Will your solar panels bring sunshine to your savings?

Your situation has many similarities with my own, except that I was able to get my installation for around £5 K, but have to weigh this against lower sunshine generation in the North. My gut feel, in retrospect, is to take the technical hype with a large pinch of salt and regard cash-funded PV somewhere near the bottom of the list of priorities for savings investment, considering how many years it will be before you break even and the fact that your (my) money once spent is “gone”. Unless I have misunderstood the mechanics the vast bulk (not all) of the return comes from what the state pays you under the FIT scheme which is linked to what you generate not what you consume. Much less comes from a reduction in your energy consumption – but this depends on you having your emersion on when the sun is shining! [more logical would be to invest in air conditioning …]. There is a case for PV – but buyer beware!

Rob Roy:
Your comment about a “pay-back” period of 8-9 years is quite true; however, you, like many others have chosen to ignore the fact that using the “pay-back” scenario results in a COST-FREE rising income for the next 10-15 years.

PV, for me is (mainly) another income asset class in my investments – I put it at the same level as 25-year Income shares in a Split-Capital Investment Trust. As you know, with this type of investment, you would get a higher income for 25 years, but lose your capital.

If I amortise my PV investment over the 25 year period that the government guarantees my FIT, after allowing for a replacement Inverter about year 10 and inflation of 3%, the rate of return is 12.7% NET of tax – equivalent to a GROSS return of 15.9% for standard rate tax payers. I don’t know of any other almost risk-free investment that would provide a return anywhere near this.

Finally, if you cannot afford to lock up your capital in ANY specific investment (whether PV or a financial instrument of some kind) for the term of that investment, then it is not for you.

I think the idea of comparing PV with your split capital IT is a huge leap forward compared with the usual comparisons with instant access bank accounts and ISA’s. The nearest I got was to compare it with an annuity but with the tax relief removed.
Provided we compare like with like – “schemes” where you sink your initial investment in return for seeking better returns in the longer term (only) – then there is a case for PV, at least up to 23 / 25 (?) years. But in my view only as a fairly minor complementary part of one’s total savings portfolio once higher priority avenues have been fully exploited. Your quoted rate of return will vary hugely depending on the time period – if it was 15.9%, net, from year one then the combined British Military would be incapable of controlling the stampede!

Jim Kenney is quite right in saying that you should diversify your investments.
I invested in PV when it was expensive (£14,000 for 4pKv) and the TAX FREE return was guaranteed for 25 years. I regard it as just another asset class – it is a wasting asset, but it provided an income (FIT) of over £1,500 in the first year, just under £1,600 in the second year. On top of this, we have saved about 25% of our daytime electricity charges – about £160 p.a.

£14,000 in an ISA would have yielded about 3% over this period – £420 a year. Using that yield as a benchmark, not only have I received the same income on the capital as if it had been in a cash ISA, my original investment cost has been reduced by about £3,000 over the 2.5 years since it was installed (it now “owes” me £11,000).
On this basis, assuming that RPI stays at the 3% level, the installation cost will have been extinguished within another 7 years and my COST-FREE income of £2,000+ p.a. will continue for another 15 years.

Sorry to keep blethering on about this: A [cash] ISA is NOT an appropriate benchmark!!

It’s the filling the bath with the plug unplugged scenario. I don’t “earn” enough from PV to make an ISA make sense – in isolation – and being philosophical about it it will still be many years (8 – 9?) before I have “earned” enough to amortize the PV investment, even longer to catch up with putting the same amount into an ISA at the outset. I use the piggy bank to budget for when I have to replace the inverter!

Rob Roy
I’m puzzled by your comment “It’s the filling the bath with the plug unplugged scenario”. Can you elucidate please ?

I use the FIT payments to supplement my income (I’m retired), I add them to an instant-access cash ISA when I receive them and withdraw from it if & when I need to do so. (I haven’t touched the last 5 payments so far, so I still have a £2,000 buffer available).

As you alluded to previously, the return from an annuity would be less than half of what I get from PV. It’s true that if I live more than another 23 years, my income will drop, but if I felt that it would be a problem then I could leave an amount equivalent to the excess of PV income over annuity income in my ISA every year for 12 years and still be better off than if i’d put the money into an annuity.

Jim Kenney:
In answer to your query about investing the FIT payments in an ISA – if you don’t need to spend the FIT, then a cash ISA will give you a safe tax-free home for your money. Apart from inflation, what have you got to lose ?

If you have found a way to both add to and withdraw from a cash ISA (presumably without losing the tax benefits) then that put’s you in a financial league way beyond mine!

Re your second para I think it would be helpful to differentiate between % and absolute return. If I had to exist on the absolute income that my 16 panels produce, even though percentually way ahead of an annuity, I’d have to sell up and move out from here!

The danger throughout comes from comparing the returns from an accessible cash ISA with those from PV. In the latter case the returns over the initial 8 – 9 years or so (in my case) will represent no more than repayment of my capital. Only after this does a PV investment begin to catch up with an ISA – which in time it should outstrip, if I stay here long enough to benefit.

I only use the cash ISA for storing my FIT payments – these total about £1,600 p.a., so there isn’t any problem with Tax benefits. Excess income (from all sources) is invested in my Stocks & Share ISA.

Re my second para, that is just considering the equivalent pension available for £14,000 (cost of my PV system) with the FIT payments!

Assuming a “pay-back” period of 9 years, as far as “no more than repayment of my capital” is concerned, don’t forget to take into account that a REAL comparison should include the amount of interest that the “repaid capital” would earn in an ISA. In other words, after 3 years, the annual amount of interest on “repaid capital” in the ISA will be 33% of what it would have been if you hadn’t invested in PV and after 6 years it would be 66%. Average interest over the whole 9 years would be very close to 50% of what you would have earned with no PV. AND, after 9.5 years, not only would your cash ISA contain more money than it would otherwise have done, but you will still be getting an income (FAR in excess of your ISA interest) from what would then be a zero cost asset.

As far as an “accessible cash ISA” point, this should only be of concern if you regard the original capital as short-term savings. However, if it’s your “rainy day” pot of money, you should probably not invest it in PV.

P.S. I’m still puzzled by your previous comment “It’s the filling the bath with the plug unplugged scenario”. What did you mean by this ?

The mathematics risk getting rather complex and the assumptions inevitably more risky. I think however that I am agreeing with your main point – that if you allow for interest to accumulate in your ISA then this puts back the point at which you will have earned an equivalent – net – from your PV quite some way beyond “my” 8 – 9 years.
Great if your crystal ball says that you are going to stay put for (say) 12 – 25 years, you are laughing, but not if you up sticks before then. To me PV is on a par with long term investment (in a “wasting” asset) with the risks that that involves in return for which the returns should be correspondingly greater. Not something that is generally emphasized in the hype.

I don’t agree with “quite some way beyond “my” 8 – 9 years”; for us, it’s actually 8 years.

To make the maths easier, let’s just look at 2 examples of a cash ISA:

1) A £14,000 deposit at the start of year 1, with a 3.2% interest rate compounded over 8 years (same rate as 10-year Money Market rate). Value after 8 years = £18,012

2) An empty ISA into which all FIT payments (starting at £1,600 p.a and increasing annually by 2.75% RPI) are made for 8 years, same interest rate compounded would result in a value of £18,206 – £194 more than the “pure” ISA.

I do accept your point that if you move house frequently then PV is probably not the best investment for you. However, as we don’t, with our break-even point at just under 8 years, we expect several years free money beyond that.

No real contradictions as I see it. You can prove anything with statistics (depending on the assumptions). I compared how long it would take a PV investment to “net” me the same as putting the same investment into a cash ISA, and the number crunching came to something in excess of 12 years depending on the inputs. Reality will inevitably be different and your situation different from mine. The basic point remains the same: PV is not risk-free as is widely promoted, it is highly dependent on timescales for its profitability

We are still on economy-7, so to make life easy, we run dish-washer & washing machine between 2:00am and 4:00 am – essential during the Winter and we’re too lazy to change that regime during the Summer. (Apart from which, during the first year, we found that by running dish-washer followed by washing machine during the day only brought our overall usage up to 35%)

As we have extremely reliable gas (condensing boiler) heating, we have not used the immersion heater for over 20 years, so I cannot comment on the controllers now available for using PV energy.

If you have been quoted £6000 for a 4 kW installation (?) then this tallies more or less with my experience in June 2013. On the other hand £9 K FIT income strikes me as distinctly rosy – 40% above my first year return. I am north and east from you (Newcastle) and my panels face due south with minimal shade. A pinch of salt would not come amiss.
Bear in mind that whatever return you use for your calculations, not to compare this with ISA’s and the like. In the early years the system is using your / my money to pay us back, and it is only after about 8 or more years that any return is “net”. Solar is in this sense a high risk investment – we are taking a gamble on remaining in our house for at least this kind of a timescale in order to begin to reap the benefits. The nominal returns should therefore be compared with those (much higher) from the kind of investment where you lose out if you try to cash in early. I think of my investment as a kind of mortgage in reverse.

I agree with Rob Roy. Zenith appear to have (at least) massaged the figures for your purchase.
Your annual outgoings will be £1,164 and your FIT payments, based on 1770 units will come to £296 per annum.

On these figures, you might, in 20 years recover your total outlay : allowing for inflation at 4%, your total FIT over 20 years would be about £7,100 and assuming that you could use 50% of the energy produced, that might save you as much as £3680 (£10,780) as against your outlay of £11,640 over the first 10 years.

N.B. In your case, you are being charged an APR of about 15% on the £6,300 (£7,500 – £1,200) that you have borrowed. Too high with current bank loan rates.

[I hope these comments don’t get out of sequence ..]

I couldn’t have put it [Bridge Coach’s] better myself – and woe betide you if you move house in 4 or even 10 years! I’d be interested to know if you’ve got a case against Zenith for misrepresentation.

I was interested to read your comments on the nil affect on property values as advised by estate agents. I suppose some buyers might actually be put off by having such a system, and certainly wouldn’t pay more than the fundamental market value.

Don’t worry about being a time waster – that’s the solar panel company’s risk, not yours. You’re potentially entering into a long-term loan agreement streching over many years ahead during which the economic situation of your household could change in various ways, so take your time. Are you absolutely certain that you can still withdraw if you choose to and that you are not contractually committed in some way? – Protect yourself by cancelling, in writing, now – you can always start again if you feel you are on the right course. Try and take some independent advice based on a competent calculation of your household energy requirement and the likely power generation capacity of your installation. In the absence of more detailed knowledge of the situation it seems a little odd to have panels on both the back and front of the property – is that the best configuration for optimal power generation, or just the only way the company can fit the biggest installation on your roof? You could be paying a very large sum of money for a system that has a very slow pay-back. Nobody can truthfully say what is going to happen to energy prices over the next few years, or, crucially, what government support for renewable sector will be going forward and whether the export tariff for surplus energy you generate on your roof will rise or fall in line with fuel prices or political whim. I am a cautious person, and this seems to have so many uncertainties surrounding it that I would stop and count to ten at this point in time.

Bonkers :
I would go further than John Ward and say that this looks to me to be a “blind him with science/complexity” type of deal. On the face of it, £10,000 is much too expensive for a 4kW installation and unless your house faces East-West, putting panels on front & rear roofs is a waste of time.

3 years ago, when the FIT payments were in excess of 40p per kWh, I paid £14,000 for a 4kW installation, which has proved acceptable.

I have seen similar installations available today for £4,000 to £5,000. Given the much lower FIT of 13.88p per kWh, that should be economical for you. As far as the “extras” are concerned, they could be purchased separately for less than £500 rather than the £5,000 that you are being asked to pay.

Final points – you need to tell your insurance company (and your mortgage company) if you have a mortgage, try to extend your mortgage to cover the cost, which would be much less interest than the £5,000 you are being asked to pay.