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A real life example of highly attractive economics

The highlights from Colin Kirkby's review, May 2012, are:-

 

  • He is very satisfied with his installation

  • His installation is performing better than our conservative estimate  

  • The TAX FREE Return on Investment (ROI) is 12.4% in the FIRST year 

  • This return is index linked to RPI for 25 years

Assumptions used in the IRR calculation above:- 

  • capital cost and first year savings as in Colin's paper below  

  • 25 year life; no tax 

  • the FIT tariff increases with RPI by 3% each year compound.  This is based on RPI being 1% above the Bank of England's CPI target of 2% 

  • the payment for electricity deemed exported to the grid also increases by the same 3% RPI each year 

  • the cost of electricity bought increases by 9% more than RPI, i.e. by 12% each year compound 

  • we have taken the deemed electricity saved at 31% of electricity generated; this is Colin's actual figure  

  • we assume that the electricity generated by the panels will degrade by 1% per year from the previous year's output, after the first three years 

  • we assume that the inverter will be replaced in year 13 at a cost of £1,000.  No other maintenance costs 

 

Given recent experience we regard these assumptions as conservative.

Solar-PV-Evauluation-16May2012

The PV System was 17 x 235wp Sanyo HIT Hybrid Panels (3.995Kwp) on a south, south-west facing semi-detached property, with little shading.  The first year’s performance would have been 2 to 3% better if facing true south.

 

Here is the text of Colin's financial analysis, in full and unedited.  Thanks again Colin!!  

We calculated the IRR, effectively the interest rate of Colin's investment

over the lifetime, at 16%

 

When comparing this investment with other investment options you

may be considering please bear in mind that

this 16% is after tax

(albeit at a nil rate for Solar PV)

 

With the FIT payments set by the Government, and index linked to RPI,

this is a very LOW RISK investment with an excellent return.

How many alternative investments do you know that match this?

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We have then calculated the full Internal Rate of Return (IRR) for Colin's installation, over the 25 year period, using a financial technique called Discounted Cash Flow.  

We have applied the assumptions given below:-

One of our clients, Colin Kirkby from Bromley Kent has kindly sent us an unsolicited and very detailed review of the economics of his solar installation.  This covers the first full year of operation from May 2011 to May 2012.  We are most grateful for this excellent review.  With Colin's permission we have copied that review below.

 

Since that review there have been three changes in the market place:

  • The Government has reduced the Feed-in-Tariff to 15.44 p/kwh, but increased the deemed purchase rate to 4.5p/kwh

  • The lifetime of Government support has been reduced from 25 years to 20 years, but still linked to RPI

  • The capital cost of installations has fallen

 

The net effect of these changes has been to reduce the first year TAX FREE Return on Investment to 8-10%.  

This remains a HIGHLY ATTRACTIVE return for owners when compared with, for example, the savings market.  The general savings market currently returns 2.6% average, and 3.3% for the five leading rates, both TAXABLE.*

 

* Source, Which? October 2012, One year fixed rate accounts for £5,000 to £10,000

 

We would be happy to calculate the Return on Investment for your particular situation.

Please contact us on 0208 654 9000.