Savings account or PV?

Exiled_Tyke

A discussion that has been around these boards a lot is that of whether it's better to put money in the bank and get interest or into solar panels. Very often the discussion has started with some saying something like, 'well 8% a year from PV is better than 2% a year in the bank' followed by someone else pointing out that in the bank the money is always available to withdraw and with PV the investment is 'non-recoverable'.

Whilst I realise that this calculation is probably not relevant to those currently deciding on whether to install (in most cases the pitiful tariffs won't make it worthwhile) I still thought it might be of interest to some here.

So here's my calculation (I'm open to correction if I've made mistakes) : The assumptions first: Bank interest is available at 3% before tax (generous I think), basic rate income tax is payable (at 20%), all cashflows are at the year end (which would be the case (or equivalent of) with the bank, but works against the PV case), FIT tariff is payable for 20 years, Payback estimated at 9 years, all income from PV (both bill savings & the FIT will be put into the savings account) and of course the all important no repairs, replacement inverters etc in the meantime (we need to keep it simple) and errrrm no performance deterioration!. Also to keep it simple the investment will £1,000 (the numbers simply scale up)

First the bank. After 20 years the balance on the bank account I calculated to be £1,607.

The PV system would have returned £2,848 (less the initial investment gives, £1,848). So this would suggest that a £5,000 system could leave the owner £1,000 better off than having the money in the bank. Also the reinvestment of earnings (to earn bank interest) decreases payback to a little over 8 years. (Although in reality this again is pessimistic as the income would be throughout the year and not at the year end).

I also recalculated for 1% inflation on the FIT payments and electricity bills. This gives £3,193 or a return after investment of £2,193. So now nearly £600 better off for a thousand pound investment. I suggest the previous calculation is probably more appropriate as the inflation merely starts to compensate for panel deterioration (to a small extent anywhere) rather than providing increased benefit.

Of course the lower the savings account rate is then the better the case for PV.

Now if you have found this interesting and I expect many may not, please accept my assumptions, I'm not getting into tax free savings allowances, different rates of tax, relative risks of banks against bits of kit on the roof etc etc. But I hope this will have been of some use to someone.

Now if only I could be bothered to work whether it's work paying for the extended warranty on my SE inverter........

Martyn1981

There is the argument that the money in the savings account is always available (probably a lower rate for easy access) whereas the PV money is tied up. But I've never bought into that claim, since the money is only available until you use it for something (like a new bathroom ...... or PV for instance).

So it's only available if you don't use it, but if you don't use it ........ hmmm! So there seems to be a logic issue/problem here.

Mart.

Exiled_Tyke

I don't see it as a problem. For the purposes of the calculation we need to compare like with like. The point I was making was that the comparison of percentages is incorrect as one is the return on an investment where the capital outlay is always there, the other where it (has to be) assumed that it will come to the end of its useful life and be worth nothing. My calculations attempt to deal with this.

Of course the extra item in favour of PV is that the kit will still be useful after 20 yrs and have value or future productivity. But I don't see that as prudent enough for the calculation.

matty2767

On your calcs I note you say you aren't getting into tax free but we have tax free savings now with the personal savings accounts so it is valid.

What savings off electricity/gas bills which benefit the PV argument?

Exiled_Tyke

matty2767 wrote: »

On your calcs I note you say you aren't getting into tax free but we have tax free savings now with the personal savings accounts so it is valid.

What savings off electricity/gas bills which benefit the PV argument?

Yes I know, I'd happily work through some more specific calculations if people wanted me to. I suspect that 3% with basic tax (bringing it down to 2.4% is probably closer to the tax free rates possible at the moment so no major worries there. Of course different people will have different amounts of their tax free allowance available - but maybe most, like me, have all of it spare!

Bill savings don't need to be brought into the calculation as they will have been considered by payback estimates - again I could work through specific figures if available rather than rough and ready payback estimates.

Martyn1981

Exiled_Tyke wrote: »

I don't see it as a problem. For the purposes of the calculation we need to compare like with like. The point I was making was that the comparison of percentages is incorrect as one is the return on an investment where the capital outlay is always there, the other where it (has to be) assumed that it will come to the end of its useful life and be worth nothing. My calculations attempt to deal with this.

Of course the extra item in favour of PV is that the kit will still be useful after 20 yrs and have value or future productivity. But I don't see that as prudent enough for the calculation.

No probs, it wasn't a criticism of the use of a savings % figure, I was just saying that sometimes folk have suggested a secondary 'bonus' of the savings account being that you still have the money, to spend on something else.

But I see that as a falsehood, or perhaps a logic trap, since such spending is exactly what you've just done on PV, so that means you can never spend it, so it too becomes tied up and inflexible in a twisted attempt to always keep it flexible IYSWIM - brain hurts!

Mart.

Martyn1981

Hi ET, another thought, and I hope I'm not moving too far from your original aim, but PV could last a lot longer than 20 years.

I think 20 years is a fair figure to use, or even 25 years, giving you a 5% or 4% annual depreciation cost, but if they last longer then the total income rises, and the annual depreciation cost can be reduced as it's spread thinner.

Here's an article looking at the costs of the Dubai €0.05/kWh install (there have been similar deals in the US and Chile). It considers the impact of longer lasting PV.

It goes further to suggest if we already have it, then our current PV is already cheaper than we realise.

€0.02 Solar Is Quite Possible

As for longevity, the article points out that arrays built 40 years ago are still in operation, and the first manufacturers have begun offering 30-year performance guarantees.

The finding is a bit tendentious, but the calculation is nonetheless worth investigating. Germany still calculates the cost of solar based on a 20-year time frame, which is clearly outdated. On the other hand, there are reasons (a lack of space being one) why utility-scale arrays are avoided in Germany. Quite possibly, Germany is already building five-cent solar – and other countries are building solar for less than two cents. We simply won’t know for another 30 years.

These prices are for large scale supply side generation, which is cheaper, but of course demand side gen benefits from a higher income (retail prices v's wholesale) so the idea works across the board.

Mart.

Exiled_Tyke

Ah well, blame the accountants. They love to be overly prudent on their estimates of asset lives.

And of course, income goes down significantly after 20 (or 25 yrs) when FIT's expire. It wouldn't be at all reasonable to estimate a renewal of those at this point.

silverwhistle

Just posting here in case anybody passes by, but to duplicate what I put on the solar switching thread. I got PV when I came back from abroad, for both economic and environmental reasons. It was quite satisfying to say stuff it to my cash ISA provider which I was stuck with whilst abroad, with interest so small you wouldn't notice.

As I commented elsewhere my savings in water heating in just less than 3 years have been over 3100 units, which has made it worthwhile to go on a zero standing charge (but very high unit charges), with a gas bill of £36 a year. Mostly scrounged wood for my woodburner too.

I'm a single person household so your savings might differ, but it all helps make the return on investment a bit better. Anyway, off to spend some at the pub supporting Italy.