Discounting income payments

olbas_oil

This is not annuity related, but it may amount to the same thing. I am considering buying the solar panels on my daughter's roof, which are owned by a finance company. (Installer went bust, new company persuaded previous owner to sign a new lease. New company went bust. Finance company bought leases).

I think the feed-in-tariff payments are about £700 index linked, and will last for another 12 years. The quoted figure under the original agreement is about £17k to buy out the lease. (NB this was not a lease we signed- but are bound by its conditions having bought the house)

£700 for 12 years is £8400. Assuming inflation at 4% it would be £10500. Ignoring any residual value of the panels (they are probably worthless) is £10500 a fair counter-offer, or should I be discounting that, because I am giving capital up-front, and taking on the risk of something going wrong with the system?

QrizB

You'd be better continuing this on Green & Ethical

Was the £17k quoted in 2012, or in 2022 when your daughter bought the property?

olbas_oil said:

I think the feed-in-tariff payments are about £700 index linked

You really need to check that. FIT payments are RPI linked but are based on how much electricity is generated. On the G&E thread you suggested that the panels weren't working at more than 30% efficiency (producing 1kW under good conditions when they should be producing 3kW) which, if true, will reduce your future income proportionately.

olbas_oil said:

... is £10500 a fair counter-offer

From previous threads on buying out solar panel leases, you won't get to offer anything. The leaseholder will give you a figure and you'll either pay it or decline.
Have you contacted the leaseholder? Have they given you a quote? Until you have done that, this is all so much navel-gazing.

olbas_oil

t

QrizB said:

You'd be better continuing this on Green & Ethical

I switched to this board because I'd like to understand the issue in a financial sense. What is the correct way of calculating a future benefit against a current cost? I assume that you don't just add up all the future payments?
I've heard the term 'discounting' in relation to share price v future dividends. Is there an excel function/ method for valuing such things?




t

QrizB

I wouldn't bother with complicated calculations. The FIT payments are RPI indexed, so as a first approximation you can think of them in today's terms.

12 years of FIT payments at £800 a year (see other thread fox calcs) will be worth 12 x £800, so  £9600.

If the solar panel company will sell to you for somewhat less than that, it might be worth doing. Note also that once you own them you'll be responsible for maintenance, insurance etc.

Linton

The financially correct way of calculating the benefit would be to get a current value of each  future feedin payment by comparing it with the cost of an index-linked gilt bought today to deliver the same payment at the same time.  You dont need to guess an inflation rate because the gilt will be increasing by the same amount. You then subtract a bit as compensation for taking the risk.

For example a risk free index linked gilt maturing in 12 years time costs around 95p and returns 1.125% interest.  So you get a capital gain and interest as well as the inflation linked capital.  

Linton

olbas_oil said:

This is not annuity related, but it may amount to the same thing. I am considering buying the solar panels on my daughter's roof, which are owned by a finance company. (Installer went bust, new company persuaded previous owner to sign a new lease. New company went bust. Finance company bought leases).

I think the feed-in-tariff payments are about £700 index linked, and will last for another 12 years. The quoted figure under the original agreement is about £17k to buy out the lease. (NB this was not a lease we signed- but are bound by its conditions having bought the house)

£700 for 12 years is £8400. Assuming inflation at 4% it would be £10500. Ignoring any residual value of the panels (they are probably worthless) is £10500 a fair counter-offer, or should I be discounting that, because I am giving capital up-front, and taking on the risk of something going wrong with the system?

Just looking at your numbers again - £10500 is grossly overpaying.  Firstly 4% inflation is too high judging by current market rates. Secondly, you can get inflation matching and more over the next 12 years for free from an index linked gilt with zero risk so why pay the finance company for it up front? I would think a fair price now would be under £8400.  

QrizB

Linton said:

I would think a fair price now would be under £8400.  

https://lategenxer.streamlit.app/Gilt_Ladder suggests ~£9200 to buy a 12-year £800-a-year index-linked gilts ladder.

(That was on my phone so I might've clicked a wrong option somewhere.)

Linton

QrizB said:

Linton said:

I would think a fair price now would be under £8400.  

https://lategenxer.streamlit.app/Gilt_Ladder suggests ~£9200 to buy a 12-year £800-a-year index-linked gilts ladder.

(That was on my phone so I might've clicked a wrong option somewhere.)

The OP gave the return as £700/year.
 But the OP should pay the finance company less because of the risk. There is no point in paying the finance company just to get a return they could have got from a gilt ladder.

QrizB

Linton said:

QrizB said:

Linton said:

I would think a fair price now would be under £8400.  

https://lategenxer.streamlit.app/Gilt_Ladder suggests ~£9200 to buy a 12-year £800-a-year index-linked gilts ladder.

(That was on my phone so I might've clicked a wrong option somewhere.)

The OP gave the return as £700/year

There's some discussion in the OPs original thread about how much this FIT is worth:

https://forums.moneysavingexpert.com/discussion/6606010/leased-solar-panels-maximising-benefit

It could be ~£1100 a year.

Linton said:

But the OP should pay the finance company less because of the risk. There is no point in paying the finance company just to get a return they could have got from a gilt ladder.

Agreed. You can't make a meaningful decision re. buying out the lease without knowing what it's worth.

westv

What happens if the OP's daughter decides to sell the property?

QrizB

westv said:

What happens if the OP's daughter decides to sell the property?

The FIT stays with the PV system, so the new owner of the property will be eligible for the payments.

It's relatively common for property buyers to request that the seller buys out the solar lease as a condition of their purchase. We don't know why OPs daughter didn't consider this at that time, or if they did consider it but decided not to.