It costs £12,500 to install solar cells on your roof, but new tariffs should give you a return of at least £25,000. So what's the catch? There isn't one, says Miles Brignall

If the government offered to pay you £1,000 a year for the next 25 years, in return for an up-front investment of £12,500, you'd snap it up in a second. Well, that's pretty much the deal on offer this week after the government finally revealed what it will pay those who install electricity generating solar panels – in and around their homes – through the new "Feed-in Tariffs" (FITs).

After years of campaigning by environmental groups – helped in small part by this newspaper – the government has finally agreed to reward households and businesses installing electricity-generating measures with enough of a return to make it a serious financial, as well as an environmental, investment. If you've got the money (which is a big "if") and, crucially, a sunny, south-facing roof, you can earn a 7%-10% tax-free return, an income that will rise in line with inflation. At the same time, you get to do more than your fair share in reducing the UK's carbon­ emissions.

In the week that the energy regulator,­ Ofgem, warned the nation to expect 20% electricity price hikes by 2020, and warned future supplies were in jeopardy, investors in solar panels will have the added benefit of being a net provider of electricity, and largely insulated from future price hikes that could see household bills top £2,000 a year by 2020.

Announcing the new tariffs' introduction this week, the energy and climate change secretary Ed Miliband said the guaranteed income would be a big incentive for householders "to make the move to low carbon­ living".­

"The feed-in tariff will change the way householders and communities think about their future energy needs, making the payback for investment far shorter than in the past."

Although Milliband announced a number of tariffs – including what the government will pay those installing wind turbines – the one that will appeal most to the average UK householder will be for installing photovolatiac (PV) solar panels – at a typical cost of £10,000-£12,500.

From 1 April, households with approved­ schemes will be paid for the electricity they generate, even if they use all of it themselves.

The level of payment depends on the technology and whether it is being fitted to an existing­ home, or installed as part of newbuild. Importantly, future payments are guaranteed for the next 25 years and have been, unexpectedly, linked to inflation.

Anyone fitting a typical £12,500, 2.5kW PV system to their existing home will initially be paid 41.3p per kilowatt hour (kWh) generated. Enough, according to Miliband, to reward them with up to £900 in the first year on top of a £140-a-year saving on their bills.

The measure, which is inevitably quite complicated, is designed to reward those who reduce their own electricity consumption by installing low-energy lighting and A-rated white goods, and to ultimately export excess electricity generated back to the grid.

Households get an extra 3p for each kWh they export on top of the 41.3p they get paid for all units generated. Those building PV roof panels into a new-build home get a slightly lower tariff (36.1p per kWh). The fact that the payments are not taxed make it a particularly rewarding investment for higher-rate taxpayers – those earning more than just over £43,000.

Regulated payments

The feed-in rates change depending on which year you install the technology. They will also apply to installations commissioned since July 2009 when the policy was announced. Early adopters, who have installed grant-assisted PV and registered­ for the ROC scheme, will also receive payments, but at just 9p/kWh.

The payments will physically come from your existing electricity supplier, but will be overseen by the regulator Ofgem. Jeremy Leggett, chairman of SolarCentury, the biggest supplier of PV systems to UK homes, says homeowners need a largish (8m2), unshaded, south-facing roof, or similar place to mount panels.

"Feed-in tariffs are going to be a big boost for the industry and for the first-time, homeowners can see a decent financial return," he says. "We estimate homeowners can save and earn more than £1,000 per year for 25 years, increasing with inflation, giving a payback in around 10 years."

He says homeowners with flat roofs may well find they can install a system, as will those with conventional roofs that face a few degrees either side of south, east or west. Panels perform best in unshaded sites angled towards the sun at a pitch of 30-40 degrees.

Prior to this week's announcement, grants of up to £2,500 had been available to those installing PV panels under the terms of the government's Low Carbon Buildings Programme. There are still grants available for other green technologies. FITs now provide the entire financial incentive for PV installers.

Dave Timms, climate and energy campaigner at Friends of the Earth, says the new tariffs will allow people to turn their homes into mini-power stations. "We were hoping the government would go further, but this is very welcome and long overdue," he says.

"For householders who have a south-facing roof, PV panels are really worth looking at. Not only are they a sound financial investment, they will also allow you to do your part in tackling climate change.

"Our homes are responsible for over a fifth of UK emissions, but by fitting renewable electricity systems and wind turbines, we can be part of a greener, safer future."

There is an expectation, he says, that once investors and banks see the benefits of the scheme, specialist loans or top-up mortgages will become available for those who want to install a system, but can't raise the capital.

Take it from me – it's worth it

This week's announcement on solar panels is good news for homeowners wanting to install green energy systems, simplifying the procedures and shortening the payback time of renewable technologies, writes Ashley Seager.

Ashley Seager went solar three years ago

I fitted solar photovoltaic panels on my house nearly three years ago. They are great – we get 90% of our electricity off our own roof over the course of the year. And three years ago the panels were more expensive than they are now.

We spent £17,000 but got half of that back in a grant from the Low Carbon Buildings Programme, which was dogged by complexity and stop-go ­decisions by the government.

It is much easier now. You install the solar panels or wind turbine and away you go – no messing about with grant applications that take months.

The pain for people like me who have already fitted such technologies is that we will only get a tariff of 9p per kWh, roughly equivalent to the payments we already get from the government's renewable obligation certificate scheme.

The Department of Energy and Climate Change (DECC) argues that it is incentivising new installations, not helping people who have already done one and may have got a grant for it. But that means early adopters – many of whom stuck their hand in their pocket for a lot of money and became evangelists for the new technologies – get a lower return than they would get if they had waited. Pity.

But, undeterred, I am looking at fitting solar thermal panels elsewhere on the roof to generate most of our hot water. That is because, as well as announcing the cashback for green electricity schemes, DECC also published its proposals for payments for renewable heat gear such as solar thermal or ground source heat pumps.

I reckon that from next April a normal solar thermal system could generate around £200 a year, based on the 18p per kWh DECC is proposing. Added to the £150-odd you save in heating water, you approach a 10% return, assuming you pay £3,000-£3,500 for your thermal system. Go for it!

Your questions answered

I have a PV system and am furious I'm not getting the new tariff. Can I rip it down and start again? Technically, it has to be "new", and everyone in the industry has speculated as to whether this is possible. Unclear at best.

These figures look great on paper, but are they guaranteed? How much electricity­ your system generates, and the resulting returns will depend on the size and quality of panel and its position. Shading has to be avoided – even a telegraph wire. But sun-hours in the UK are remarkably stable and well documented – so you should get close to the promised figures.

What happens if I move house? The most obvious drawback, but it needn't put you off. Estate agents will get used to selling their benefits, and a PV scheme should add to the value. Lots of people spend £12,000 on a kitchen and don't expect to get the money back. If your buyer won't pay up, find another or take the system with you.

Are there any planning problems? In England and Scotland, you don't need planning permission for most home solar electricity systems, as long as they're below a certain size – but you should check with your local planning officer if the building is listed, or is in a conservation area. In Wales and Northern Ireland, you still need permission.

Is it just solar PV? No the government has announced tariffs for those fitting wind turbines – good out in the countryside – and also hydro schemes. Perhaps more importantly, it has said it will be giving feed-in tariffs to households installing solar water heaters, from April 2011. These are much cheaper (£3,500). There's also help for air and ground-source heat pumps. Money will be returning to this subject in forthcoming articles.

Have they got to be on the roof? Do they require maintenance? No. People­ have installed panels in gardens and on south-facing walls – although given their cost, you will want to find a secure spot where they can't be easily stolen. There are no moving parts and they require no maintenance – PV systems­ are designed to last 20-30 years. Miles Brignall