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Feed-in-tariff for PV review – the number crunching

by Mel Starrs on November 13, 2011

in Feed In Tariff

This is part one in my series of posts in response to the Feed-in-tariff review – I’ve had a request for the number crunching first, so I’m not going to comment on the wider issues until later posts. These numbers are illustrative only and not intended to be taken as financial advice (obvious – but please – don’t quote me, sue me or base any future investments on the basis of this post!).

Firstly, from page 21 of the February 2010 “Feed-in Tariffs – Government’s Response to the Summer 2009 Consultation“:

  1. Tariff levels have been set to provide an expected rate of return, in real terms, of approximately 5-8% for well sited installations, taking into account the risks associated with deploying the different technologies and the likely effect those risks would have on investors’ willingness to invest. As the tariffs are linked to inflation, in nominal terms this rate of return could then be considered to be approximately 7-10%.

It is important to understand the difference that inflation has on rates of returns – I have done my number crunching in a spreadsheet which INCLUDES assumptions on inflation, and an additional increase on electricity prices (as these have recently risen faster than inflation and show no sign of not doing so in future). So my numbers are to be compared with the 7-10% figures above. I believe the figures quoted by government in the current consultation EXCLUDE inflation (which is why I was getting confused between the 5% and 8% numbers being bandied around). I’ve also not included maintenance costs nor inverter costs (inverters are predicted to be a one off costs at year 10 and possibly again at year 20 over the 25 years). All these assumptions can make or break any model. Again, see the disclaimer above – this post is illustrative rather than definitive!!!

The table below is based on a 2.1kWp array (typically this would be around 15-25m2 depending on orientation and angle of installation) and I have assumed a good output of 850kWh/kWp (this decreases as panels are located further north). This would be a typical domestic installation for a private householder. I’ve taken the rates for <4kW on a retrofit installation. The carbon abated by the panels in this instance remains 23592.47kg throughout – in reality if I modelled different locations with different outputs, the carbon abatement would change. I’ve also assumed the grid remains at the current carbon mix which I sincerely hope over 25 years will significantly de-carbonise. The panel degradation assumed also affects the carbon abatement – I’ve assumed panels drop their output by 0.5% per year – I have heard from several friends who have panels that in year one panels have exceeded the quoted output, so they probably start at a higher base than 850kWh/kWp.

The figure I’ve used to compare the various scenarios is IRR (which in this case includes both inflation and electricity price increases). The IRR (internal rate of return) is the interest rate required to get a net present value of zero. If this means nothing to you, don’t worry too much – it’s the differences between the scenarios which matter. Just remember to question if figures quoted elsewhere have or have not included assumptions on inflation and electricity price rises – if they are in ‘real’ terms, they won’t have and won’t be directly comparable to this analysis.

Scenario 1 is based on the figures when the FiT was released, using the original FiT rates and a ballpark capital cost. The second scenario looks at the same scenario a year later with the new rates (including an increase in the rate paid for exported electricity – throughout I’ve assumed 50% export for ease – this is the rate you get if you don’t have an output meter installed, and is also the number the government are using) – the IRR has improved slightly but not significantly. But in this 12 months we saw a massive drop in the capital cost of panels – I’ve assumed a drop of 25% to £7,500. I’ve heard of even bigger drops in cost using cheaper panels (but then we would have to adjust the output – tricky isn’t it!). For this analysis let’s assume same output. The IRR increases to mahoosive 12.11%!!! Fair enough, on this evidence the FiT rate ought to be reduced.
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The proposed rate is now 21.0p. A haircut too far? Perhaps, looking at the evidence here. Scenario 4 takes our reduced capital cost and the proposed rate and returns a paltry IRR of 2.50%. This likely won’t beat the bank (i.e.  you might be better off putting your money in the bank instead of on your roof).

There have been noises that perhaps the export rate could be changed in tandem. To get back up to the original IRR of 6.3% the export rate (assuming 50%) would need to be 17.92p – see scenario 5.

To retain an IRR of 6.3%, the FiT rate assuming the 25% price drop is correct needs to be 28.41p – Scenario 6 which matches what many were saying before the recent annuncement.

Hopefully the numbers presented here will give some context to the next few posts where I hope to look at the impact on certain markets (private householders with capital to invest being significantly different fish to councils renting roofs of social housing).