Introduction
For anyone new to this blog, my focus is improving the energy efficiency of a house in the UK. So this post focuses on the investment case for solar panels in a domestic application in the UK.
This would be a much bigger investment than other energy saving investments (such as insulating the attic) and needed a bit more thought. In addition, the other investments, on the whole, brought the benefit of increased comfort...
...if solar panels worked well then we would not notice them, other than a smaller electricity bill, ie the only benefit is financial and a nice warm fuzzy feeling that we are helping the environment.
Baseline Return on Investment
Having recently retired the obvious comparison is the annual return on pension investments (I have a defined contribution pension):
- 4.5% - my calculation of the long term return from my pension pot over the last approx. 30years (ie the difference between the final pot value Vs what I paid in converted to annual %age compound interest)
- Published data is available from pension providers, such as Hargreaves Lansdown & People's Pension giving average annual growth over the last 5 years. Picking a couple of funds:
- High performing/high risk (& a Boring Money popularity winner) - HL Fidelity Index World: 13.1% - risk level 96 of 100
- More balanced (equity and bonds) & perhaps more typical performance - People's Pension Global Investments (up to 60% shares): 4.6% - "medium risk".
So how does investing in solar panels compare to these investment funds? Both for rate of return and risk.
The pension investment risk is interesting. Fidelity uses FErisk scores - a comparison to the FTSE 100. A .pdf booklet from People's Pension has a riskregister and it explains the risks and how they are mitigated. My take is that much of the pensions industry mixes up risk with volatility (eg https://www.aviva.co.uk/retirement/fund-centre/investment-funds/risk-ratings/) and that what we get is a volatility score relative to other financial investments.
Pension literature often highlights the need for diversification:
- https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-success/The-importance-of-diversification
- How to Fund the Life You Want by Robin Powell and Jonathan Hollow.
However, this is typically a mix of equity & bonds; I have not seen mention of buying solar panels as part of the investment mix!
So, given that I can now access my pension pot, should I invest part of this in solar panels or should I keep it all in more typical investment funds in a SIPP? How does the return on investment compare and what is the risk? Does it give better diversity?
Return on Investment
Taking the Energy Saving Trusts example of £605 saving with a £7,000 investment then the ROI is 8.6% (see post "Our House is Not Suited to SolarPanels?"). They also suggest that I should factor in £600 for a new inverter at around year 12.
However, there are some differences to investments funds. For example, with the investment funds, my capital is still an asset that I hope to get back (but the small print does highlight that it is at risk of falling in value). If I invest in solar panels, then it is not practical to sell the panels and get my money back. At some point they will stop working, so I need to include depreciation and maintenance. In this calculation I have assumed that, as well as a new inverter at year 12, the solar panels have no value after 25 years (ie they stop working). Differences to this assumption are included in the risks.
The return from the solar panels is also peculiar because it is index linked. We know that energy prices don't go up each year by exactly the rate of inflation, so I have modelled this as inflation of 2.5% every year (my financial advisor suggested this figure for my pension calculations) and then I have considered differences to this average rate in the risks (downside and upside).
Finally, the pension investments come with small fund and platform charges (eg 0.25% for Hargreaves Lansdown platform for funds of <£1,000,000, 0.12% for the Fidelity fund, 0.50% total for the People's Pension fund).
Putting all of this together gave me a total ROI, based on today's prices, after 25years, from £7,000 investment:
- Solar Panels: £15,000
- HL Fidelity World Index: £80,000
- People's Pension Global Investments (up to 60% shares): £10,000
For the 2 investment funds the above includes the return of the original £7,000 investment and the headline growth is reduced by inflation and the charges. For solar panels I don't get back the £7,000, but there is no inflation erosion of the return on investment and, while there are no fund charges, I have assumed the new inverter mid-way through the 25years.
Risks
Given that this blog is about energy, below I have focused on the risks that I see with solar panels:
- Additional costs of breakdown and repair
- They do not last for 25 years (downside) or they last longer than 25years (upside)
- The sun does not shine. I am assuming that this will average out over time and that the average is accounted for in the Energy Savings Trust estimates, but I guess that climate change could change the average for better or worse (eg more cloud)
- Inaccurate estimates from the Energy Savings Trust and from installer quotes. My understanding is that these are deliberately slightly pessimistic (ie I should get slightly better generation than quoted).
- Panels degrade over time - apparently this will happen, but to what extent?
- Decision to move house before 25years. My guess is that there will be some increase in house value because it has solar panels. Quite a few websites offer opinions on how solar panels affect the value of a house:
- https://www.thisismoney.co.uk/money/bills/article-12277789/Sales-hotting-solar-panels-add-value-house.html
- https://www.yopa.co.uk/homeowners-hub/how-much-do-solar-panels-add-to-the-value-of-your-house/
- https://www.bettermove.co.uk/blog/increase-home-value-with-residential-solar-panels/
- https://www.theecoexperts.co.uk/solar-panels/property-value
- https://solarfast.co.uk/blog/do-solar-panels-increase-your-house-value/
- https://www.moneysavingexpert.com/utilities/free-solar-panels/
We have no plans to sell our house in the next 25years, but we might want to and it is clearly a risk that we will not get back the residual value of the solar panels. Money Saving Expert seems to give the most balanced view of the above and my opinion is that the affect on house price value will be in the range of £0 to £not very much!
- Electricity prices go down (or up): This is an odd one as:
- Electricity unit prices go down: the ROI is reduced and the return is less. However, (assuming that I still have to buy some electricity) then my energy bills also go down (which is good!).
- Electricity unit prices go up, above inflation, then the ROI is better, but I am paying more.
- Change in government/regulator policy: this is really about pricing, but with a subtle difference. The whole price framework could change:
- This happened with the recent April '24 price cap change; the regulator shifted a little of the cost from the unit price to the standing charge. The view expressed in the Guardian (https://www.theguardian.com/money/2024/mar/30/energy-bills-standing-charges-are-not-standing-still) is that this is specifically so that "affluent households, who could afford to install things such as solar panels, would still pay their share."
- Over the next 25 years you can imagine all sorts of regulatory changes to encourage different behaviour:
- Reduce standing charge/increase unit cost to encourage domestic investment in energy saving (or vice versa as above)
- Reduce electricity unit pricing to shift costs from electricity to gas to encourage use of (green) electricity (eg encourage heat pump uptake)
- Increase electricity unit pricing to replace taxation on petrol/diesel as large numbers of people switch to electric vehicles.
- In the end this is another risk - something not in my control and almost impossible to predict.
- Death within the 25years. I guess that if our children inherit the house with solar panels then there will be limited additional value, but they would inherit my pension pot, complete with the original capital in the funds.
Conclusion
My take on the above is that:
- The return on investment in solar panels is the range of that from other pension investments.
- There are risks but these are very different to regular financial products and, in my view, a 'medium' order of magnitude, but this is very subjective.
- Investment in solar panels is a good idea as part of a diversified portfolio of investments
- And gives a nice warm fuzzing feeling of being good for the environment.
Next steps - get some quotes and confirm that the above conclusion still holds and another question...
...is solar with a battery a good idea?
