A solar panel is a packaged interconnected assembly of solar cells which can be used to generate and supply electricity in commercial and residential applications. The technology has been available for some time, and householders are able to install Solar panels on their own properties for the production of electricity for use at home. However, the increasing cost of power, along with the new guarantee from the government in the form of a feed in tariff (FIT), has enabled this green technology to be packaged as an investment.

The rates of return advertised for the scheme appear to be generous:

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

“Tariffs for solar panels pay eight per cent a year”

“Investment in solar energy producing panels will pay a tax-free return of six to eight per cent per annum. That is more than double the best High Street savings accounts”

“If you’ve got the money and a sunny, south-facing roof, you can earn a 7%-10% tax-free return”

The initial outlay for the solar panels is generally speaking somewhere between £7,500 and £12,500. Clearly the more panels you have installed, the more power you can produce. The returns are generated by the government FIT scheme, which will pay you 41.3p per kilowatt hour (kWh) generated. For a typical 2.1kW PV system this should provide a reward of up to £750 a year. Interestingly, this payment is made regardless of whether you use the electricity, or export it into the national grid. In addition, for exported electricity pays an additional 3p per kWh. Further benefits are that the payment is tax free, guaranteed for the next 25 years and also linked to inflation!

So, what are the drawbacks? Although the current government has guaranteed the scheme for 25 years, clearly they won’t be in power for that long, and subsequent budget changes could potentially change the tax free status. Furthermore what are the chances of the government sticking to this for such a long period? Perhaps public sector workers experiencing forced changes to their pension plans might have their own view on this.

However, the real downfall that is quietly overlooked by all parties concerned, government, suppliers and commentators alike, when looking at the real returns on this as an investment, is the wholesale disregard for any capital write down with the investment.

One recent national newspaper article claims:

“It costs £12,500 to install solar cells on your roof, but new tariffs should give you a return of at least £25,000. So what’s the catch? There isn’t one” and “If the government offered to pay you £1,000 a year for the next 25 years, in return for an up-front investment of £12,500, you’d snap it up in a second”

This is very naive. Solar panels last 20 to 30 years. After this period they are perhaps likely to be worth nothing at all. So your original investment is lost forever. On the figure above, paying £12,500 up front in exchange for £1000 a year for 25 years is equivalent to putting your money in the bank at an interest rate of 2.8% per year and letting the interest accrue for the period, so after 25 years you have £25,000 in the bank.

So realistically, that is your net return, circa 3% (though with inflation guarantees, it might be a little more). Clearly then, installing solar panels is reserved for those doing it for ethical reasons, rather than also looking for a great investment return.