Are solar panels worth it? How solar panels pay back

Image credit: Adobe

Put simply, solar panels offer many financial benefits, including reducing electricity bills, but they have many other benefits that make them worth the cost and organisation of installation. 

In this feature, we’ll explain why it could be worthwhile investing in solar panels. We’ll discuss the outlay, break-even figures and the all-important variables, so you can assess how solar panels can improve your financial bottom line.

Solar panels pay back in two main ways. Firstly, they reduce electricity bills because less power is drawn from the grid – if your solar panel system produces enough energy to cover your household consumption, it’ll eliminate your electricity bills entirely, known as going ‘off-grid’. Secondly, under the government-backed Smart Export Guarantee (SEG), money is earned for any unused solar electricity sold back to the National Grid. Let’s use a common domestic example to see what this means in practical terms.

A three-bedroom house in the Midlands, with a household energy consumption of 3,350kWh per year and somebody at home for half the day, will require a 4.5kW solar panel system of around 12 panels. With this solar panel system, around 4,100 kWh of solar energy will be generated per year, meaning you’ll have more than enough energy to cover your consumption. Based on this data, your annual energy savings should be upwards of £796, not including any savings from the SEG.

How much you’ll earn from selling your surplus energy to the National Grid using the SEG will depend on the rate you’re getting. Based on an average SEG rate of 10p per kW of energy, your annual payment should be at least £75. Add this to the energy bill savings of £796, and you’ll see overall annual savings of at least £871. And while the energy price cap is currently decreasing again after years of escalation, the maths still makes sense for using solar energy if you’re looking to reduce your electricity bills.

The break-even point of the investment is when the returns have paid for the initial outlay. This is a significant milestone for solar consumers, as from this point on investment returns increase. 

Based on the same figures as above, the payback period for a solar panel system of this size is around 11 years. While the savings made from solar panels each year can change, depending on the current energy price cap and the SEG rate, if we use the total annual savings figure of £871 from earlier, this means you’ll have saved almost £10,000 after 11 years and will have paid off your solar panel system. However, if energy prices hike again and raise to a much higher amount, you’ll save even more and pay back on your system in less than 11 years.

Thus, a variety of variables – some within your control, others out of it – impact your potential returns, which are determined by your unique circumstances. Let’s take a closer look at the variables to get a better understanding of how they can help or hinder investment returns.

As mentioned above, a variety of factors will impact how quickly you can make back your initial investment on solar panels. We discuss these below. 

The panels you choose

Like any consumer item, there can be significant differences in prices for solar systems. This is due mostly to variations in panel quality and performance: is it a standard system, or is it high performance?

In our 4.5kW example above, the initial cost was £9,600. You could pay as much as £10,500 or more for a 4kW system and above, but the size of the system you’ll need will be determined by your roof size and household energy consumption. However, some other things you should take into consideration include:

• A standard system may fit your budget and could be all that’s needed for maximum return. 
• A high-performance system may deliver such a high output that it cancels out the price difference between standard and high-performance and reduces the break-even milestone.
• A high-performance system may last as long as 30 years, extending the investment return period by five years.
• Your house location, design and/or another aspect may not suit a standard system. High-performance panels might therefore be required to make any financial return viable.

Installation costs

Solar panel installation costs can vary across the UK, so it’s best to get quotes from several companies before making a decision. (Image credit: Adobe)

By and large, solar panel systems are priced and advertised with installation included. However, solar professionals will survey your home to assess any complications such as property access or complex roof structures or slopes. In these cases, an extra installation charge is likely. You should therefore factor any additional installation costs into your projected returns.

If you purchase your solar system online, it can be considerably cheaper, but that’s usually because it will be up to you to organise and pay for installation. For a 4.5kW system, you should budget for a minimum of £9,600 including installation.

The weather

The weather is out of our control – as much as we’d like to, we can’t command the sun. However, the amount of sun solar panels receive is critical to solar returns.  

A 4.5kW system generates around 18kW per day in ideal sunny conditions. Annually, that’s a fantastic output of 6,570kW – perfect for the home used in our example. Unfortunately, though, conditions aren’t always ideal, and a more realistic yearly output is closer to 4,100kWh. While this covers the 3,350kWh annual energy consumption of the home in our example, there’s not a great balance of electricity remaining to take advantage of SEG income.

In that regard, we become very much like crop farmers. We speculate on the weather in order to predict our investment returns – and the weather can be difficult to pin down.

Your home and its location

The further south your home is located, the more sunshine it will receive. For example, the South West will receive, on average, around 300 hours’ more sunshine than northern Scotland annually, according to the Met Office. 

Additionally, solar panels are most efficient when installed on a roof with a southern aspect at an angle of 35 degrees. Consequently, solar panels on a south-facing house in Ipswich with a pitched roof will have a greater return on investment than on a home in Inverness with a western aspect and a flat roof.

Most importantly, a roof requires space to install solar panels. For a 5kW system, you’ll need 15–20 panels, requiring a roof area of 25–35m².

There is, however, some wiggle room for insightful solar professionals to overcome circumstances that aren’t ideal. For example, custom panel mounting or ground-mounting can improve efficiencies and, therefore, your returns.

Often, the installation of high-performance panels can compensate for situations like low sunlight or overshadowing by trees and other buildings.

It’s almost certain, however, that when mounting alternatives, high-performance panels and extra parts are required, the outlay will increase –eating into potential savings.

Government grants for solar panels

Government-backed solar incentives have been reduced in recent years, and most have now ended. However, you can still enjoy 0% VAT on your solar panels, as well as the SEG. While the latter is a government initiative, it is nevertheless regulated entirely by the electricity market – which means each SEG Licensee (the supplier paying for the electricity generated) sets its own rates, and it’s worth shopping around.

The EOC4 initiative is also available, providing eligible low-income households and those in receipt of state benefits with incentives that may make solar investments more profitable. For example, the scheme’s home insulation grants can be used to make homes more energy-efficient. This way, even smaller solar panel systems may become viable and deliver better returns. 

Variations in the SEG rate

It’s important to note that the SEG is only available to those with systems of 5kW or smaller. The rate per kWh earned from the SEG will vary depending on the energy supplier and whether they also supply your home’s electricity. Here is an example to illustrate. EDF pays a low 3p per kWh for non customers, whereas Octopus pays between 22.73p and 30p per kWh to its customers. Clearly, this is a big difference that will have quite an impact on solar panel returns.

Fortunately, we get to choose our electricity retailer, adding a level of control over the returns. There’s an added level of flexibility as consumers can choose variable or fixed SEG rates. Fixed rates offer a bit more security: you’re protected if market conditions worsen. But at the same time, you won’t benefit from better conditions, either. With a variable rate, you run the risk of your rates decreasing over time – but they may also increase if market conditions improve. The choice is much the same as deciding between a fixed or variable mortgage, and the more you know about the market, the more confident you can be in your choice. 

Adding a solar battery

Solar batteries can further reduce your dependence on grid electricity, but they will add to the cost of your solar panels installation. (Image credit: Adobe)

According to the Energy Saving Trust, a typical household will use about 15-25% of the electricity solar panels generate. The other half is fed to the grid. With a solar battery installed, any unused, surplus solar energy produced will be stored in the battery. You can then use this solar energy later on, for example in low-light conditions or at nighttime, when the panels can’t produce solar energy. Adding and using a solar battery is an alternative use for surplus energy, instead of selling this energy back to the grid for a SEG tariff.

While income from the SEG can seem appealing, using your excess energy yourself has actually been the most cost-effective option, because the cost of non-solar energy (which you will effectively be saving by using solar panels) wass higher than the amount you can be paid for your surplus solar energy via the SEG. However, now that electricity prices are falling again, this calculation is not so cut-and-dry. 

The current energy price cap means that mains electricity costs 22.36p/kWh. The best fixed SEG price on the market is Octopus Flex, and is between 22.73p/kWh and 30.31p/kWh (depending on the time of day you export your energy), but it’s only available to Octopus customers. If you can access the higher end of that SEG rate, and you’re an Octopus customer, you’ll earn back more money than you’ll be saving on electricity by using solar. However, the next best SEG tariff for non-customers is currently provided by Scottish Power, and is 12p/kWh, which is over 10p less than the current cost of non-solar energy.

A 4.5kW system requires a minimum 5kW battery. Costs for a 13.5kW Tesla Powerwall 2 start at £6,700 and the battery has a 10-year warranty. Once the warranty period is over, the battery will likely start losing its charging capacity.

This is already a large outlay, and an additional problem is that the battery will not last for the life of the solar panels. It will need to be replaced at least once during your solar panel system’s lifespan.

It’s important to note that prices for batteries suitable for a 4.5kW solar panel system will vary significantly, and factors such as warranties and capacity sizes will differ. Like any consumer product, it pays to shop around.

Adapting household routines

The bottom line is the less mains power you use, the better. There are a number of ways you can adapt your household routines on this basis. For example, you could use power-intensive appliances, such as your washing machine, dishwasher and clothes drier, during the day while your panels are operating at peak capacity. 

Regardless of whether you have solar panels, solar panels plus battery, or no solar panel system at all, saving electricity is much easier than you think. The less electricity you use overall, the greater the return on your solar investment.

Aside from the obvious financial benefits, solar panels help reduce your carbon footprint, which is important for protecting the environment for future generations. (Image credit: Adobe)

We’ve so far outlined the financial benefit of using solar panels to lower your energy bills, but there is a more obvious upside to solar power that benefits the world outside of your home: reduced household emissions. It’s a sad reality, but the majority of the UK’s electricity supply is still powered by damaging fossil fuels. While steps are being taken by the Government to switch to renewable energy sources and become less dependent on gas, there is still quite a lot of work to do on that front. This makes it all the more important for individual households to do what they can to reduce carbon emissions, and solar panels are one of the many home improvements that have a net positive environmental impact.

While the production of solar panels does produce some carbon emissions, overall their impact is less harmful than fossil fuels. According to SolarPower Europe, energy produced by solar panels is 96% less carbon intensive than coal and 93% less intensive than gas. In a solar panel’s lifetime, it will generate 30 times more electricity than is needed to manufacture it. As global governments race to combat the climate emergency, these figures show why so much attention is being placed on solar power.

The good news is that many of the components of solar panels can be recycled at the end of their life cycle – in fact, the practice is mandatory in the UK due to the hazardous nature of some of the materials used to produce them.

As you can see from our guide, there are many factors that will impact how quickly solar panels pay for themselves, but the bottom line is that solar panels are worth the investment for a number of reasons. They can save households hundreds – and possibly thousands – of pounds on their energy bills every year and are a great way to reduce your carbon footprint.