Manse Capital Limited Financial Planners - Financial Planners, Wealth Managers, Tax Planners

In this article we will consider the financial arguments for fitting Solar Photo Voltaic (PV) panels on your house.

We will look at :-

• How you make money from solar panels and what the income is likely to be
• What you should pay for a system
• Calculating the yield on your capital investment and comparing it with an ISA
• Conclusion 

Should I Buy Solar Panels This Year?

 There is much in the market today about generating electricity through solar energy using Photovoltaic (PV) panels fitted to the roof of your house. The Solar PV companies are quoting fantastic returns on capital and are selling the systems as a sure fire winner. With this in mind Nick Crabbe one of our directors set about to examine these claims and to carry out some due diligence in to whether or not it makes financial sense to install Solar PV units on your roof.

Why are Companies now selling PV systems?

The solar PV systems are now being pushed heavily by many companies because of three main factors.

Feed in Tariffs (FIT’s)

To encourage green energy production and to help meet our national green energy targets the government has introduced a “feed in tariff” that pays people producing Electricity from solar PV systems  fitted to domestic properties a guaranteed index linked (inflation proofing linked to RPI) amount of money for each Kilowatt hour of electricity produced. This currently stands at 43.3p for retro fitted domestic systems and therefore if you have a system that produces 3,000 kilowatt hours pa you will receive 3,000 x 43.3p = £1,299pa in tax free income this year from the government. If RPI remains at approximately 5% this will rise to £1,363 next year and so on. You receive this money irrespective of whether or not you use the electricity yourself. These FIT rates are reducing from next April so there is a definite advantage to installing PV panels before then if it is the right thing for you to do. There are also FIT’s available for commercial installations up to 50KW but at a lower rate.

Savings off your Electricity Bill

The second saving to be made is a reduction in your personal electricity bill by using the electricity you generate during the day, as this will mean that you draw less from the national grid. For a family of four with an annual bill of approximately £700 it is estimated that you could save between £150 and £400. However this very much depends on who is at home during the day and what appliances you set to run during the day. Thus to make best use of it you would set your washing machine and dishwasher to come on one after the other starting at about 1.00pm in the afternoon effectively running them for free. The same can be said of other electricity hungry appliances. If no one is at home during the day, then clearly the savings won’t be great.

Sell Energy back to the Grid

Currently an estimate of the energy you don’t use is assumed to be exported back to the grid and you get paid for this. However the amount paid for this is relatively low. The current rate is 3p per kilowatt hour and as such if you assume 50% of the power produced by a 3,000 KW system is sold back you will only make about £45 a year.

Total Savings

Depending on the performance of your solar system and its size, but using the above figures (4kw system) as an example you could therefore make and save approximately £1,635 in the first year.

How much Electricity would a PV System produce?

This depends on the following factors:-

• How big a system you install in Kilowatts
• The direction your roof faces (the azimuth), north east south west etc
• The pitch or angle of the roof
• The efficiency of the cabling and the box that turns the PV current in to usable electricity (known as the inverter)
• The number of expected bright days and daylight hours you get in the year which is dependent on where you live geographically

There are websites that will tell you the approximate expected power output of a system such as http://re.jrc.ec.europa.eu/pvgis/apps4/pvest.php#

The best direction to have your roof facing is south, if you fitted a 4KW system and the angle of the roof was 30 degrees and you lived in the Midlands then you could expect 3,380 KWh according to the estimates from this website.  This would provide you with an approximate income and savings of £1,803 pa. Clearly this cannot be guaranteed and it is always better to assume a less efficient system and hence in the calculations going forward we will assume an output of only 3,000 KWh

The Costs

The costs to install Solar PV vary tremendously from provider to provider. Of the companies that were looked at the average price before any negotiation started at about £15,500 for a 4kw system but it was possible to find similar systems for about £10,000 if you shop around. However be aware that due to the launch of the feed in tariffs the market has become populated with new companies with little experience using “double glazing” sales tactics. My father was quoted by one company (which advertised in the Telegraph) £15,000 for a 2KWh system, along with all the usual “buy now while stocks last” and “I’ll just call my manager to agree a really special deal if you sign today” tactics being employed.

However, like any system it’s not just about the initial costs, it is also about the technical knowledge of the company involved, how long they have been in business, the quality of the equipment, the guarantees they provide post installation and their sales process. The technological ability of the company plays an extremely important role, in that using lower quality panels, cables, inverters and connectors can lead to a significant loss in the amount of power generated. Not all systems are the same, far from it.

What is clear from our investigations is that up to 25% of the cost of a 4KWh system bought for £15,500 is commission which is usually split between the salesman and the company involved. That is not to say that this is wrong and it does depend on the technology being used, but what it does highlight is that there is significant room for negotiation in any deal if the company starts at a high price. One company was honest enough to inform me that the real cost of a 4KWh system was about £12,000 which included a 20% profit margin for the company involved. Anything that the salesman could sell it for above this was his commission. You can see therefore, why there are so many people selling the schemes, as there is a lot of money to be made before next April.

The larger the system you install the better the “bang for your buck” as they say, with 3KW systems costing about £13,000 before negotiation you can see that you pay £4,333 per KWh but if you buy the 4 KW system at £15,500 you only pay £3,875 per KW. The more you can negotiate off the price the greater the savings and the cheaper per KW you end up with.

So Does it Make Sense Financially?

The reason for writing this article was to unpick the figures from a financial planning perspective and to look through the claims of the salesmen that it was possible to get a return on capital of over 10% pa. With advertised figures like this it would appear to be a “dead cert” with no risk and therefore our clients would be better off fitting solar panels before next April than utilising their ISA allowances for this tax-year.

However all is not what it seems and as part of the exercise we have constructed a spreadsheet to look at the real compound returns on the investment in a solar PV system in comparison to investing in an ISA.

The Salesman’s Calculations

The companies selling PV work out the return on capital very simply. They sum the estimated income from the FIT’s, the electricity sale back and the savings off your bill and divide it by the cost to install the system. Thus taking the figures from above if it costs £15,000 to install the system and you get £1,635 back per annum your return on capital as a percentage according to the PV companies is £1,635/£15,000 x 100 =10.9%. This is highly misleading and is extremely simplistic in its approach.  What it fails to take into account is the fact that you have traded your capital for an asset that is now effectively worth nothing as no one wants to buy second hand PV systems.  Thus you are effectively starting from a position of -£15,000, whereas if your money was invested into an ISA, your return would be much lower but you would still have your original capital (if it were invested in a cash ISA) or your capital plus or minus any growth or loss (had it been invested in an equity ISA) to spend. Thus after the 25 years of  FIT payments and savings the question you need to answer is “would the total income I get from my PV system having deducted the original capital costs be greater than the total return of original invested capital plus any growth that may have been made on an equity ISA?” You need to bear in mind that Stocks and Shares ISAs involve a degree of investment risk. There is therefore risk of capital loss.

The Compound Return on Investment Calculations

The spreadsheet we have constructed shows the following results using the following assumptions:-

Assumptions

• Annual return on Equity ISA Investment in our balanced portfolio net of all charges is 6%
• The PV system is 4KWh and produces 3010KWh each year (conservative)
• The FIT payments are currently 0.433p per KWh and will increase each year with RPI
• The export Tariff is 0.031 per KWh
• The electricity saving is £300 pa increasing by 1% pa above RPI
• RPI is 3%
• The cost of the PV system is £15,000

With these figures the results are as follows:-

Your £15,000 invested in to an ISA would have grown to £64,378 over the 25 years.

The total return on the PV investment after 25 years having deducted the cost of the capital is £59,849

Actual compound return on capital over the 25 year period of the PV system 5.69%. Not as the companies would like you to believe in excess of 10% pa.

Thus in this example you would have been better off investing in an ISA.

We can also calculate the “payback” period with this spreadsheet using the same assumptions. Once again the PV salesmen will quote payback periods of 7-8 years but all this does is calculate over how many years your total FIT income and electricity savings will take to reach the original cost, in this example £15,000. This once again ignores the fact that you could have invested the money in an ISA instead and as such you would still have access to the capital. If instead we recalculate the payback period based on how long it would take the total FIT income and savings to exceed the value of the original capital invested in an ISA plus all its growth at 6% the answer is 16 years. We can call this the real payback period.

However, despite this there are still many arguments for the PV system in this case.

• The income (and hence return) is guaranteed from the FIT’s whereas 6% growth pa within the markets is not. The risk is therefore highly likely to be lower with the PV investment than the ISA investment.

• If energy inflation and RPI rise at faster rates than 4% and 3% pa as per the assumptions in the above calculation the equation will quickly move in favour of the PV system as an investment. In 2011 energy prices have risen by up to 16% depending on your provider.
• There is a significant “green” benefit to the planet in terms of CO2 emissions.

Is it Suitable for me as an Investment?

This article was written from the perspective of looking at Solar PV as an investment and comparing it with an ISA investment . Whether it is suitable or not depends on a few factors and you would need to consider the following:-

• Am I prepared to give up liquidity i.e. a permanent loss of access to my capital?
• Am I going to remain in the property to at least get my original investment back using the Real Payback Period discussed above?
• If I’m not going to move house am I likely to live long enough to get to achieve my Real Payback Period?

Currently if you have a sum of money and are approaching retirement and are looking at simply obtaining a regular tax free income it should be looked at and compared with an annuity purchase, because in both cases you give up your right to capital for an income. Other risk factors need to be considered but it is certainly an option to examine.

The idea of fitting PV to get a higher resale value on your property however is unproven. Not enough sales of properties post PV fitting have occurred for the market to identify what capitalised value would be placed on the income stream. As such, to fit PV simply to increase the value of your property would currently be a very risky strategy.

However, because it is the individual that owns the right to the FIT income, even if you sell the house in the future you can still continue to receive the payments and the export income, you will only lose the electricity savings. Thus in this example the vendor of the property would agree a cost for the lease of the roof space to the new purchaser and the purchaser would receive a small income plus savings on their electricity bills. Thus a PV system does still have a definite income value even after selling a property with it installed.

Conclusion

It is our belief that if you have a suitable roof space for a PV system, use a reputable and experienced supplier and haggle hard over the initial costs then PV could make an excellent investment before next April when they reduce the level of the FIT payments. Based on the figures above, you only need to get a 4KWh system for £14,000 and it provides a 6.05% compound return net of capital costs over 25 years with greater guarantees than the expected return on an ISA investment.  Clearly however you need to consider the PV argument as an integrated part of your overall financial planning. For example there is little point in spending capital that you need for education costs or a new car tomorrow on a PV system today that can only ever produce you income and electricity savings over a 25 year period.  It should therefore be considered as part of your next financial planning review if you are interested in the possibility, but remember the system needs to be installed before next April.

Where do I go from Here?

Having done a lot of research in to the subject if you are interested in looking into PV as an investment we can point you in the right direction. As part of this process we have had many discussions with many different companies and can certainly provide you with a starting point for your own research if you wish. We can also calculate your real compound return and real payback period for a PV system you have been quoted, by using our spreadsheet if you contact us.

This article was researched and written by Nick Crabbe, who has since had panels installed at his home.

Disclaimers

We are Financial Planners and wealth mangers and as such we set out to examine the financial claims of the PV companies in terms of returns on invested capital and to provide an unbiased and impartial view on this debate for our clients. We do not pretend or claim to be technical experts in the field of solar PV and as such although we have learned a lot about the different systems in our research, all technical queries should be directed to the PV companies you are talking to.

 

Manse Capital is authorised and regulated by the Financial Services Authority. When considering investments please note that past performance is no guarantee of future performance and the value of units can fall as well as rise.

 

Tags: energy savings, feed in tariffs, Financial Planners, investing, ISA, PV, Solar Panels, wealth management