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Financial returns for solar heating

 Jun, 02 - 2014   Renewable Energy

Stuart Elmes, from Viridian Solar and a representative of the Solar Trade Association, wrote a blog for the Solar Power Portal explaining the financial returns of social heating under the RHI compared with solar photovoltaics and FiTs. Here’s an overview:

Stuart calculates that returns for solar heating can be as much as 17%, with returns in the range of 7% -14% not unusual.

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 FiTs 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, Stuart goes through the following steps:

  1. Calculate the annual renewable heat and associated energy savings
  2. Add in maintenance and running costs
  3. Select the current cost of energy
  4. Choose an energy inflation rate
  5. Build a cash flow and calculate the Rate of Return

Stuart has made a sample calculation available as an online spread sheet. 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.

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 spread sheet 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.

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:

ScenarioAnnual fossil fuel saving(kWh/year)
Replacing an old cylinder with a new twin coil cylinder

263

Re-using an old cylinder and upgrading to current levels of performance

237

Adding a solar cylinder as a preheat to a combi-boiler

Nil

Replacing a modern cylinder with a twin coil

Nil

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).

The Solar Trade Association compiles historic and current data on energy bills.  The ‘Fossil Fuels Energy Price Tracker’ is available on the website.

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.

Electricity 2.8%

Gas 5.8%

Oil 8.5%

Inflation at 2.1%

For Stuart’s full workings out, visit his blog: https://www.solarpowerportal.co.uk/guest_blog/financial_returns_for_solar_heating

Return overview (solar vs gas and oil):

 

Oil Heating
Number of People in house

2

3

4

5

6

Equivalent annual return(20% taxpayer)

10.7%

12.1%

13.6%

16.6%

17.1%

Payback year

11

9

8

7

7

Total return

£15,200

£19,000

£21,450

£28,000

£29,550

 

Gas Heating
Number of People in house

2

3

4

5

6

Equivalent annual return(20% taxpayer)

3.9%

5.3%

6.7%

9.6%

10%

Payback year

16

14

12

9

8

Total return

£7,300

£9,200

£10,450

£14,000

£14,550

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.

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.

Logic4training delivers solar thermal and solar photovoltaic training, for more information about these and our other renewable training courses, click here.