How would you like an income of £500 a year for the next 25 years just from your roof?

Sound too good to be true? That’s how much money you could make (for an initial investment of around £12,000) if you install solar panels. What’s more, you can then save money on your electricity bills from the solar power you generate. Read on for the Moneymagpie guide to making money from your roof.

• How does the scheme work?
• What are the benefits?
• Are there any downsides?
• What are the real costs?
• Should I go for the ‘free’ option?
• How do I know which is best for me?
• Take advantage while you can

How does the scheme work?

Solar panels could make you money through the Government’s Feed-in Tariff (FIT) scheme – it’s also known as ‘Clean Energy Cashback’. The Labour Government introduced it in 2010 to encourage us to produce more clean energy for ourselves and for the national grid. It’s part of the UK’s target to generate 15% of energy from renewable sources by 2020.

To take advantage of the scheme, you will need around £12,500 capital for the initial investment (a fairly hefty amount for most of us). However, the tariff rewards are so generous, you should definitely think about the scheme if you can afford the initial outlay.

The scheme promises to reward you if you have photovoltaic solar panels (solar PV) installed on your roof. If you go for it, you’ll profit in three ways:

• You get paid what is called the ‘generation tariff’, which is a direct payment from your energy supplier for each unit of electricity you generate. This starts at 21p per kilowatt-hour (kWh), and this amount will increase in line with the rate of inflation for the next 25 years.
• You also get what is called the ‘export tariff’, which is a payment made for energy you send back to the electricity grid, as opposed to power you use yourself. This pays you an extra 3p per kWh.
• You make savings on your electricity bills as you no longer need to buy all your electricity from an external supplier.

So, you’ll save money on your electricity usage (which will become ever-more helpful, as energy regulator OFGEM estimates that the price of electricity is set to increase by around 20% by 2020). Plus, you’ll make money from producing solar energy to sell back to the grid.

What are the benefits?

Aside from the environmental benefits – a reduction in your CO2 emissions while promoting renewable energy sources – there are big financial rewards up for grabs. Not only do you save money on your energy bill but you will benefit from an annual income for the next 25 years – an income that has been protected by statute. The amount you could get each year is not guaranteed but it’s highly likely to be at least £500 a year for most of the 12.3 million households that could be suitable for the panels.

Importantly (and even better for your pocket), your income from this system is exempt from income tax. This makes the scheme particularly attractive to those paying higher rate tax and those paying none. It means that you get to keep the full amount each year – earning you money for doing nothing! The returns are index linked (i.e. they go up with inflation) and could add a substantial amount to your retirement income, particularly if you have not put enough away into a pension or other investment.

In fact, the boffins at British Gas have worked out that to get the same return with a bond investment, a 40% tax payer would have to get an annual interest rate of 14.83% (compared to the income generated from the largest type of panels).

You can get an estimate of how much money you’d save with solar panels by entering your postcode into Alert Me’s Virtual Solar Panel tool.

As a rough guide, anyone fitting a typical £12,500, 2.5 kW PV system to their home can expect electricity bill savings of around £140 a year – that’s £3,500 over 25 years.

Are there any downsides?

The big downside to installing solar PV is the length of time it takes to pay for itself. In environmental terms solar panels offset themselves after about four years, but financially you’ll have to be living in your home for at least the next 20 years to get back your investment, and start making a profit.

If you can reasonably expect to be in your home for that length of time then solar panels could be for you. However, if there’s a chance you’ll be moving home in the next couple of years (say to downsize, or to find more space for a young family) you should tread carefully. Not only will your buyers benefit from your investment, you might actually find it harder to sell your home! Solar panels can be huge and, depending on where they’re placed, very obvious. Some people really don’t like solar panels, and there have been cases where would-be sellers have had to remove the panels to close a sale. (Although any estate agent worth their salt will view most solar panels as a plus rather than a minus).

So even if you’re considering the free option (see below), you should only do it if you know you won’t need to sell your home for a while. The housing market is likely to be sluggish for the next couple of years and you don’t want to give yourself any hurdles to get a sale, or be losing money unnecessarily.

As the main electricity production time is, funnily enough, during daylight hours, appliances running during the day will benefit the most. If you’re out of the house all day you could set a timer for some machines to work during these periods such as water heating, washing machines, dishwashers etc.

What are the real costs?

Feed-in tariffs are designed so that the average monthly income from your installation will be significantly greater than your monthly loan repayment (with a 25 year loan). The Energy Saving Trust reckon that an average system – 2.9 kilowatts peak (kWp) – costs around £12,000 (including VAT at 5%). Solar electricity systems can cost in the region of £4,500 to £8,000 per kWp, but costs per kWp should reduce as the system size increases. Here are some of the best current deals:

• The largest size offered by British Gas is the 3.36 kWp which is suitable for roofs of at least 30.2 square metres. This one costs £15,624 (including installation) but over 25 years it will bring in an estimated £42,521 in income and savings and should pay for itself in just over ten years. They also offer 2.52 kWp and 1.68 kWp panels, paying for themselves in 12 and 14 years respectively.
• SolarCentury tot up their costs from a personalised estimate based on your postcode. With standard 2.2 kWp tiles, they suggest that you could earn around £26,000 over 25 years, with a typical cost of £12,500 if you buy outright. Their panels range in size from 1.7 kWp to 3.7 kWp – the exact amount you can earn depends on the size of your panels and how big your roof space is. They also offer ‘solar loan’ and ‘solar mortgage’ options to finance your panels.
• HomeSun do sell solar panels outright, but lean towards ‘free’ panel provision (see below). They estimate that the ‘average user’ could be £1,085 a year better off, factoring in energy savings: to achieve this you’d need to use 2.5 kWp panels. You can buy solar panels outright from HomeSun from £11,000, or get the panels for free under their ‘Solar Share’ scheme.
• ISIS solar ask you to contact them directly for more information about buying solar panels from them outright. If you go with their ‘rent a roof’ system you don’t have to pay anything: installation and maintenance are both free, and your electricity will be free too because of the solar electricity your home will generate. They say that the average customer could save around £300 a year with their system.
• A Shade Greener operates in Yorkshire, Derbyshire, Nottinghamshire, Lincolnshire and Humberside, with plans to extend this service to the Midlands and South West. You can’t buy solar panels from A Shade Greener, but they generously agree to leave the panels on your home after the 25 year agreement is up so you, or whoever is living in your home, can continue to benefit from the panels. Like ISIS solar, A Shade Greener will take care of installation, maintenance and the cost of the panels, and you get the electricity the panels generate for free.
• It’s also possible to buy and install solar panels yourself! You won’t get the same warranties as you would if you bought panels through a company like the ones above, but you will be cutting out the middleman, benefiting from the full Feed-in Tariff. Consumer guide Which? has produced a guide to buying solar panels full of the ins and outs of how to buy, what the jargon is and how your system will work.

Do beware of cheap deals, by the way. The solar panel business has suddenly sprung into life in the last year and there are all sorts of very small businesses around (mostly builders and roofers) who are trying to get in on the action. However, not all of them will do a good job so it’s best to go with a reputable company (such as the ones mentioned above) who can give you a cast-iron 25-year guarantee on the panels.

If you’re looking for a grant to help with the cost of buying solar panels, your best bet would be to have a look at the Energy Saving Trust’s grants database, which works out what you can get financial help with depending on where you live and your income. It’s also worth getting in touch with your local council to see what’s on offer: you can get your local council’s contact details here.

Oh, and if you’re wondering about maintenance, you don’t have to worry. Other than washing them once a year or so, you don’t need to do much to maintain your solar panels. You may need to replace the ‘inverter’ after about ten years at a cost of roughly £300. Solar PV has been available for many years and is a reliable system, and the panels come with a 25-year guarantee.

Should I go for the ‘free’ option?

With the free option there are no upfront costs to you, and you do benefit from cheaper electricity each year thanks to the energy generated from your panels. However, you won’t benefit from the regular annual income from the electricity for the next 25 years. It comes down to whether you can afford to invest in solar panels or whether annual savings on your electricity bill will be enough for you. The free option still saves you money, but won’t make you any.

This is a big downside as the index-linked, tax-free income could be very useful. However, if you don’t have the money to invest now, and particularly if you think you might move house in the near future, this free option may be better for you. Consumer Focus has a good section on things you should ask before getting ‘free’ panels if you’re thinking of choosing this option.

How do I know which is best for me?

Deciding whether to buy or ‘rent’ solar panels depends very much on your own circumstances – whether you can raise enough to buy the panels, whether you’ll be moving home in the short to mid-term, and how important renewable energy is to you. If you’re planning to buy solar panels you’ll need to factor in their cost – they represent an investment as much as buying shares does.

Panels perform best on south-facing roofs, at an angle of between 30-40 degrees to the sun. Even if your roof doesn’t match this ideal you could still have solar panels fitted and make a profit – it’s best to talk to an individual company (or companies) for more information.

Each provider has a different way of working, but in general you can expect:

• an upfront estimate as to the expected ongoing performance of your installation
• an in-home display that will enable you to see how your installation is performing and when it is generating power. This means you can decide to use your electrical appliances at this time to take advantage of the ‘free’ energy
• an EPPC (Expected Panel Performance Certificate) that will enable you to see the additional value and benefit impact on your home. This will protect your investment if you were to move home or sell property. Showing would-be buyers the benefits should stop them demanding that the panels be removed.
• help with applying for the Feed-in Tariff benefits and ensuring you have all the required elements for a successful application to the scheme.

Whichever scheme you choose, generating your own electricity from solar panels is a good long-term plan for making a bit of extra money while doing your bit for the environment. Solar panels make a lot of sense even if you’re just looking to save on your electricity bills – something we will all be forced to do as prices continue to rise and incomes fall.

Take advantage while you can

Despite the recent Feed-in Tariff cut, solar PV panels are still a great investment if you can afford the initial outlay and companies such as Eco-Environments are campaigning to have the FIT rate raised again, so you could end up even better off in the future.

Useful links

• Energy Saving Trust
• Ofgem
• ISIS solar
• A Shade Greener
• HomeSun
• SolarCentury
• British Gas
• Consumer Focus’ solar panel factsheet
• Find your local council here