Feed-in-Tariffs: the Sums and the Risks

There’s been a lot of discussion recently about the financial attractiveness of FiTs and, in particular, whether any of these deals which offer you free electricity in exchange for your roofspace are a good deal. I thought I’d run my calculator over the FiT offer and proffer some thoughts.

Firstly, what is the offer? It’s complicated. The place to find detailed information is the Energy Savings Trust website. There are four different technologies covered by the scheme, being Solar PV, Wind, Hydroelectric and Micro CHP. For most people in most properties, hydro and wind are not going to be options; micro CHP might be, but the one I am looking at is the one where most of the action is and will be, which is roof mounted solar PV.

The offer on existing buildings is this (it slightly less for newbuilds):
• You have to bear all the installations costs yourself. Both the kit and the installer must be MCS certified.
• The output is metered and you are paid for every kilowatt hour of electricity you produce at a rate of 41.3p per kWh
• Further to this you are paid an additional 3p per kWh for electricity that you export, rather than consume at home.
• These payments are inflation-indexed, tax free and will last for 25 years
• In addition, you will be spared paying for the electricity that you would have purchased from the Grid had you not been using your home-made electricity.

So is it worth it?

You have to estimate how much it will cost you, how much electricity your plant will generate, and what income/savings you will receive.

As a rule of thumb, it seems that most people are opting for a 1.5kW system, and it’s costing around £10,000 to install. It’s a good benchmark to start from. A 1.5kW system is quite large - it will probably involve 10 or 12m2 of PV on the roof.

How much power will this produce? Let’s assume it’s around 1,250kWh/annum. Maybe that’s a little generous - it rather depends on where you live - but we’ll leave it here. It means that the PV arrays operate at an average of around 20% of peak power in daylight hours.

And let’s assume that around half of the power you generate is consumed at home, and the other half is exported. What is the financial value of these 1,250kWh?

• The value of the generation tariff is 41.3p x 1250kWh = £516
• The value of the export tariff (remember we are exporting 50% of what we produce) is 3p x 625kWh = £18.75
• The value of what we save is 625kWh x 10p/kWh = £62.50

In total, that’s £597.50. Let’s call that £600. Or 6% of what we paid upfront to install the system. This more or less tallies with what DECC set out in their Consultation Document.

Tariff levels have been set to provide an expected rate of return, in real terms, of approximately 5-8% for well sited installations, taking into account the risks associated with deploying the different technologies and the likely effect those risks would have on investors’ willingness to invest. As the tariffs are linked to inflation, in nominal terms this rate of return could then be considered to be approximately 7-10%.

Is that an unbeatable return? I don’t think so. It’s OK, but hardly outstanding. Especially when you take into account that the capital outlay has to be written off. The actual return is also very difficult to predict. It depends on a number of assumptions.

• The installation cost: I’ve pencilled in a fairly conservative figure of around £7,000 per peak kWh installation costs. You might get it for less, but would it be any good?
• The longevity of the PV system - just how long will it last? No one can say for sure. They might be good for 50 years, or they might be useless after 10 and need replacing. What happens in case of a major malfunction? Or theft? Or, in accountancy terms, how quickly should the value of the PV array be written down to zero?
• The efficiency of the system - are they going to continue producing the same amount of electricity, or are they going to tail off after a while?
• Will there be maintenance costs? How long will the inverters last?
• How long you will stay in the house? And if you think you'll move on before the 25 years is up, what effect does adding PV to a roof have on resale values? Apocryphal evidence suggests that it adds only marginal value, certainly nothing like the capital costs incurred.
• Future inflation rates? And future electricity prices? And will the electricity price outstrip the overall inflation rate? I think most people signing up for FiTs think this will happen, but it’s pretty much unknowable.
• The legislative risk. The assumption is that the feed-in tariffs are as safe as gilts, and that if the government promises to pay them for 25 years, then they will have to stand by that promise. But 25 years is a long time.....

Now if I was a financial advisor suggesting income streams for my wealthy clients, I am not sure I would go a bundle on the Feed-in Tariff. You can purchase index-linked gilts with inflation-proofed yields above 2% and your capital is both safe and instantly retrievable. Or you can buy Vodafone or Glaxo with yields above 5%, both with less risk involved than putting PV on your roof, and with a better chance that your initial capital would still be worth something after 25 years.

And If I was a businessman borrowing money at anything over 4%, I’d steer well clear, because the upside depends on everything working well, and the cashflow is negative for many years (until the capital is paid off). If inflation kicks in, then the investment begins to look clever, but then inflation has a habit of making all borrowing look clever.

As it stands, the Feed-in-Tariff is a bit like buy-to-let, only with a wasting asset. Which is why I am surprised we are seeing companies setting up to harvest this subsidy. Despite the Guardian describing FiTs as “super lucrative,” I reckon they are anything but. Have these guys really done their sums? Or do they know something we don’t?