There were many reasons why I decided to have the solar panel system installed. But whilst trying not to completely discredit my green credentials, a significant element is the financial story.
For systems installed and registered prior to Dec 12th this year, there is a generous Feed In Tariff (FIT) of 43.1p per unit generated and then additional advantages in terms of electricity usage to offset and revenue from exporting excess power in the summer.
The various companies that I asked to quote for the project all included standard pay back calculations, but frankly these seemed too good to be true and also lacking in practical factors. (In fact it is too good to be true, and why the government if halving the FIT going forward, for once I have the timing just right.)
Having some experience of financial modeling of my own, in the preparation of business cases etc., I decided to design my own payback calcs by way of checking the figures.
The main elements are very simple, but are based around comparing the outlay, return and the potential value of return against what the investment could achieve if left in a safe place. The problem with most calculations I’ve seen is that they:
- Do not consider that the investment would earn interest if not spent on solar pv. (Financial folks might start talking about NPV at this point, but since I’m not sure this is the correct term, I will refrain from this).
- Do not consider that the FIT income could be invested on receipt
- Do not acknowledge that there is a difference between return on investment and interest on a lump sum, whilst retain the lump sum, which have different levels of utility.
The latter point is very important when looking at the cash flow concerned and determining an AER equivalent for the 25 year period.
So, based on the spreadsheet I have received, I built a very simple payback calculator to determine real payback based on interest lost, cash flow and comparative position vs the lump sum investment.
To simplify the model I’ve rolled the various cumulative effects into a single RPI factor, i.e. panel degradation, electricity cost, FIT payment increase. Overall this worked out at 3.0% annual increase in benefit. To simplify the model I have assume I can obtain a 3% risk free rate of return for both the lump sum and FIT payments. I have chosen to model the cash flow on the FIT payments alone. This was for two reasons: Firstly, I will probably only notice the FIT payments since they represent the bulk of income and secondly, the FIT payments will be ring fenced into a separate nest egg for my kids. Hopefully by the time they are old enough this will be sufficient to make a hole in university fees or mortgage deposit.
The analysis below shows the comparison between cash flow (return - investment) allowing for interest, the lump sum return and the difference.
The quoted payback on the system from the official spreadsheets is said to be, typically, 8 years. However this is the point at which the system cost is recouped. You haven’t at this point made any profit, and you haven’t allowed for interest you would have earned in the mean time.
Allowing for potential return you can see from the model that although you recoup you investment at about 7.5 years, you only match what the lump sum would achieve at 9 years. (The point at which the green line goes positive).
However, overall it’s good news. Over the 25 years, with reasonable reinvestments and a RFRoR of 3%, the initial outlay should create a nest egg of over £58k. This is nearly £38K more than the outlay of £10K would have generated at a 3% p.a. return.
Whilst this sounds like a lot, you need to bear in mind that inflation will significantly reduce the value of £58K in 25 year’s time – however, it should at least be equivalent to £20K in today’s money.
It was this analysis that prompted me to move forward with the project. I think it’s a more fair reflection of the investment return than the calcs from the various vendors. But then that’s just me.
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