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Why schools should hurry if they want to maximise savings from solar

The proposed changes to the UK’s solar subsidies from January 2016 will:

1) Dramatically reduce benefits to schools from installing solar.
2) Create a massive rush to complete projects before December 2015.


What will change?
  • The most significant changes are to the level of subsides provided for every unit of electricity generated. See table below.
  • Plus a number of smaller changes to legislation relate to when a project qualifies for subsidies - in future this will increase the risk when developing a solar project.

Table 1: FIT subsidies per unit of electricity generated for systems installed between October and December 2015, vs. systems installed from January 2016.

Capacity | Oct-15 | Jan-16 | Drop
0-10kW | 12.47 | 1.63 | 87%
10-50kW | 11.3 | 3.69 | 67%
50-250kW | 9.63 | 2.64 | 73%
250-1000kW | 5.94 | 2.28 | 62%

How will it impact schools considering solar?

Thankfully carbon savings and educational benefits to schools will remain the same, but most schools are motivated by income and savings, and this will be dramatically reduced.

Background

Currently solar pv systems receive a generation subsidy (generation tariff) per unit (kWh) of electricity they generate (see table above). This electricity can then either be exported, for which it receives an export tariff or used locally. In the case of schools who have paid for the panels themselves, they will receive the generation tariff and save money by using the electricity themselves rather than buying all their electricity from the grid. Typically schools can consume up to 90% of the electricity generated from panels on their roof and replace 20 to 40% of their total electricity consumption with solar electricity depending on roof size and their energy consumption profile.

Worked Example (figures rounded for simplicity):

Pre-December 2015

A school with a south facing 50kw system in the south of the UK will generate about 45,000 kWh of electricity a year. Assuming that school consumes 120,000kWh and pays 10p per unit (kWh), they could reduce their electricity bill of about £12,000 a year by about 1/3 (90% of 45,000 units at 10p). I.e. reduce their electricity bill from £12,000 to £8,000 a year and thus save about £4,000 a year on electricity bills.

In addition the school would also be entitled to the generation tariff (~11p) for the 45,000 units of electricity generated. i.e. £4,950. Any electricity the school can’t consume (i.e. sunny weekends) will be exported and will receive the export tariff (~5p) for the remaining 5,000 unites (~10% of the total) This equates to a further £250 a year. This brings total annual income to about £5,200.

Electricity bill savings plus subsidy income (£4,000 + £5,200) add up to over £9,000 a year. A figure that should increase over the coming 20-30 years depending on increases in electricity prices and official consumer price inflation figures (CPI).

In the above example income from the subsidy makes up over 50% of the total economic benefit.

Post-December 2015

In the same example school from January, the subsidies per generated unit of electricity would drop to less than 3p. Savings from using the electricity will not change. Neither will the small income from exporting electricity, but the single largest source of economic benefit drops from nearly £5,000 (45,000 x 11p) a year to about £1,100 (45,000 x 2.64p), bringing the total economic benefit down from over £9,000 a year to under £5,400 (£4,000+ £1,100 + £250).

Is that really so bad?

You might argue that £5400 a year savings is better than nothing, but this doesn’t represent pure savings, it’s a return on investment and it will be 40% lower than currently. So unless the investment in solar equipment, installation, project development and operating costs also fall by 40% the return on investment on solar will also fall by at least that amount. For small systems, and depending on who the investor is, a return of 7-10% may be required. So a 40% reduction would mean most rational investors would choose not to fund solar on other buildings, were there is a risk of default. The government’s own figures for the cost of solar systems in the 40-50kw ranges from £1200 to £1400 per kWp. So for investment returns to remain at the same level these costs would have to also fall by 40%. I.e. you would have to install solar at between £720 and £840 per kWp. This is not currently possible in the UK. It is possible in Germany for larger systems, but unless the UK government provides a relatively stable environment, UK companies will be so busy trying to deal with the rush before tariffs are cut, that they will not have time to invest in processes and training to allow them to be that efficient longer term.

What does it all mean?

1) There will be a mad rush to get solar installed before the deadline. The longest lead item in the process is the grid application and this can take up to 12 weeks for larger systems. So schools need to get this process underway NOW. We are currently doing this for a number of schools at no cost, while we wait for full approval to proceed.

2) Installation prices may actually go up in the short term as installers pick the most profitable jobs in a supply constrained market. Schools wishing to manage the process themselves and purchase solar systems, should secure installers and complete installation as soon as possible.

3) Free solar with no risk to schools will be virtually non existent from early 2016. Schools that can fund solar themselves and have a cost of capital below 5% may still consider installing solar. For schools who don’t have capital we are looking at lease based options, but savings, once financing costs are covered, will be about 80% less than they would be today and compared to the roof lease and power purchase agreement we currently offer, is riskier for schools.

4) Eventually solar on schools will become attractive enough again so that even with this low level of subsidies some schools will proceed with solar as they are in Germany. This will require a combination of:

  • Lower cost saving expectations, (higher value attributed to learning and CO2 savings).
  • Lower cost of capital (In Germany banks will lend 80% of capital required for a solar project at 18 year 3.5% fixed interest).
  • Lower sales and installation costs for equipment. (More self service offerings via the Internet, combined with very efficient installation companies).
What is solarforschools doing about it?

1) We are working with Industry bodies to try and reduce the level of subsidy cuts (or at least the speed).
2) Looking for new partners who can provide viable funded solutions to schools.
3) Accelerating the development of the crowd funding platform to enable schools to access low cost financing (raising money from parents for example).

And of course we are working with as many schools as we can now to fund and install solar before the deadline.

What you can do:
  • Register your school for initial assessment and if suitable authorise us to submit a grid application on your behalf while you consider alternatives and collect signatures for long term agreement.
  • Sign the petition to stop the proposed cuts to solar. (Link: https://petition.parliament.uk/petitions/106791)