Solar panels: a tax-free return of 10pc pa

A tax-free, index-linked return of 10 per cent a year, guaranteed for 25 years may sound too good to be true.

By John GreenwoodPublished: 7:59AM BST 06 May 2010
A tax-free, index-linked return of 10pc a year, guaranteed for 25 years may sound too good to be true. But this is the level of return the Government claims you could receive by investing in a solar panel system for your home.
If you think installing solar panels is only for those committed to ecological issues, a new government scheme designed to increase uptake of renewable energy may make you think again.

The Department for Energy and Climate Change's (DECC) Clean Energy Cashback Scheme is offering big financial incentives to anyone installing solar panels in a bid to make doing so stack up as an investment to even committed climate-sceptics.
The cashback scheme, also known as the Feed-in tariff, has been going since April. Grants for solar panels have been abolished and replaced with a system where people who install them are rewarded for every unit of energy generated by their system. Energy companies are also required by law to buy back any excess they generate.
To qualify for the scheme you have to install solar photovoltaic panels, known as solar PV.
This type of panel generates electricity from sunlight. The scheme currently does not cover the other main type of solar panel, solar thermal, which warms the water in your boiler system, although the DECC aims to bring thermal systems on board from April 2011, albeit with lower cash rebates.
Wind-generated electricity is now covered under the scheme, however.
The scheme promises to reward investors in three ways. Firstly, you are paid the ''generation tariff'', which is a direct payment from your energy supplier for each unit of electricity you generate.
This starts at 41.3p per kilowatt/hour (kWh), and is fixed by statute to increase in line with the retail price index for the next 25 years. The second saving is under the ''export tariff'', which is a payment made for energy you export back into the electricity grid rather than use on site.
This pays an extra 3p per kWh. Finally, you also make savings on your electricity bills, now saving you about 13p per kWh.
"The biggest financial savings through solar go to those who use all or most of the electricity they generate. This means the retired or those who work from home get the best return on investment because they get the saving on their electricity bill as well as the feed-in payment," says Charlotte Webster, public relations manager at Solar Century, a solar panel provider.
Systems cost between £8,000 and £14,000, but the Energy Saving Trust says a 2kWp panel will supply about 40pc of the energy used each year by the average gas-heated home.
This would typically give a total saving of about £830 a year, and could also reduce your carbon footprint to the tune of almost one tonne of CO2.
The Government says systems should pay for themselves within about 12 years and should give real returns of 5 to 8pc or 7 to 10pc when allowing for inflation. These returns are based on electricity inflation continuing at 6pc a year, its average level for the past 10 years.
If energy costs rise higher, savings will be greater, but they will be less if they fall. The scheme is being funded by a levy on the bills of everybody else, with British households each paying on average £6.50 a year more to subsidise the Feed-in tariff payments.
Some environmentalists have criticised the scheme as a cash giveaway to wealthier people who have the money to invest and who own the property in which a system is installed.
But not everybody is convinced that solar panels are a one-way financial bet. Mark Dampier, head of investment at Hargreaves Lansdown, an IFA, points out that while Feed-in tariff payments are tax-free now, there is nothing to stop a future chancellor changing this.
Nor is it impossible for future ministers to cut tariffs.
"A return of 8pc a year sounds fantastic, but I am suspicious of anything backed by the Government," says Mr Dampier. "The idea of politicians guaranteeing anything for 25 years seems fanciful to me – you have just got to look at what they have done to pensions.
"What's more, the technology is still in its infancy. You could spend a lot of money putting a system on your roof that in a few years time will seem dated and inefficient."
Ken Rumph, a financial analyst at Nomura Code, a subsidiary of the Japanese bank, is, however, positive about solar panels as an investment.
He has written a report on the viability of solar generation for the bank, which concluded that the investment opportunity currently on offer will prove so favourable that the scheme will achieve its target of signing up 12,000 home owners faster than predicted.
Mr Rumph has spent £14,000 installing a system on his house in Berwick-upon-Tweed and believes it is money well invested: "I am expecting a 10pc return and although my capital is now tied up, I am getting income from a reliable source that is index-linked and tax-free.
"I expect the cost of electricity to go up, and I also anticipate that in five or 10 years, people will regard the system as an asset on the house. It has been an exceptionally sunny April, and I made £100 in the first two weeks of the month, having generated 240 kWhs."
A further concern, however, is the reliability of the claims made about the returns on the systems. Last month The Telegraph reported that consumer group Which? had found 10 out of 14 salesmen offering solar thermal systems were exaggerating the benefits and pressuring people into sales.
Solar Century said that report covered thermal and not PV panels, and that to get hooked up to the cashback system your panels must be installed by an operator who is an approved member of the Microgeneration Certification Scheme (MCS) watchdog. You can find an MCS installer through the organisation's website.
Mr Rumph also suggests using common sense. "When looking to take on an installer, treat it as you would any building project – get several quotes and look for personal recommendations."
Which? also suggests that because solar technology is a new industry, companies come and go, so it is worth paying with a credit card if possible to ensure protection under the Consumer Credit Act, provided, that is, you clear the debt immediately to avoid high interest payments.