Here, Kevin McCann, policy manager at Solar Energy UK, Kirk Archibald, director at Think Three, and Franz Fuerst professor of real estate and urban economics at the University of Cambridge, explore the report’s findings on how solar is adding significant value to properties – a huge boost for installers in encouraging customers to make the switch.
The research findings – which included statistical analysis of more than five million property transactions – are clear. The return on investment makes upgrading a home with a solar power system an easy and simple way to lower a property’s running costs and increase its value while also reducing its environmental impact.
The report describes and explains these in detail, based on case studies for homes around the UK. It also makes recommendations for how government and the property development, finance and construction industries can help ensure the deployment of solar and energy storage systems on new and existing homes. Doing so would ensure that homeowners, renters, and landlords make the most of the contribution that solar’s clean, affordable power can make to their properties. This is vital if the UK is to meet its legally binding target of achieving a net zero economy by 2050.
New research supports the investment case for residential solar power systems and can support valuers in taking account of domestic installations
Recent research has demonstrated for the first time that homes fitted with solar photovoltaic (PV) systems sell for more than equivalent homes without them. It also shows that installing PV on a typical home could reduce average annual energy bills by a third.
Trade association Solar Energy UK, sustainability consultancy Think Three, and the University of Cambridge wrote The Value of Solar Property report, which looks at the financial benefits of residential solar.
Understanding this is important because the UK must decarbonise 29m homes to achieve net zero by 2050. However, one of the barriers to deploying solar is the perceived cost of improving a home’s performance.
In 2021, the Department for Business, Energy and Industrial Strategy’s UK Rooftop Solar behavioural research confirmed that ‘up-front costs [are] a clear barrier to [the] installation’ of residential solar.
Meanwhile, discussions with lenders carried out for The Value of Solar Property confirmed that some financiers share this viewpoint. Banks and lenders, in principle, recognise the potential of on-site power generation. However, they lack clear evidence on the value it creates, whether in terms of the asset itself or running costs. Our report aimed to fill this gap.
Models informed by sale data
Research asked what impact, if any, PV has on house prices and energy bills. To determine the impact on asset value, we carried out a hedonic regression analysis on house price data held in the Land Registry. We cross-referenced this with the Microgeneration Certification Scheme solar installation database and energy performance certificates.
The analysis controlled a range of variables and isolated the influence of solar on sale price. Our sample size of 5.7m sales transactions makes this the largest study of its type conducted so far.
To look at the running costs of a solar power system, we developed an adjustable financial model based on actual cost data. The model has more than 15 variables for solar and energy storage systems – including size and cost of the array, the type of house and whether cash, a loan or a mortgage is used to pay for the installation.
The model uses these variables to calculate a range of outputs relating to the system, including its expected annual electricity generation and how these relate to its capital and operating costs.
In turn, the model produces a range of standard investment metrics to assess the financial performance of the system. It also provides specific information on, for example, the value of grid electricity that the system displaces.
‘Our sample size of 5.7m sales transactions makes this the largest study of its type conducted so far’
Increase sales price by £1,800 – half the cost of installing the system
We found a statistically significant price premium of between 0.9% and 2% for homes with PV fitted. This means that, for example, installing an array on a terraced house in the East Midlands could increase its sales price by £1,800. Furthermore, as the depreciated value generated by our research reflects that several years usually pass between installation and resale, the initial uplift in value is likely to be much higher.
In fact, £1,800 is equivalent to around half the cost of installing the system in the first place. This is even before the significant savings it enables: for the same home, installing PV could lower bills by approximately £330 every year over the 30-year lifespan of the system.
According to our research, the combined value of these benefits means that the system could effectively pay itself back in ten years, far less than the average 17.4 years that owner-occupiers spend in their home. This is a major finding given concerns about whether homeowners investing in zero-carbon technology will break even before moving.
Furthermore, our research shows that while solar already makes sense on current economics, its financial performance will only improve as the UK adopts efficient electric heating and vehicles at scale.
Decarbonisation could lose public support if it’s seen to mean higher energy costs
This is particularly important because the cost of energy is a prominent public issue, as evidenced by the recent UK energy crisis. Solar Energy UK believes the decarbonisation of domestic buildings could lose public support if it is seen to mean higher energy bills.
Our research proves the opposite: solar properties can help reduce exposure to rising energy costs. With mass-market uptake of electric vehicles and heating, it is important that consumers can mitigate the risk of cost increases resulting from likely higher household electricity demand.
Generating power on site is a crucial way to do this. Our research confirmed the popularity of doing so by polling 2,000 people. The poll focused on their understanding of and attitudes to residential solar.
We found that solar panels are the third most popular home improvement priority after a new kitchen or bathroom and new windows, with 33% of respondents favouring PV.
Most favoured home improvement for 18-30 year olds
However, this rises for young homeowners: more than half of respondents aged 18–30 said installing solar was the home improvement they were most likely to make. As a new generation of homeowners emerges – and as young people find it more difficult to get on the property ladder – this is clearly relevant for lenders.
Significantly, 46% of homeowners polled also said they would be more likely to install a solar energy system if a new consumer finance product, such as a green mortgage, meant it did not require an upfront payment. That is why we have engaged with experts at RICS and lenders involved in developing financial and valuation models about our research findings.
Pricing PV on property
Homes fitted with PV command a premium, save people money and help reduce carbon emissions. We are thus keen to see the value of such properties formally recognised in mortgage assessments and home valuations.
We think the findings should inform the work of the valuation profession and we recommend that the RICS Valuation – Global Standards (Red Book Global Standards) advise surveyors to consider the presence of PV when valuing a home. This would enable more home buyers to invest in solar because lenders could reflect the increased value of the property in higher mortgage offers.
It would also enable property developers to include solar as a standard on more new-build homes. Developers should be confident that they can go further than installing only enough solar to enable them to meet the energy performance requirements set by the Building Regulations, knowing that solar homes command a higher sale price. As such, PV can provide a valuable differentiator for their product.
Retrofitting properties with solar arrays
Furthermore, it would enable more homeowners to retrofit their property with solar arrays, safe in the knowledge they will realise some of the value of their investment should they sell. In the meantime, they will reduce their electricity bills and improve their home’s energy performance.
There are also benefits for landlords or investors with a property portfolio. Installing solar on homes should see returns for both occupiers and owners. Solar is a long-term investment: properly installed and maintained, a PV system should last at least 30 years.
This would significantly contribute to decarbonising the UK’s residential building stock and helping the country achieve net zero. That, ultimately, is the value of solar property.
This article first appeared in RICS Property Journal, January 2022.