Ken Richards outlines the investment case for domestic solar photovoltaic panels.
When the current coalition government came to power, the prime minister boasted that his was going to be the greenest government ever, though some of its subsequent actions might cause people to think that this promise is a hollow one. For example, the government has reduced incentives for the installation of domestic solar photovoltaic panels by cutting the feed-in tariff (FiT) rate, reducing the time period over which payments are made, and reducing the amount payable where the energy efficiency of the property is below a certain standard.
This article will show that:
– The monetary benefits of solar panel installation were partly appropriated by the installing companies in the form of higher profits
– The payback method used in illustrations to assess the benefit is seriously flawed, but that a more scientific method shows that the benefits of solar panels are still significant in comparison with other forms of investment
For homeowners who have installations up to 4 kilowatt/hour (kWh) in size, there are three benefits:
– Payment for every kWh of energy produced –the generation tariff (GT)
– A small payment called the export tariff (ET) for surplus energy exported to the National Grid, which is not metered at present but which is assumed to be half of the amount generated
– Not having to pay for the electricity which it produces itself and, for people who are at home during the working day, this feature is even more beneficial as they are able to use power which would ordinarily be exported to the grid
A fourth benefit was that in the case of old-style analogue electricity input meters, the meter ran backwards when energy was being produced, though many power companies subsequently replaced these with digital ones.
For systems installed before March 3 2012, the generation tariff was 43.3p per kilowatt/hour (kWh) and the export tariff was 3.1p, both being increased every year in April by the retail price index (RPI) and payable tax-free for 25 years. Effectively, the total payment amounted to 44.85p per kWh (i.e. 43p + 0.5 x 3.1p). Given that the estimated generation is about 3,200kWh per annum, this amounted to a tax-free amount of about £1,435 per annum, payable quarterly. It was estimated that the amount of electricity saved amounted to 12p per kWh or about £190 per annum, which is also effectively index-linked since the price of power is expected to increase by at least the rate of inflation over time.
As an example of the incidence of the benefit being shared by the producer and the consumer, a quote for a 3.87kWh system was received by the author in mid-October 2011, costing about £15,000, which at the time would give a total annual income of £1,600 and a payback period of 9.4 years (15,000/1,600). At the end of October, the government announced that for installations after December 12 2011, the GT would be 21p, following which another quote was received from the same company for a slightly larger system for about £10,000 giving an annual income of £933 with a payback period of 10.7 years.
Although both economies of scale and technological change have reduced the cost of panels, it beggars belief that these factors alone would have accounted for the £5,000 fall in cost of the installation, particularly given that the cost of the panels themselves account for less than 50% of the total installation.
A successful appeal was made by Friends of the Earth in the Court of Appeal against the reduction in the FiT from December 12, which meant that systems installed up to March 3 2012 also became eligible for the rate of 43p.
For systems currently being installed, a GT rate of 14.7p, frozen until January 2014, applies for houses with an energy performance certificate of band D or better, together with an EP of 4.64p per kWh. The store Ikea is now offering a 3.36kW system for £5,700, claiming that a semi-detached house in Southampton with a south-facing roof would generate savings of about £770 a year, although the Energy Saving Trust suggests that this is optimistic and that a more realistic figure is an annual saving of £600 which gives a payback period of nine-and-a-half years. After 20 years, the householder continues to benefit from producing electricity for a further five years as the expected life of the panels is about 25 years.
The payback method used by companies to illustrate the benefits of solar power is unsatisfactory in several respects namely that it:
– Ignores the foregone interest tied up in the panels
– Makes no allowance for inflationary increases in payments
– Ignores any benefits received after the end of the payback period
A more satisfactory method which allows for these factors is to estimate the internal rate of return (IRR) or yield rate (r) over the whole period of 20 years in real terms. This can be illustrated by taking the Ikea example of a cost of £5,700 and an initial benefit of £600 per annum, or just over £150 per quarter, as payments are typically received quarterly. If inflation was zero over the whole period, these figures would also represent the real returns and even if inflation was, say, 3% per annum, the figures would be increased by 3% but then reduced by the same amount to get a real figure.
An iterative computer programme uses the following equation:
£5700 = 150/(1+r) + 150/(1+r)2 + ···· + 150/(1+r)80
Where r is the quarterly yield rate calculated over 20 years. This works out to be:
0.0215 or 2.15%
The annual yield rate is 100 x ((1+0.0215)4 -1) = 8.89%
To find the gross equivalent monetary rate of return which is the equivalent before tax yield required from an alternative investment, this can be calculated using the following formula:
– Gross Yield = (net real return + inflation rate)/(1 – marginal tax rate)
With an inflation rate of 3% and a tax rate of 20%, a net real return of 8.89% is equivalent to a gross monetary return of 14.86%, while using Ikea’s original savings figures, the gross return rises to 19.86%.
For many people a time horizon of 20 years may be too long to consider, so the yield rate which would obtain after 10 years was calculated which comes to just over 1% with a gross equivalent yield of just over 5% per annum. By contrast, it is possible to add in to the calculation the electricity savings in years 20 to 25, which increases the yield rate to 9.04%. All of these figures are shown in the third column of the table below.
Yield rates from Ikea solar panels
Thus far, the analysis has made no allowance for the possibility that future electricity prices might increase at a faster rate than the RPI, i.e. increase in real terms. In the period 2000-2011, electricity prices increased by an average of just over 3% per annum in real terms and given recent trends this seems likely to continue into the future, perhaps at an even faster rate. Recent pronouncements by the industry seem to suggest that energy prices are likely to rise at a faster rate of inflation for at least 17 years. The figures in columns four and five of the table also show the yield rates obtainable when the cost of electricity is assumed to increase in real terms by 3% or 5% per annum.
Thus, for example with inflation at 3% and electricity prices increasing at 8% per annum in money terms, i.e. 5% in real terms, a 45% taxpayer would need a gross return from, say, a bank account of 23.8% per annum to be as well off as he or she would be by investing in solar panels. Alternatively, a basic rate taxpayer could still make a profit if he or she had to borrow at a rate of less than 15% to install the panels.
Finally, because solar panels reduce the amount of carbon emissions, the homeowner might derive satisfaction from this social benefit, also.
As for the future, some commentators are forecasting that with the continued rise in energy costs and reductions in panel costs, solar energy may not require any form of subsidy from feed-in tariffs, particularly in sunnier parts of the country, to be a significant competitor to conventional forms of investment. This is especially true of the current time when it is difficult to get even a positive real yield from such investments as cash ISAs.
Ken Richards is a freelance finance writer, and formerly senior lecturer in taxation and finance at Aberystwyth University.
Will Self-Driving Cars Be Better for the Environment?
Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?
But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?
The Big Picture
The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.
That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.
One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.
There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.
As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.
Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.
Make and Model of Car
Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.
On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.
The Bottom Line
Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?
Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.
New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.