Feed In Tariffs(FIT) Announced.

Cardew

Not contributed to the discussion or given it much thought as I am in the USA for a while; but how nice to see a 'grown up' debate!

Will give it some thought but can't see any flaw now in noncom's(or Freddix) logic, although(of course) any assumptions we make over a 25 year period are prone to look silly at completion of the period. At the end of the day it will probably boil down to 'gut feel'! - Like Betamax will win the VCR battle and Mobile phones are just a gimmick! Guess what I thought!

Radiantsoul

noncom wrote: »

From this, I would challenge George Monbiot's assertion that it is the best investment that a homeowner with spare cash can make. I think it's a decent investment, especially given that at the end of 25 years, a good quality system should actually have a reasonable life left once it's "paid for itself", but not a no-brainer. And compared to reducing your mortgage, it is at least doing something to help the fight against climate change.

Hope this helps to explain my thinking, and I'd welcome anyone who thinks I'm making a terrible mistake to let me know before it's too late!

Andy

Discounting your income stream(which I broadly agree with) shows that net present value is pretty marginal. At a 6% discount rate the present value is only £17,264 from which you need to deduct the initial investment. The break even point occurs at about a discount rate of about 6.2%.
That is probably a reasonable investment in relation to a savings account. But you probably want a reasonably high discount rate as I am not sure it is a particularly liquid form of investment. You can access a mortgage overpayment by borrowing back or remortgaging.

noncom_2

Errrr, wot?

Sorry, I have no real knowledge of economics (but a reasonable grasp of maths). Could you explain what you mean without the jargon? (ie "net present value", "discounting your income stream" etc)

Thanks
Andy

Radiantsoul

noncom wrote: »

Errrr, wot?

Sorry, I have no real knowledge of economics (but a reasonable grasp of maths). Could you explain what you mean without the jargon? (ie "net present value", "discounting your income stream" etc)

Thanks
Andy

A discount rate is a bit like an interest rate and it used to reduce the value of a future sum of money to one equivalent to a sum of money today.

If I offered you £100 today or £100 in a years time you would probably choose £100 today. But it might be different if I offered you £90 or £80 in a years time. This is because people generally prefer money now to later. A discount rate of 6% means you would be indifferent between £94 in a years time or £100 now. If I offered you £93.99 in a year you take the money now, if I offered you £94.01 in a year you would wait.

To get the net present value you multiply the non returns by the discount rate, which needs to be compounded. Assume the discount rate is 6% then cash received at the end of year on is multiplied by 94%(1-0.06), year 2 by 88%, and so on...

Year 1 94%
Year 2 88%
Year 3 83%
Year 4 78%
Year 5 73%
Year 6 69%
Year 7 65%
Year 8 61%
Year 9 57%
Year 10 54%
Year 11 51%
Year 12 48%
Year 13 45%
Year 14 42%
Year 15 40%
Year 16 37%
Year 17 35%
Year 18 33%
Year 19 31%
Year 20 29%
Year 21 27%
Year 22 26%
Year 23 24%
Year 24 23%
Year 25 21%

You mulitply each years income by the discount factor. It is pretty similiar to calculating what would happen if you shoved the money in a savings accounts, but it is easier to see what happens to any residual value. So if the panels last another five years the net present value will only be a bit over £1000 or if the panels are still worth £5000 then the net present value of that is only going to be £1000.

Of course the net present value method is not uncontroversial.

noncom_2

OK, now I'm confused.....

If people generally prefer money now to later, why would I possibly prefer £94 in a year's time to £100 now? Shouldn't it be the other way round, ie I might consider £94 now (less money, but straightaway) to £100 in a year's time (more money, but I have to wait)?

Anyway, for my way of thinking, I have one realistic goal for the money available. Invest it for the long-term to get a decent low-risk return. Normally my inclination would be to pay straight off the mortgage. The FITs system seems to provide an alternative to that, which also fits in well with my desire to reduce my environmental impact at my new house.

I take your point about liquidity. However, our equity will be such that I don't think it realistic that if we ever needed to mortgage ourselves up to the max in future for any reason, the fact that we had solar panels on the roof instead of an extra £15k of borrowing room would be a stumbling block. Surely also, the panels would potentially add some value to the house which could be taken into account when remortgaging.

Unless I'm missing something vital, I don't see anything in your method which would dissuade me. But thanks for your comments, and I appreciate your explanations....

Andy

noncom_2

Ah wait, I think I sort of get it now.....

Are you saying that if I have an investment which will yield 10% in a year, then I effectively have to "discount" that rate to take account of the "fact" that psychologically I'd rather have a smaller amount of money now than a larger amount later.

So, for me personally, I could work out a rate at which I have no strong preference as to whether I get the money now or a larger amount of money later (because that's the rate that tips the balance of "worth waiting for" to me). And then to work out the "real" value of any investment, I should subtract this rate from the actual mathematical rate of return of the investment?

I can see why it's controversial........ I'd have to think much more about it to consider how much merit I'd give such a calculation, but my gut reaction would be that 6%, for me, would be way higher than my own personal rate. Otherwise I'd never put any money in my ISAs.

Have I sort of understood this correctly?

Radiantsoul

noncom wrote: »

OK, now I'm confused.....

If people generally prefer money now to later, why would I possibly prefer £94 in a year's time to £100 now? Shouldn't it be the other way round, ie I might consider £94 now (less money, but straightaway) to £100 in a year's time (more money, but I have to wait)?

Oops. Yeah it is the smaller sum of money you prefer now to in a years time.

You are correct that the panels might add say £5000 to the value of the house in a year 20(assuming that is when you want to sell). However a £1 in year 20 is only worth 29p in todays money.

I think comparing the investment to investing it at mortgage rates is probably what Monbiot gets wrong. My view is for most people the discount rate needs to be quite a bit higher to compensate for the lack of liquidity and also an element of political risk. Also if solar panels are installed at a £15k it is not known yet if that would increase the value of a house by £15k in year 0.

Discount rates are quite subjective as they can be based on individual preferences. And my view is that solar panels on roofs will not be installed by every well to do member of the middle class because they dislike the returns available.

noncom_2

OK, thanks for the clarification.

I think I follow your argument reasonably well. But for every pound I pay off my mortgage in year 1, that's only worth 29p in year 20's money too, so I still don't a disparity between the two cases (both considered as long term investments).

I agree with you about the likely take up of this scheme though. The initial investment is very high, and as you say the liquidity is low, so many people will baulk at this. Equally, many people will stick money in accounts earning far less money in real terms than reducing their mortgage would, just so they can have access to it whenever they fancy a new telly or expensive holiday.

For me, though, it suits the way I live my financial life - relatively low risk, disciplined and long term strategies. It also suits my "political" outlook.

I think the element of political risk is reasonably low in this case, as the Govt has "guaranteed" the scheme for 25 years. I think it would take a brave future Government to undo that. I think I'm going to end up going for it, and we'll see what happens!

Cardew

noncom wrote: »

I think the element of political risk is reasonably low in this case, as the Govt has "guaranteed" the scheme for 25 years. I think it would take a brave future Government to undo that. I think I'm going to end up going for it, and we'll see what happens!

Agree about the political risk - I can't see any Government tampering with existing FITs.

If panels get much cheaper*, I can see them reducing FITs for future installations(by more than the outlined proposals.)

Obviously the scheme is more attractive for high rate taxpayers. However whatever assumptions you make, it is very clear that it is a long term investment and many people will not be prepared to wait 10-15 years before they start to reap the rewards.

* I read a US article that opinioned 1 watt for 1US$ was a realistic goal. - 3kW of panels for £2000!!!!!

shoi

Cardew wrote: »

If panels get much cheaper*, I can see them reducing FITs for future installations(by more than the outlined proposals.)

* I read a US article that opinioned 1 watt for 1US$ was a realistic goal. - 3kW of panels for £2000!!!!!

In France it is already announced that the FIT equivalent rate will be reduced for installations done in 2011 (but the 0.58€ rate for installations done this year is guaranteed for 20 years and inflation proofed)

And yes of course they'll get cheaper (see nanowatt.com for one). In the end they need to make sense without subsidy. It's a bribe and I'm taking it.