Government plans to slash solar panel earnings from £515/year to just £135/year

The sun may be about to set on solar panels. A Government consultation is proposing the biggest changes to the scheme since it launched, decimating the amount those with panels are paid for generating electricity in England, Scotland and Wales from January 2016.

Therefore for many it simply won't add up, here's the full analysis on what it means for you.

What are the proposals?

The Department of Energy and Climate Change (DECC) has proposed to slash the feed-in tariff  – which is a payout by the Government for the energy you produce via panels – by almost 90% from January.

To understand what this means for you in real terms we've listed the three key ways you can benefit from solar panels, and these cuts will decimate the gain in point two below. The figures below are based on averaged data from the Energy Saving Trust.

1. A lower electricity bill. When your solar panels are generating electricity, you can use their energy. This can save around £120/year on energy bills.

2. The 'feed-in tariff'. This is a payment you receive for all the electricity the panels generate, even if you use it yourself. The rate drops slightly from 12.92p/kWh to 12.47p/kWh on 1 October, but it's proposed from January 2016 it'll drop to 1.63p/kWh. So what now pays £435/year would be just £55/year if that happens.

3. The 'export tariff'. You're paid this for energy you don't use and export back to the grid. That's generally assumed to be 50% of what you generate. This is set at 4.85p/kWh and the consultation doesn't make any proposals to change this. This can earn is roughly £80/year per house. 

In addition to its proposals to cut the feed-in tariff, the Government has also proposed changes to link the feed-in tariff to the Consumer Prices Index rather than the Retail Prices Index measure of inflation (as it is currently) and so would mean an even lower return for new applicants it's likely the payouts wouldn't rise by as much.

The shift to the CPI measure of inflation compared to the current RPI could make a very substantial difference over 20 years – as RPI tends to be higher than CPI. For example from Jan 2012 to Jul 2015 while RPI rose by a total of 8.4%, CPI has increased by just 5.3%.

The consultation is open to the public and contains 35 questions on plans to change the current scheme. DECC has contacted solar panels companies, energy companies, consumer groups and other intersted parties for their views on the proposal.

Why is this happening?

This follows Energy and Climate Change Secretary Amber Rudd's pledge in July to cut household bills while reducing emissions.

And the payouts to solar users – which some view as too generous – are effectively passed onto all energy users via slightly higher bills as suppliers pay a green levy to the Government to fund this. Without them, it could mean lower bills.

You may ask yourself how does this help to cut emissions given solar panels are environmentally-friendly. Well, some commentators argue that as the cost of panels has come down over the years, the Government doesn't need to give so much back.

They typically cost £5,000-£8,000 per home to install compared to £10,000-£12,000 a few years ago.

Unsurprisingly, the swingeing cuts have been met with anger from the solar industry, and were dubbed "self defeating" by Mike Landy, head of policy at the Solar Trade Association.

What will happen next?

The DECC consultation closes at 11.45pm on 23 October.

It has said that if there is no agreement on cutting the costs, the option of abolishing the feed-in tariff will happen as soon as legislation can be passed - which it believes would be January next year. It's not clear what the exact date would be that the changes would take effect, so to be safe err on the side of caution and assume it is 1 January.

While the cuts are currently only proposals, it appears inevitable that the earnings from solar panels will drastically decrease - it is only by how much that is in question.

Can I beat the cuts?

The amount you are paid for the electricity your solar panels generate is based on the rate on the day you register for the feed-in tariff, which happens after you’ve had the panels installed. At that point the tariff is set for 20 years (and rises with inflation).

Some firms can install & fit within 4-5 weeks, but it can take longer. So act quick, and you can lock in high rates, even if things change in January. 

See solar panels – how to get them and evaluate their worth.

So are solar panels worth it?

Based on panels costing £6,500 at the current rate, a typical homeowner would be able to pay off the panels and start earning in around 10 years. Not only that, but over the 20 year feed-in tariff you could make a profit of around £6,000.

Yet if the feed-in tariff were to plummet as the Government's proposed, the earnings could drop to just £255/year. Based on that, it would take over 25 years to pay off panels (and the rate's only guaranteed for 20 years).

What if I already have solar panels?

If you've already signed up to the feed-in-tariff, the rate you get depends on what was in place on the day you registered your panels. These new proposals will not affect you. 

To be sure, we asked the DECC to confirm this. It said: "We are taking urgent action to get a grip of renewables spending and protect hard working bill payers.

“None of the actions proposed in the consultation is retrospective for current customers who are already receiving feed-in-tariffs. If it goes ahead it will only apply to new applicants once it becomes law, at the earliest in January next year."

We also checked that its proposed change to the annual inflation increase from RPI to CPI inflation wouldn't impact existing solar panel customers.

It said: “We propose to change the RPI link for generation and export tariffs to a CPI link for new installations.

"Whilst we recognise that investors place a high value on the opportunity to earn real returns on their investment, we believe a CPI link is a more appropriate way of compensating investors for inflation. Any such change would apply only to new entrants to the scheme and would not affect existing generators."

So in a nutshell there's no change to your earnings proposed. You may think this unsurprising, after all the feed-in tariff is guaranteed for 20 years from the date you get it. Yet parliament is omnicompetent which means it can overrule itself – thankfully though, retrospective changes are frowned upon, though not unheard of (see Martin's retrospective student loan hike blog).