Since the domestic RHI launched in April 2014, I’ve been hearing people saying that the domestic RHI ‘isn’t such a good return as the feed-in tariff (FiT).
I calculate that returns for solar heating as high as 17% are possible, and returns in the range of 7-14% not unusual. Consequently, I thought it might be useful to go through the financial returns of solar thermal in some detail.
There are a couple of important differences between the RHI and the FiT.
The first is that the larger part of the financial returns for solar thermal come from own-use energy savings rather than tariff payments, unlike the FiT where, (despite significant tariff reductions since launch), the lions’ share of the returns still come from the FIT payments themselves.
The second difference (and this may come as something of a surprise) is that the real inflation rate for the cost of gas and heating oil has been way, way higher than that for electricity – which also tilts the balance in favour of energy savings rather than subsidy payments.
In a simplistic comparison only looking at the value of the tariff payments, FiT is going to look more attractive, but it’s necessary to take both these factors into account to make a proper comparison.
To construct a return on investment calculation for solar water heating under the domestic RHI, I’m going to go through the following steps:
- Calculate the annual renewable heat and associated energy savings
- Add in maintenance and running costs
- Select the current cost of energy
- Choose an energy inflation rate
- Build a cash flow and calculate the Rate of Return
I’ve made a sample calculation available as an online spreadsheet. You can examine how it works here:
Use File>Download As to save a version to your hard drive where you can change the input numbers to see what effect different values have on the outcome.
Energy Yield and Savings
The first step is to calculate the renewable heat and the energy saving. This can be done using the MCS ‘Thermal Solar Performance Energy Calculator’ or TSPEC, which can be downloaded from the MCS website here.
This spreadsheet calculator must be used by the MCS solar thermal installer to predict energy performance. You input data on the solar system to be installed (for example panel area, efficiency, cylinder size) and the household (number of people, location, roof orientation) and the calculator outputs the deemed renewable heat and annual energy saving.
Here’s some I prepared earlier using TSPEC:
Other: Clearline solar panels (Viridian Solar), Location – Cambridge, Orientation – South, Panel tilt angle – 35 degrees, Overshading – none or very little, Heating system – System boiler, gas, post 1998 condensing with automatic ignition, Electric Showers: non-electric showers only
The deemed renewable heat is the solar heating delivered to the hot water store. This figure is multiplied by the domestic RHI tariff of 19.2p to calculate the payments under the RHI.
The estimated annual fuel saving is the saving on energy bills from that solar heat. This figure takes into account a summer-biased value of boiler efficiency so it’s a higher figure than the deemed renewable energy (the boiler burns more fuel than the heat it puts into the hot water cylinder).
I’ve added a line of installed cost for each system size. These figures are based on estimates used by the STA in its work with the Department of Energy and Climate Change (DECC) in the run up to the launch of the RHI.
One element that is missing from the MCS calculator is the improvement of the performance of the hot water store that comes ‘free’ with a solar installation. A solar installation might involve the replacement of an existing hot water cylinder with a new solar cylinder with modern levels of insulation. Where a solar design allows a cylinder to be re-used, the MCS standards require the installer to upgrade insulation to the cylinder (for example with a jacket). In both cases all hot water pipes (not just the solar ones) must be lagged.
The energy saving that comes from reducing hot water cylinder losses is significant and represents a ‘hidden’ benefit from a solar thermal installation that should be represented in a financial presentation.
The Solar Trade Association estimates the average energy saving as follows:
The saving from the replacement or refurbishment of the hot water cylinder should be added to the annual fuel saving calculated by TSPEC. The total is multiplied by the cost of energy that would have had to be paid if solar wasn’t installed (for example gas, oil, electricity).
Maintenance and Running Costs
A solar thermal system uses electricity to power the pump and the controller. The glycol solution used in the system degrades over time, slowly losing its power to protect against freezing and will need to be replaced periodically. The solar circulator pump contains moving parts and may wear out and need replacement.
The governments’ SAP calculation was recently updated to use a figure of 47kWh/year for electricity consumption, based on the results of an Energy Saving Trust trial.
The running costs can be estimated as the cost of electricity multiplied by 47kWh. To this I have added £100 every five years for a glycol change and £60 in year 10 for a pump replacement. These are assumed to be carried out at the same time as regular boiler maintenance.
The Solar Trade Association compiles historic and current data on energy bills. The ‘Fossil Fuels Energy Price Tracker’ is available on the website.
I have used figures for gas, electricity and oil heating from this source.
Energy prices have been rising faster than general inflation for many years, as growth in demand driven by the developing world has outstripped the rate of growth of supply of new fossil energy sources.
To complete our financial analysis it’s necessary to take into account the rate of inflation of these costs into the future. The STA has recently published a paper analysing the average inflation for energy costs in the last 16 years.
I used the following real (above general inflation) rates from this paper:
I also used general inflation at 2.1%
Putting it All Together
To work out the financial return, we put it all together into a cash flow table running forward for 25 years of energy savings (a life that a solar installation would be expected to achieve with relative ease).
The RHI payments cover years 1-7.
Any cylinder heat loss reduction benefits are taken to last 15 years, after which it is assumed that a cylinder would have been renewed in any case.
The Return on Investment (ROI) is calculated for a cash flow in real terms – that is with the effect of general inflation removed. Energy prices are inflated by only the real-terms increases above general inflation for the 25-year period. The RHI payments are index linked to inflation, this means that the real-terms value does not change.
I calculated the payback year and total cash return in nominal terms – that is with the effect of general inflation included. Energy prices are inflated by the total of real terms inflation and general inflation. For example inflation for gas is 5.8% + 2.1% = 8.9% in nominal terms.
So if we put the installed costs and energy yields from the systems above into our calculator, what kind of financial returns do we get? Well, here are the results:
The financial returns for solar thermal under the domestic RHI can be extremely compelling. The more people there are in the household, the greater is the use of hot water and the better the returns become. The fastest payback is found where the energy costs are highest – homes that heat water with electricity or oil.
That said, the mass-market of gas heated properties still achieves respectable returns and innovative approaches to retrofitting solar heating have come to the market recently with the goal of driving down costs further.
Installing solar thermal at the same time as PV or renewing a heating system can result in shared costs (e.g. for roof access) and makes the finances for a combined system even more attractive.