Are solar panels a good investment?

Energy minister Greg Barker caused a storm when he suggested people would be better off installing solar panels on their roofs than investing in a pension.

The argument went like this. Save hundreds of pounds a year while helping the environment and the government will also reward your green credentials by paying you for the electricity you generate. Over the long term, you could secure a return on your investment that beats some pension options.

While that was an overly simplistic comparison, the merits of solar power have certainly caught on. The Department of Energy and Climate Change says there are now more than 500,000 solar panel systems installed across the country.

If you're considering installing solar panels on your roof, here's a quick guide to everything you need to think about.

Is my home suitable?

To get the optimum performance – generate the most electricity – from a solar system, your roof should ideally be south facing and pitched at an angle of around 30 degrees. The panels will still work if your roof faces another direction and can be fitted to flat roofs with a frame but the power generated from the panels will be less.

While there's no need to worry about the gloomy UK weather as panels still generate significant amounts of power even on cloudy days, you do also need to consider whether there are any obstacles that could get in the way of light reaching the panels – such as trees, or maybe next door's extension.

And the more space you have for the panels to be fitted to, the better. So while your shed or extension might be in a more southerly direction, chances are your roof will be a better home for the panels.

How much does it cost?

Microgeneration expert at the Energy Saving Trust Ian Cuthbert says the cost of installing a solar unit has fallen significantly in recent years, with most people looking at a cost of between £6,000 and £9,000.

"The installation cost is going down, with systems generally around half the price they were one to two years ago, and people are installing bigger systems, with the average size going up from 3 to 4kWp in the space of a year," he says.

Some suppliers will even install the panels for free but the drawback to this is that you won't get the government's feed-in-tariff, which pays out for every unit of electricity the panels generate. Instead, the installation company will take it, meaning you'll just save on your energy bills.

Once installed, the panels will require little maintenance but need to be kept clean and free from any debris from nearby trees. The panels should last 25 years or more but the inverter – which links your roof to your domestic supply – is likely to need replacing at some point and will set you back around £800 currently. So it's wise to consult with the installer about guarantees and warranties before you take the plunge.

On top of cutting your carbon footprint and reducing the amount of electricity you need to buy from an energy company, the government will pay you for the amount you generate through the feed-in tariff. This was introduced in 2010 as an incentive for people to install renewable energy technologies in their home. Plus you can sell any electricity you don't use back to the National Grid.

What you'll earn

If you had already installed panels before 31 March 2014, you will be guaranteed a rate of 14.9p per kWh for the next 20 years. And every kWh your system generates that you don't use in your home will earn you 4.64p, meaning a typical home with a 4kWp system could make a combined saving of around £770 a year, according to the trust.

However from 1 April 2014, the feed-in tariff fell to 14.38p, so the amount you could potentially make will be reduced to around £750 a year. It's worth remembering that the tariff is reviewed on a quarterly basis and has been dropping ever since it was introduced as more homes install systems. So if you are certain you want to take the plunge, then it's best to act quickly.

And don't forget whatever electricity you do use, the less you will need from your energy provider, cutting down the amount you have to spend on your electricity bills. Comparison site uSwitch says the average annual saving is around £200 a year.

When highlighting the benefits of solar power, energy minister Greg Barker used the example of annuity rates as a comparison. A typical annuity – which guarantees you an income for life in return for trading in your pension – currently pays out around £6,000 a year for every £100,000 of pension savings. With the government claiming panels return between 5% and 8% a year, that sounds like it could beat the 6% annuity rate.  

Is a solar panel really better than a pension?

However, the comparison isn't quite as straightforward as that.

Andrew Tully, pensions expert at MGM Advantage, says any fair comparison between pensions and panels is difficult to achieve and that the benefits of a pension shouldn't be underestimated. After all, an annuity guarantees a fixed income for the rest of your life. And there are plenty of other advantages to pensions.

"There is no tax-relief (with solar panels) whereas a payment into a pension would get 20% tax relief, or more if you are a higher-rate taxpayer," he explains. "Your employer obviously won't contribute towards solar panels whereas many will make some form of payment to your pension scheme, plus your pension comes with the bonus of a 25% tax-free lump sum when you take benefits, and potential payments to dependants if you die."

In a nutshell, solar investment should be viewed as a potentially complementary investment to a pension - not a substitute.

Should I install solar panels?

If you are looking for a way to cut down on your energy bills, getting panels installed for free could work well. You won't be able to take advantage of the feed-in-tariff but you will make savings.

If you want to make money out of your panels too, then you'd be better off paying for them but remember it will be several years at the very least before you see a return on your investment.

One final point to consider if you do decide to pay for them is that your 20-year feed-in tariff is linked to the panels being installed on your property so if you move you won't be able to take your investment with you.

Your Comments

The problem with solar panels are the warranties. Does the £800 for replacing the inverter cover labour costs? I don't think so, (and if the warranty is only for 10 years, you've got to assume they will need replacing after 10 years). The 25 year guarantee on the panels covers only the efficiency of the panel ie that it will not decline below a certain performance level. I don't believe it covers replacing the panel should it go wrong or, again, the labour costs. Please correct me if I am wrong! The people selling solar power are a bit vague, and also make assumptions about usage, such as a 50% split between day and night. Really? Usage of solar panels is much higher in Germany; I wonder if a) the installation costs are lower and b) the warranties are more explicit and comprehensive.
The other thing to consider is that existing panels are very inefficient; less than 20% is actually converted into electricity. Nor, of course, can you store the electricity to use at night, so you are still dependent on electricity suppliers (and their extortionate prices). However, technology is evolving rapidly and it might be better to wait for efficiency gains and the possibility of cheap storage. Any comments, please?

I bought mine when the fit was 48.5 p / kWh and the best has paid me back £5500 ie over install cost in  coming up for 3 years the saving in bills I give to my tenants and income is tax free I only try to use dishwasher w/m when sun is out and time freezedpr off at night
25 year old 200m2 house gas bills £35 pccm elec av  £25pcm and 4 kids and I am home all day in theory but....
i dont think its its worth it now at 11.5p /kWh unless you are off the gas system and if you live in the north forget it  I think it's best in Surrey sussex Dorset devon pay back 1/3 more than Birm or Mcr if you do then do buy a diverter to use the spare elec for an immersion heater on a non combi system  cost £225. Re the £800 inverter cost in 8-9  years the systems will be paid for by then so it's just a fraction of the fit for a year no gain without pain £150 pw tax free 25 years for £35000 expend in year one 5.53% I think

Solar warranties on panels guarantee a minimum performance for 25 years. If the panel fails to deliver, then the panel will be replaced under warranty. Labour costs for this are covered by your installer within their warranty (usually 10 years) then are chargeable after that.
Inverter warranties start at 5 years and then range from 10 to 20 years, depending on the technology and manufacturer.
So it is quite easy to buy a system with 20 year inverter warranty and 25 year panel warranty, which cover you for the life of the FIT tariff.
40.x p/kWh FIT tariff systems used to cost between £ 12 K to £ 16 K and paid back within about 8 years.
14.38 p/kWh (Dec 2014) Fit Tariff systems start around £ 6 K and pay back within 6-7 years, with annual income, saving and export adding up to approx £ 1,000 p.a. in the south of England (London and further South).
10 years ago the average electricity bill was £ 429 p.a. and now the average is £ 1,270 p.a.
With electricity linked to oil - which way are prices going ?
There are now devices to divert exported electricity to Immersion heaters for free hot water, thus allowing you to keep and use more energy than ever.
Battery storage is coming and will be financially viable for grid connected systems within 2-3 years.
75% usage is easy to achieve with the use of timers and the immersion device.
Based on the facts above, a lot of people still enjoy the benefit of solar and now the lower price makes it more accessible for everyone.

I had some additional solar panels installed recently and I decided to see if my house insurance covered all my panels for damage.
The first thing they asked me was if I owned the panels myself. Fortunately I do, as I was told that insurance companies are unwilling to insure panels installed and owned by the installer. 
If you own them, they are counted as part of the fabric of your house and I was charged no additional premium.
If you do not own them, you are counted responsible for seeing that they continue generating the Feed-In Tariff ... and if they fail, the owner can charge you a fine in lieu of their lost revenue.
I haven't checked to see if this is true of other insurance companies, but it's something to bear in mind. Also, I understand that selling your house with panels you do not own can cause problems.

Some very misleading statistics given in above comments. Methinks that they are propaganda by those selling pv panels. If you have both pv and thermal panels then the suggestion that pv panels can be used to power an immersion heater is not relevant.  I have both types of panels and, if I were to start again, I would use all of my roof space for pv panels. During June through to August  the intensity of the sun is capable of raising the recirculated glycol/water fluid in the thermal panels to 160C causing it to boil. You get a runaway heating rate when the maximum temp (85C) of tank water is achieved!  I overcome this by drawing shades over panels when the collector temp gets to 90 to 95 C.  This not so easy for a 2-storey house. Fortunately, i also have a flat roof that facilitates easy access to panels.
You require 1 inverter for each roof orientation. Therefore locating panels on a south and north west roof would require 2 inverters. I've had mine for 4 yrs and so far so good! But that's what the guy falling off the Empire State building called out when he got to the 50th floor!

I agree that you cannot trust the figures from sellers. They tend to over-estimate the Kwh generated, certainly compared to the Energysavingtrust website. However, the biggest question mark lies with their estimates of future electrical costs which, they assume, will rise by 8-10% per year. Is this realistic? Who knows where the price of oil will go but US fracking (and advances in technology, in general) seem to have established a ceiling for the time being. (Of course, oil is a finite resource and so will rise over time.) In addition, more solar/wind/hydro/geothermal power will increase the supply of electricity, reducing demand for fossil-fuel generated power.
These considerations become less important when you factor in Tesla's storage units. This means that you no longer need to rely on gas for home heating, as many of us do. As the technology develops (and gets cheaper), there is a genuine possibilty of going "off grid" completely.
I would expect companies (some even reputable) to put together packages, within 2 years, that replace all your power needs (electricity and gas) with solar panels, storage, an electric home heating system, full 20 year warranties for parts and labour and even a small back-up generator for emergencies. Then, calculations of payback become transparent and easy.

I have had solar panels (south facing, North East England) for 2 years and am still undecided over the  wisdom of making the investment in spite of all the hype.  What invariably gets omitted is that going solar is a financial decision to be compared less with annuities than with a high risk investment where the break even is of the order of 10 years depending on local circumstances.  If I move house after say 5 it is extremely unlikely that I will get a "premium" from the buyer specifically in return for my panels, and will therefore lose out.  Conversely if I stay to enjoy the benefits for 15, and maintenance / repair costs are reasonable, then I should be quids in.  The benchmark for percentage return comparisons should therefore be set much higher than the annuities, ISA's and the like that are normally used.  Until I cross the breakeven point the system is paying me back with my own money!

Can anyone please tell me if the F.i.T incentive scheme, we receive for our solar array, will affect any benefits we may be entitled to.  We have asked various departments who are unsure.  N.Power, who pay our F.iT seem to think it shouldn't have any affect but are unsure.  The council says it may affect our council tax relief application but have had no other applicant who is in receipt of F.i.T to compare.  If anyone can throw light on this query I would be most grateful.