Solar#13: 12 months ROI

Introduction

I have discovered that calculating the Return on Investment (ROI) for a solar system is easier said than done.

 

The first question is how much electricity would I have used without a solar system? The GivEnergy app does give a home consumption figure, but in my view it overstates this as it clearly includes some losses from the solar inverter. I explain below my method for estimating what I would have paid without the solar system.

 

Then we need a comparison with an alternative investment - typical comparison parameters are listed below:

 

	Financial investments	Solar System Investment
Interest Rate	Most give an annual rate	This requires calculation - see below for my approach
Risk	Often give a premium for high risk (& often confuse risk with volatility)	Solar systems come with their own risk - see Solar#2: Solar Panels Investment Case for my view of these risks
Volatility	often give a premium for high volatility	My view is that volatility is low, but I will need to wait a few years to have data to demonstrate this.
Liquidity	Good liquidity often gets a lower rate of return	As discussed in Solar#2: Solar Panels Investment Case, this is poor.
Tax	There are a range of tax incentives (eg in the UK with SIPPs and ISAs)	For UK domestic solar system, the savings on a utility bill are not taxed (May-25)

 

Often a solar investment analysis gives ROI as 'payback time' - I will discuss if this is a reasonable approach.

 

Health Warning:  this post is just my views on investments and is not intended as investment advice.

 

But first - how much have we saved in the first 12 months?

 

How many £s have we saved by having our solar system installed?

 

This was harder to work out that I would have thought. It is easy to see our electricity bill for 12 months:

• Imported electricity: £819 (3888kWh)
• Exported electricity: -£765 (3891kWh); I used the "-" to show that we were 'paid' by Octopus

So the net electricity bill was £54 (ie a net cost to us over the year). I will repeat this analysis in September when our smart meter will have been working for 12 months (I hope - see post SmartMeter #3: My Smart Meter Journey Part 2). My suspicion is that this will show a lower net cost for 12 months (and perhaps even negative ie Octopus pay us!).

 

But what would our consumption have been (kWh) without the solar system and what would be the charge (£) be for this consumption? I used the same methodology as for the post InterimROI Figures - 1st 6 months:

• I assumed that we would have used 10.18kWh/day*
• I used the rate quoted by Octopus when I asked for the regular (flat) tariff each quarter (standing charge and price per kWh)
• I added 5% VAT onto this calculation
• This came to £1,107 - my estimate for what we would have paid without a solar system.

 

So the total saving, over the period 1st April 2024 to 31st March 2025 was:

 

£1,107 - £54 = £1,053

 

*This is 3,715kWh/year, the average consumption for a few years before the solar system was installed when our electricity consumption was pretty stable. This is  a little less that the home consumption given by the GivEnergy App for the same period (3,967kWh - see post Solar#8: 12 Months Review), as the home consumption includes losses from the inverter that are not shown (as opposed to losses from the battery that can be calculated from the numbers given by the GivEnergy app)

 

Payback Time - an Absurd Example.

Our investment (excluding the new roof) was £13,647 and this has earnt us £1,053 in the last year. If I assume that this payback goes up with inflation (ie the cost of electricity rises with inflation) at 2.5%/year, then we will have paid back £13,647 during year 12.

 

However, my view is that this type of analysis has limited value.

 

If our objective was simply to get our money back then a building society would be a better place to keep our money - we can have our money back at any time that we like, eg you might quote payback as "1 day" with a building society.

 

However, our objective is to make a profit from our investment. We understand that it is a long term investment and that there is only a limited ability to get the original capital invested back (even if we sell our house then this is not certain - see post Solar#2:Solar Panels Investment Case). While the investment in solar does give us a warm fuzzy feeling of helping the environment, we do want it to be reasonably profitable as a primary objective.

 

Comparing Investments

So a more reasonable (& usual) comparison between investments is interest rate. Business investments will typically look at Net Present Value (NPV) or Internal Rate ofReturn (IRR) - in effect what interest rate would we need to get the same return over the same period. We can do something similar/simpler here - what rate of interest would we need to earn if we invested the money (eg in an ISA) so that we match the return we get with a solar system.

 

How I have Calculated the Equivalent Rate of Return

I want to understand the %age rate of return that I need from a financial product that will match a solar system. For this case I will assume that the returns of the financial product are also tax free (eg a UK ISA or SIPP)

 

I set up two columns in a spreadsheet:

1. Invest £13,647 in a solar system & this saves £1,053/year. I have assumed that:
1. The saving increases by inflation at 2.5% each year
2. At year #12 the battery and inverter breakdown and that I invest a further £5,050 in replacements and their installation.
3. The solar system ceases to function/has £zero value at 25years
2. Invest £13,647 in a <financial product>:
1. I use this investment to pay the additional electricity bill each year (ie the saving that I get with the solar system)
2. At year #12 I add £5,050 into the investment fund (ie the amount I assumed is required to repair/replace the inverter & battery at year #12
3. The investment grows at a fixed annual %age rate that gives it £zero value at 25 year.
4. I assume that there is no tax to pay on this interest (eg a UK ISA or SIPP).

 

By trial and error I set the %age return on the <financial product> so that the value at 25 years £zero.

 

This gives a return of 6.6% for the <financial product> to match the solar system ROI/savings.

 

Discussion

I have most of my pension invested in a SIPP in various funds and bonds. My sense is that 6.6% is in the spectrum of long term returns that I might expect elsewhere, eg

 

• low risk gilts UK 0.875% government bond, maturing in 2029, I calculate a yield of 4.6% to
• A more sporty indexed fund based on the US S&P 500, where I calculate an average 13.3%/yr over the last 10 years.

 

Both of these have their downsides, eg the S&P 500 has been quite volatile in the early months of the new US presidency in 2025 (some might say that it had the 'yips') and while the gilt is low risk if I hold it to maturity in 2029, if I want to cash it in earlier then the market decides our return.

 

The risk for solar is different. It is not impacted by the stock market nor the vagaries of the UK gilt market, but if we had to sell our house (eg due to a new job, ill-health or death) then we would likely lose much of the capital invested. In my view, our solar investment adds more diversity to our investment risk (& the literature says that this is good)  and has a reasonable, mid-range, rate of return.

 

Other Comments:

While there is some effort involved in setting up and managing a pension/SIPP, for me, the effort involved in installing a solar system and then learning how to operate it efficiently was far greater. 

 

On the plus side the solar system does give us a the warm and fuzzy feeling of helping the environment and with the battery addon has me feeling that we am doing our bit to minimise peak demand and so reducing the need for new grid and power station infrastructure.

 

Is it Possible to Split out the ROI from the Battery Vs the Solar Panels?

It is reasonably easy to get a 1st pass estimate from the GivEnergy app. If I had the same system, but no battery then I would have 3 energy figures for the year:

 

Solar only Energy flow	Estimate from solar with battery data	My estimate of Energy for the last 12 months
Solar to Home	Solar to Home	1153kWh
Solar to Grid	Solar to Grid + Solar to Battery	3355kWh
Grid to Home	Grid to Home + Battery to Home	2814kWh

 

Note: there are some errors in this:

• The above assumes the GivEnergy ECO mode and so may not be true during the Octopus Flux peak rates when the battery is discharging (eg in the summer when we are still generating solar power in  the evening).
• While the calculation does remove the battery round trip losses, it maybe that a solar only inverter would have different losses that a solar + battery hybrid inverter.

 

I can also convert this to £'s using the Octopus flat rate tariff - again this is an estimate as I do not have the tariff costs recorded for all quarters:

• Solar to Grid: 15p/kWh (source: Octopus website 14 May 25 https://octopus.energy/smart/outgoing/)
• Grid to Home: average of 24p/kWh and a standing charge of 47p/day plus 5% VAT (source averages of figures that I recorded over the 4 quarters)
• Savings from 'Solar to Home' calculated as Grid to Home above

 

Note: there are some additional errors here:

• I do not have perfect records of Octopus flat rate tariffs for all quarters

 

This gives the following:

	Energy (kWh)	Energy Cost (£) (ie what I would expect to see on an Octopus bill)	Saving (£)	Energy Cost(£) with no solar
Generation to home	1153		+£287	+£287
Generation to grid	3355	-£503	+£503
Grid to Home	2814	+£882		+£882
Total		£379	£790	£1,169

 

However, given all the errors in this calculation I am pleased that the estimated bill, with no solar comes within £62 (6%) of the £1,107 from my estimate above (derived from average consumption prior to the installation of our solar system). My assumption is that much of this error is down to inverter losses that I have not been able to derive from the data provided by the GivEnergy app.

 

I pro-rated this error across solar and battery savings, so that the solar only system saving reduces from £790 to £748.

 

So, in summary, my estimate of the split between ROI of battery and ROI of the solar panels and inverter is:

 

	1st year saving	Initial investment	Assumed repair cost at year #12	Assumed capital value at year #25	%age equivalent pension annual growth (after charges)
Battery + solar	£1,053	£13,647	£5,050	£0	6.6%
Solar only	£748	£10,047	£1,450	£0	7.3%
Battery add on	£305	£3,600	£3,600	£0	4.8%

 

Note: As well as the errors noted above, there are further errors here:

• Repair costs at year #12 may be high for the battery (I used the full addon at installation cost and I understand that battery prices are likely to come down)
• The initial investment for a solar only system may be high - I would not need a fancy hybrid inverter capable of supporting a battery.
• This still factors in a 6 month period where our smart meter was only intermittently functioning and so does not include the full benefit of the battery - this should raise both the ROI of the 'Battery + Solar' but will have no impact on the Solar only line and, so, a disproportionate impact on the 'Battery Add On' line. I hope to correct this error in October with a full 12 months of a working smart meter - see post Smart Meter #3: My Smart Meter Journey Part 2)
• Over the first 6 months of use I was still some experimenting/fine tuning and making errors in the scheduling.

 

Discussion: Battery & Solar ROI Split

Initially it surprised me that the battery addon ROI is, in effect, dragging down the system ROI, ie from a pure ROI perspective, based on this 1st 12 months of operation, it would be better to have bought a solar only system with no battery.

 

I can see two reasons for this result:

• The mid-life 'repair' cost of the battery is proportionately much higher. This all depends on battery performance over 25 years, but if I do need a new battery at 12 years, and battery prices have not reduced (which they might do), then this makes sense.
• The non-functioning smart meter meant that we were not fully charging the battery last summer - buying energy from the grid and then re-selling it makes no sense on a flat rate. So I do expect the £1,053 ('Solar + Battery saving') number to increase a little in October, an I expect that this would mostly transfer to the  'Battery Add on' saving/ROI  - we will see!

 

Based on the last point, only a £60 additional saving would raise the battery add on ROI from 4.8% to above 7.25%, so I suspect that any concern that the battery ROI is not 'pulling its weight' is premature.

 

I also have another theory, that value of a battery storage will increase over time:

• More solar installations will mean lower prices for (sunny) daytime electricity.
• Installing electric (heat pump) heating means that we will want to consume more electricity when the sun is not shining (evening/winter), so buying at cheap rates becomes more important...

...just a theory, but maybe we will be extending our battery capacity in the future.