Does solar still have a bright future?

Investors who invest in fully operational assets that are feed-in-tariff accredited have not been affected by the tariff reductions. This is essentially an infrastructure investment and investors are seeking a yield commensurate with the liquidity and operating risks.

Solar PV assets continue to represent a very stable and predictable method of generating electricity – they have few moving parts to maintain and the sunshine is not very volatile on an annual basis.

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Consequently, acquisition of operating solar PV assets has continued in spite of the tariff reductions: the only difference between investments in projects accredited before 12 December 2011 and those accredited after is the acquisition price – yields have remained relatively stable.

Real returns on investment

In simplistic terms, previously a domestic installation of 4kWp (kilowatt-peak) solar panels cost an investor about £16,000 fully installed when the tariff rate was 43.3p, and will deliver approximately £1,600 per annum of income.

The same installation, built with exactly the same configuration – but which is installed when the lower 21p tariff is applicable – costs in the region of £8,000, and will deliver around £800 per annum of income.

The constant is the yield of approximately 10 per cent per year, with the main difference being the margin or profit for the installer, plus cost reductions in the equipment. The link to inflation – both directly through the tariff, which is index linked, and indirectly through energy prices – means that the investor should generate a real return on their capital.

Private investors have two principal routes to participate in the generation of renewable electricity from solar PV installations. The most direct method is to simply buy panels to put on their roofs. Depending on the available cash they have to spend and, assuming they have the roof space, the returns should compare favourably with other potential uses of their capital, but attention to the costs is key. It is also important to factor in the intermittent use of the power in their homes.

The other option is to invest in solar PV infrastructure through professionally managed funds that should yield cash and can be designed to deliver a capital return through a future sale of the portfolio. Listed specialist funds are available, but can be difficult to find. For UK taxpayers, there is also the option of investing through a wide variety of venture capital trust or enterprise investment scheme funds promoted by reputable investment organisations, which will provide access to this sector in a tax-efficient wrapper.