to the German success conditions than a simplistic comparison of a UK tariff of 15.57 cents a unit versus a German tariff of 51.8 cents a unit. However there remains a gap at three levels:

• Financial incentives – a modest additional effort is still needed

• Simplicity – the UK proposition has too much red tape for a consumer offering

• Scale economies – the price of installed systems in the UK needs the benefit of greater local scale
economies

Our study has set out three scenarios in a regulated UK market in a changing political climate of environmental concerns. Each leads to a quite different outcomes in 2015 for the installed base of solar PV systems. We touch on the golden scenario for the UK solar PV market in our concluding remarks.

The UK electricity companies have shown leadership with their new 2006 feed-in tariffs. Our belief is that the key to keep the UK solar PV market moving forward is for the government to gradually phase out the UK government grant (a subsidy from the tax payer) and replace it with increased feed-in tariff (a subsidy from the electricity user). This will simplify the proposition. In our view this "augmented" feed-in tariff should be kept under review by the Regulator so that the feed-in tariff rises in line with electricity prices. In this way the local industry will have a long term framework that will encourage investment in greater scale economies and a virtuous cicle can be kick-started. Our study estimates the reward of this to be an installed base of around 1 GWp by 2015.

Details of the full report can be found here: www.enf.cn/reports/

Note: Installation pictures sourced from Dulas Ltd.