Energy: Is solar still worth it?

When those in power want something to happen, history shows they can create irresistible incentives to make it so. The Bank of England keeps bond yields at extreme lows by summoning yet more electronic money into existence. The department of energy and climate change scatters photovoltaic solar panels across Britain’s rooftops using only the power of public subsidy.

Being the sort of investor who likes someone else to take the risk and leave me with the reward, I didn’t take much persuading to call in the solar panel installers in spring 2010. At that point, the government was offering a subsidy of around 43p per kilowatt hour of power the panels generated—more than four times the market price. And since this already-generous feed-in tariff was tax free and would rise in line with retail prices for the next 25 years, I could find nothing to dislike about the proposition, try as I might.

It has indeed been a sweet deal, yielding 7.9 per cent in 2012 despite the dreary weather. But since our panels were switched on, the world has changed and the subsidy for new installations has fallen by about two-thirds. So are panels still such a cracking investment (leaving aside the question of whether you care about any environmental benefits)?

The answer is yes, and no. On the face of it, the deep subsidy cut looks as if it should have killed off the investment case for solar panels. However, you also need to factor in the steep drop in the cost of having panels fitted over the past couple of years.

According to the Energy Saving Trust, the capital outlay has dropped pretty much in line with the subsidy—the approximate cost of one kilowatt of solar capacity has fallen from nearly £6,000 in late 2010 to about £2,000 today, reflecting a number of factors including a collapse in the price of the panels themselves and improvements in their efficiency (size-for-size, today’s panels generate more power than those available a couple of years ago). That leaves the returns pretty much where they started, at somewhere between 7 per cent and 9 per cent a year (depending on the weather), tax free and index linked.

In a world where it has become unbelievably hard to find any other way of making a safe index-linked net return of 7-plus per cent, the case for putting a portion of your money into panels remains compelling.

There are, however, a fair few caveats to consider alongside that superb yield. The most obvious are to do with your property. Do you live in an area that gets enough sunlight to make it worthwhile? Does your roof face the right way? Is it made of the right materials? Is it listed? Do you own or rent it? And so on.

Assuming you can pass the suitability tests, the next question is the size of your roof (or land, if you plan to get really ambitious). The point is that although the likely rate of return has remained stable, the cash income you will receive has fallen sharply—an 8 per cent return on £2,000 is no match for an 8 per cent return on £6,000. So for most of us, the roof area we have available will determine how big an allocation of capital we can make to this very attractive asset class.

Is it still worth the trouble? The answer, I think, is yes—install panels (if you can) and then look to increase your exposure by investing in other people’s renewable energy projects using your self-invested personal pension. Thankfully, there’s a growing number of ways to do this via organisations such as The Trillion Fund and Abundance Generation. Your returns from this route won’t be explicitly index linked, although they should still comfortably beat inflation. They won’t be immediately taxable either, if held inside a Sipp, but will incur charges from the intermediary that arranges the investment for you.

For my money, it still stacks up both because of the potential returns and for two other reasons: this is an asset class totally uncorrelated to the rest of your portfolio (the sun still shines when the markets go down), and it offers a partial hedge against your inescapable exposure to ever-rising energy bills.