Do Solar Hot Water Systems make economic sense for the homeowner?

If you have a modern boiler (90% efficient) this will mean that you would purchase 1833 kWh of gas less than you did before, saving you (at 3p per kWh) saving you £55 per year (in addition to 352kg of CO2).

On the face of it this is not an attractive investment. However adding in the effects of the proposed Renewable Heat Incentive (RHI) and rising fuel prices tells alters the picture significantly.

The renewable heat incentive (RHI) proposes to pay the homeowner 18p per kWh each year for 20 years.
 
Adding the annual RHI payment (18p x 1650 = £297) to the fuel saving (£55) gives an annual benefit of £352. In other words the system will pay for itself in 12.8 years and then it will produce a profit.

However the tariff is inflation linked, and fuel prices are also expected to rise, probably faster than general inflation. If we assume an inflation level of 3% over 20 years and a fuel inflation level of 5% then the system pays itself back in the 11th year. Over the twenty year life of the tariffs the system will produce tariff income and fuel savings estimated at £9,800.

For some people, who are upgrading their heating systems the returns are even better. If you are replacing your hot water cylinder anyway, the marginal cost of adding the solar panels is less. Let’s say that the amount you would have spent on parts and labour (inc VAT at 17.5%) replacing your hot water cylinder is £1,400. If you are doing this anyway then you can reduce the cost of the solar hot water system by £1,400 (as this will be replacing you current hot water system). The marginal cost of installing solar is then £3,100.

On the assumptions above the investment of £3,100 in a solar hot water system will have paid for itself in year 8 and produce tariff income and fuel savings of £9,800 over the 20 year tariff life.

In order to achieve these returns by putting money into a bank account the bank would need to pay an interest rate of 10%. And if you took into account that the tariff income and fuel savings are tax free the interest rate would need to be higher still.

Taking all the benefits of fuel savings and inflation linked tax free RHI payments into account it can be shown that a solar hot water system is a not just  a good environmental investment.