Solar PV: still an attractive investment
Posted by John Ditchfield on 27 September 2012 at 11:30 am
In these challenging times for investors, diversity is king. With interest rates low, getting a guaranteed index linked income long term is attractive. So how do solar photovoltaic panels (PV) fit the bill?
The Feed in Tariff (or FIT) has been around for a couple of years as an incentive for small scale solar PV installations. The basic idea is to install solar panels on your roof and be paid a tariff by your electric supplier for all the electricity you generate. You can use as much of the generated power as you wish, which cuts your electricity bill. Every kilowatt that you don't use is exported down the same wires you bring power in on.
The investment model is simple: you invest a lump of capital now, you get a guaranteed tariff for 20 years and you should expect payback in years.
But it isn’t that simple:
Your capital is sunk. Thus far it is very difficult to say how solar panel installations will be valued if you sell your house. So how do you cost your capital?
If you take a typical big construction project approach you may discount the income at a rate of 7%, in which case you may never achieve payback in the FIT lifetime. But the same approach would kill many projects that have gone ahead and realised big upsides. For example, with electricity prices rising at 15% a year, getting free power is going to be a bigger component of the return.
Your income is tied to sunlight. Salesmen will tell you it only needs to be light to generate power. That is right, but the brighter the light the more you generate. A typical winter week here in Aberdeen only generates 10-20% of a sunny summer week (not that we have had any this year). A wet summer week only gives half the income of a sunny week.
The tariff is guaranteed and is index-linked, but the tariff has been cut dramatically since last year, for new installations. This has caused some panic buying, some radical reductions in installation costs, and lots of uncertainty for investors and installers. It remains to be seen if the fledgling domestic solar industry will grow, consolidate, or shrink and how this will impact installation costs.
The technology is fairly mature and the cells have good lifetimes and no moving parts, so virtually no maintenance costs. But how sound is your roof? Re-slating would mean reinstalling.
How about some numbers: a typical domestic installation will be between 3 and 4kW, or 12-16 panels. This would cost around £6,800 for a 4kW system. On a good site in the south west of England this could pay back your capital in 7 years - it would take longer as you move north and the sun is less strong (this calculation does not account for the interest you would have got on this in a savings account).
The annual income* you get can give up to a 14% return, and is tax free for domestic installations. So, as an example, it may be a viable option for a pension lump sum to generate a steady, index-linked tax-free income of up to £1,000 per annum for 20 years.
Is it for you?It may meet your investment needs if you want:
- A tax free index linked income of 8-10% of your original investment paid quarterly for 20 years
- You are not planning to move house in at least 10 years
- You have a sunny aspect – not just to life but literally on your roof
- You have the capital available at low cost
- You don’t want your capital back
- You want the feelgood factor associated with saving the planet
What you need to know:
- You will not get your capital back as a lump sum. You may realise some additional value to your house when you sell, but this is very uncertain, and probably unnoticeable relative to the house price.
- If you move house inside 10 years you may get back much less than you invest.
- Installation costs can vary quite dramatically with the condition of your property
- If you have to borrow the capital you need to carefully evaluate the return vs cost of capital
Co-authored by Phil Townsend, a green energy champion from Scotland
*This consists of generation tariff at 16p/kWh + export tariff of 4.5p/kWh + savings on your energy bill as you use your own generated electricity.
Photo by Thomas Hart
About the author: John Ditchfield is a director of Barchester Green Investment.
If you have a question about anything in the above blog, please ask it in the comments section below.
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