The feed-in-tariff is a government scheme whereby money is offered to anyone who produces energy via solar panels and other renewable technologies on their home or as part of their business. The government will pay a certain amount per Kilowatt hour of energy produced and this, added to the general reductions in energy costs for the home, can mean that solar panel owners can make a reasonable return on their investment.

When the feed-in-tariff scheme began the amount offered to energy producers was very generous and this led to a boom in the numbers of people installing solar panels. However in recent months the government has changed how the amount of the feed-in-tariff is calculated and it is now on a sliding scale which adjusts based on the costs of installation and the numbers who are installing.

How does the new feed-in-tariff system work?

From 1 April 2012, the government brought in new tariffs based on total capacity. Those who had installations of 250kW or less would be subject to a lower rate. Homes would also need to meet minimum energy efficiency levels. This new level was 21p.kWh which was a reduction from the previous 43p.

Since then the government has made further changes following a consultation on the tariffs held earlier this year. With effect from 1 August the tariff was dropped to 16p/kWh and was set to decrease every three months from then on, with each decrease worked out based on the Retail Price Index.

This final change means that the feed-in-tariff will be lowered as the costs associated with the installation or renewable technologies falls. The aim is to offer a return of around 6% on the installation of solar panels. The alterations were made to ensure that there is no chance of over-subscription to the feed-in-tariff scheme and will be slowed down if up-take is deemed to have fallen.

In addition to the change in the feed-in-tariff the number of years the scheme can be taken up for will also change to 20 from 25. This will bring solar energy in line with other technologies receiving FiTs.

It is thought that the feed-in-tariff for solar panels will reduce by an average of 3.5% every three months, but could increase significantly if there is a high uptake.

The current and future feed-in-tariff rate

For most household installations the current rate is 16p, but this will drop as the installation size increases. For those businesses which are producing up to 250kW the rate falls to 10.35p.

These rates apply to systems installed during the period from August 1 until the end of October.

Future rates are difficult to predict and are based on something called digression factors (the default reduction of 3.5%, the level of deployment and an annual review of the tariff). The level of deployment can double the reduction (up to 28%) if there is high uptake, while low deployment can lead to a skipping of the three month period.

Based on this it is hard to predict exactly what the new rates will be, but a 3.5% reduction is estimated per three month period.

Examples of systems and income from the feed-in tariff

4kw 3kw 2kw
Average cost to install £6,000 £4,625 £3,250
Electricity generated (annually) 3604 kWh 2703 kWh 1802 kWh
Annual feed-in tariff income £636 £479 £320
Annual electricity bill savings £252 £189 £121
Total annual income and savings £890 £668 £445
Lifetime profit £11,814 £8,735 £5,657
Payback time 6 years 6.5 years 7 years
Return on investment 14.8% 14.4% 13.7%
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