Solar PV, Feed in tariff vs compund interest on savings

mattiker

Hi All,

I expect a lot of you have been considering Solar PV - or at least you may have been before the feed-in-tariff was slashed! Even before it was slashed at the 43p/KWh rate most energy companies were claiming a 10% return on investment....which on the face of it sounds great but I started thinking about how that compared to a savings account after you calculate compounded interest.

So for example, say our Solar PV system costs £10,000 (seems about average for approx 2KW system), and we have a perfect roof to fit it to, somewhere in the middle of England. I've used the solar calculator at the energysavingtrust website for this.

After 25 years you get back £18,162. Minus the initial cost of install = £8,162 net gain.

OK...it is pretty much expected with these systems you'll have to buy an new inverter at some point during this 25 year period, so I think we can safely take £1000 off our net gain to cover such maintenance- and any other problems that may be encountered. So lets call the net gain = £7,162.

So by comparison, lets imagine we put all that £10,000 in a bank account. To achieve the magic total of £17,162 after 25 years we would need an interest rate of just: 2.18%

This is a fairly simplistic way of thinking about it. I've not included any calculations to compensate for the fact the the feed-in-tariff is linked to inflation, and the potential rising energy costs (i.e. you could save much more on your electric bill when prices go sky high thus increasing your net gain).

So with the new tariff of 21p - well....it's not even worth thinking about as an investment - I think you will end up loosing money in real terms.

Anyone else think the solar pv industry has been miss-selling the financial benefits of solar PV?

I'd be really interested to hear your thoughts.

Thanks,

Matt

mattiker

It has just occurred to me that for a fairer comparison you'd have to put the money earned from the feed-in-tariff back into a bank account and let that earn interest....that makes it a bit more complicated but will make a huge difference.

On the above example you'd get approx £732 pounds per year income... which I believe over a 25 year period equates to saving £61/month. At 2.17% (e.g. isa account) = £24,242.75. So that's about £7,000 interest on top of the £17,162 mentioned above (as total return)....which means you'd need an interest rate to get you the magic total of £24,162 in a savings account with an initial capital of £10,000. That's 3.59%/year for 25 years.

It's complicated....let me know where I've gone wrong!

energysavingexp

you have not taken in to account export payments cheaper bills fit is tax free you will have to pay tax on savings
and for 2kw system £10000 is way to high i got a 4kwh system for £12k.

mattiker

you have not taken in to account export payments cheaper bills fit is tax free you will have to pay tax on savings
and for 2kw system £10000 is way to high i got a 4kwh system for £12k.

I have taken into account for the export payment (which is not much compared to the FIT). Yes tax free payments/savings on FIT is good point. You'd need a comparable savings rate after tax, or use a tax-free ISA.

The cost of systems seems to be hugely variable, sounds like you got a decent deal. I think a lot of solar PV companies are taking a good slice of the pie in their install charges and markup's on equipment - I with the new tariff we will see more realistic quotes soon.

Also I forgot to mention - If you went for the solar option, at the end of the 25 years you will not have your capital of £10,000 in cash (as it will be sitting on your roof in the form of an asset). Hopefully if will go on for another 25 years generating electricity but probably wont make anything like the generous FIT payments on offer for the intial 25 years.

energysavingexp

i look at if diferently
i borrowed the money @ 2% apr intrest i get paid for fit export and savings in my bill at aprox 10-12% so i pay out of that the 2%intrest.
bank in an isa the other 10% or so, this will pay of the capital in about 10 years the remaing profit and lower bills for the remaining 15 years
is all profit from someone elses money.
of corse the intrest rates can change but as long as they dont go over 10% apr i was willing to take the risk.
also ill own the system and make a profit from nothing,
this is just the same thing loads op people have done for years (including me) when we borrow the money to buy a house and hope the market prise rises (lucky for me it did on the last 7 houses that i have bought) now i have a big detached house worth about £280k and i owe 20k on it so thats a nice profit on there money.
yes it could have gone the other way same with most things its a gamble.

ctdctd

I did a spreadsheet assuming inflation at 3% and 5 year savings rates at 4.4% (less tax). No idea what the actual long term figures will be but hopefully, in the long term, savings will beat inflation!

I allowed for a 2.5Kwh system at £9500 with £2000 allowed for maintenance over 25 years. Not the cheapest, but they could install before Dec 12th!

I compared putting the cash into savings to the amount gained from the FIT + Export + bill savings. I assumed the amounts from the FIT etc payments would earn the same interest as savings.

This gives me a 9 year payback period with the 43.3p current FIT rate and 17 years for the reduced rate.

I'm lucky and have had mine installed in time for the current rate.
Figures are marginal for the reduced rate - however, installation prices are falling so a system installed for say £7000 starts to make sense again with a 12 year payback.

HTH

Cardew

There are calculators that work this all out for you, provided you estimate interest rates and tax rate, fuel inflation, RPI inflation etc.

You have discovered yourself(in post #2) the major flaw in your initial post. i.e. you must invest the income each year!

Even if you get fairly close with your estimates of inflation etc, the big unknown is repairs - not just inverters but panels - to roof, cables, meters etc. Health and safety considerations will mean any repair on roof will not be cheap(scaffolding) - and I suggest many of the installing firms will soon move to pastures new and guarantees will be worthless.

Personally I think the best way of looking at solar PV is as an annuity. You spend(rather than invest) £10,000 on solar which has no worth other than providing a tax free(at present) income. After X years, provided you invest that income, you will start to make a profit.

ctdctd

I don't think repairs will be a big issue.

Installed system has a 5 year suppliers warranty.

Inverters will come down in price so £2K should cover two of them in 25 years.

Panels are not likely to fail but degrade slightly - mine have a 20 year 80% warranty. Physical damage is covered under house insurance.

Roof, cables, and meter - well I've never had to repair any of these before and I've been here 20 years so far!

I agree that a solar install should be regarded as an annuity.

mattiker

I have to admit, my head is spinning trying to think this one through....the inflation thing really hurts! The FIT payments are RPI index-linked which makes this very attraction. It's hard enough making your savings beat inflation at the minute.

ctdctc - I'd really like to know more of your figures, did you determine Solar PV was significantly better then savings? It still seams to me that if you were very shrewd with your savings you could achieve a similar rate of return to Solar PV on the higher FIT - what do you think?

ctdctd

mattiker wrote: »

ctdctc - I'd really like to know more of your figures, did you determine Solar PV was significantly better then savings? It still seams to me that if you were very shrewd with your savings you could achieve a similar rate of return to Solar PV on the higher FIT - what do you think?

On my figures, system price £9500 and FIT 43.3p I'd need to earn 10.3% taxable on savings to beat my estimated solar return.
(With a theoretical £7000 system price and FIT of 21p I'd need to earn 8.2% taxable)
However, if my assumptions for RPI and interest rates turn out wrong, the figures and returns could be wildly different.

More risk than savings I guess but I am happier investing in my house that via bonds and shares etc.

Oh, and I get a gadget that shows me what it is doing - worth every penny :j

HTH

Cardew

mattiker wrote: »

I have to admit, my head is spinning trying to think this one through....the inflation thing really hurts! The FIT payments are RPI index-linked which makes this very attraction. It's hard enough making your savings beat inflation at the minute.

ctdctc - I'd really like to know more of your figures, did you determine Solar PV was significantly better then savings? It still seams to me that if you were very shrewd with your savings you could achieve a similar rate of return to Solar PV on the higher FIT - what do you think?

There are a couple of points on this..

ctdctc used a figure of £9.5k for 2.5kWp. People are reporting £10k for 4kWp - that makes a huge difference.

Also where you live is another huge factor. Over 1,000kWh pa per kWp is possible well South but, say 750kWh pa well North.

A best case scenario can give an initial income of around £1,800pa(FIT + export + saving in house) for £10k.