Solar#2: Solar Panels Investment Case

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.

Is it good or bad if energy prices fall or rise? My take is that we will be happy if energy prices fall (we have lower electricity bills) and feel smug if energy prices rise (electricity bills go up but people without solar panels are paying even 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?

Solar#1: Our House is Not Suited to Solar Panels?

Our house has two main roof surfaces - one faces roughly East and the other roughly West; my assumption had been that you need a South facing roof to make solar panels worthwhile.

 

Roll on energy price rises in 2022 and I started to wonder if this was true...

 

...in Summer 2023 I was researching the topic more seriously and came across this website:

 

https://www.snugg.com/

 

You enter a few details about your property and it gives you an energy efficiency plan. In writing this post I looked again at the website and it looks more sophisticated now, but even then it gave some useful pointers including a link to this website:

 

https://energysavingtrust.org.uk/tool/solar-energy-calculator/

 

 

After adding a few details you get a simple investment case for solar panels:

• How many panels you can fit on the roof (you can also pick from 1 of 4 standard house sizes - that's what I did)
• Roof pitch (our house has a shallow pitched roof, so I went for 30degrees - it turns out to be 26degrees)
• Direction - there is a really cool tool that shows a Google Maps image of your postcode. You can pick your house and adjust the direction (I later found out that mine is -74degrees from South, ie 16degrees from East, but you don't need to know this to use the tool)

• Estimate of shading (we have none - you can pick from 4 levels)
• You add a little bit on what electrical appliances you have and your lifestyle and then you get the answer.
• For me this initial feedback was:
• Solar is suitable
• Suggesting 12 panels
• Annual savings of £605
• Estimated install cost of £7,000
• Payback of 13years, including for inverter replacement at 12 years.
• One nice feature of the calculator is that you can go back and try out different examples (eg I tried out a South facing house and it did not make that much difference)
• Out of interest I retried this just now with 25degrees roof pitch and the annual savings are now £615 and payback 11 years (I guess that their model has the inverter failing just after the system has paid for itself!).

 

 

This spiked my interest, enough to give two more tasks:

• Investment case - is it worth doing with a payback period of 10 to 15 years?
• Get some supplier quotes - what is the real cost and complexity?

...and more blog posts

2023 Data Analysis

Introduction:

So one year on, how does our gas and electricity consumption compare to previous years?

 

At the end of the summer 2022 we added loft insulation (increasing from 100mm to 300mm - see post: "Insulate the Attic". We also reduced the central heating flow temperature and dropped the room temperature by about 1degC (not everywhere - we sneaked it back up in some rooms!)

 

The result:

 

 

A reduction in gas consumption of £325 per year (19%) - comparing year ending October '23 to year ending October '22

 

Lifestyle changes in the year: I retired in the summer of 2023. The year end for this data is 12th Oct 2023, so this would have had limited impact as we only put our heating on during September. We also added weather compensation to control the central heating flow temperature. This was added in mid-August, so again would have had little impact.

 

Potential Sources of Error:

My aim is to get down to purely the impact of energy saving measures. Sources off error might come from:

 

Weather in the time period	I did make some attempt to look at annual average temperatures, but it is more complex than that - eg day Vs night (when heating is mostly off). I am also unsure how much impact windchill (windy day Vs calm day) will have. These results do not take account of variations in weather from year to year, other than 2009 to 2016 should be much better given the 7 year time period.
Life style	My wife's retirement in 2019 and then my retirement in 2023 (data still to be shared) seem to make little impact.
Pandemic	The impact of my working from home and being locked down seems to have caused a big rise in energy consumption, unless there is some other big difference that year.
Energy prices	I have removed the impact of this by recording actual energy used (kWh) and then using just one rate (usage and standing charge) across the whole time period.
Inconsistent time period	I have not measured energy usage on the same date every year, so the period for each 'year' was up to 27days from the 'perfect' 365days. My estimate is that this has made a <2% error in each year's energy usage data.

 

I would be very interested in feedback suggesting any other potential causes of error.

 

My view, from the above and now seeing 2 years of post-pandemic data is that 2020/21 (ie the pandemic lockdowns) is an outlier

 

Discussion:

 

In my post: "Insulate the Attic" I stated that I thought most of this saving was due to the attic insulation. However, reading this article from University College London (https://www.ucl.ac.uk/news/2022/dec/analysis-energy-bills-how-much-money-does-turning-down-thermostat-actually-save) their model from research of 13,000 homes is £1.1 saving per year per degC temp drop per m2. For our house (186m2) this gives £205/year saving for a 1degC temperature drop.

 

I feel an experiment coming on here. We did decrease the temperature in a 'lived in' rooms in late summer 2022. However, later in the Winter we moved this back up in some rooms (for more comfort). We had also made no change in the little used rooms - these account for perhaps 50% of the external surface area of our house. So my very rough estimate would be to halve the £205 and attribute £100 for saving due to reducing the temperature.

 

I still don't believe that a reduction from 70degC to 65degC of flow temperature has much impact (eg https://www.viessmann.co.uk/en/heating-advice/boilers/what-temperature-to-set-condensing-boiler.html give the dew point  of 55degC as the maximum water flow temperature to maintain boiler efficiency. However, I have not been able to find a graph or data to tell me the benefit of the drop from 70degC to 65degC.

 

Ignore 2020/21:

Now that I have 2 years of post lockdown/pandemic data I think that 2020/21 was an outlier, most likely we were in the house for much more time and just wanted it warmer.

 

So now the comparison is:

 

Year	Gas Usage	%age Saving on previous year	Energy saving measures taken early in that year
2019/20	£2,100	baseline
2020/21	£2,690	ignore
2021/22	£1,710	19%	Smart Heating Controls (Aug) and garage central heating pipes insulated (Dec)
2022/23	£1,387	19%	Oct: attic insulation, set flow temp to 65degC, drop CH temp by 1degC
n/a	£205	12%	UCL theoretical saving for 1degC temp drop

 

Difference between 2019/20 and 2021/22 is 19% with the main changes being smart heating controls and insulating central heating pipes. Using my calculation in my post on insulating pipes in the garage, £35/year or 2%1, then a whopping 17% is down the smart heating controls.

Drop from 2022 to 2023 is temp reduction (but negated because we nudged it up during the winter, so perhaps half the UCL findings, ie £100. Leaves £200 down to loft insulation.

All the is very rough an ready. I have not accounted for weather or other more subtle lifestyle changes, so my very (very) rough summary of savings is:

 

My Current Estimate of Impact of Different Energy Saving Measures:

 

Change	Installation cost	Approx annual saving	Approx payback period
Smart Heating Controls	£1,800	£2901 +02 / -100	6-11years
Insulate Central Heating pipes in Garage	£120	£35 +/- £15	2-6years
Loft Insulation from 100 to 300mm	£1,160	£200 +/-£100	4-10years
Flow temperature from 70degC to 65degC	£0	£25 +/-£25	Instant
Reduce room temp by 1degC for some of the winter in some rooms	£0 - less comfort	£100 +/-£50	Instant

 

Notes:

1. I have used the 2021/22 gas usage of £1,710 for converting between %ages and £s so that the sequence of the changes does not bias the result.
2. While the calculation gives me 17% saving for smart heating controls I think that this is probably on the high side.

 

Oct 2024 should help confirm if 2020/21 is an outlier that can be ignored and may give more clarity to other conclusions, but also adds two new factors: I retire and the addition of weather compensation to the boiler...

...look out for a future post.