Investment turmoil and solar systems – the true return on capital

The financial markets are in turmoil. Some banks are going through difficult times, as recent happenings at the Northern Rock and Bear Sterns demonstrate. Some analysts fear that the worse is yet to come as US dollar rates fall and interest rates throughout the world are turning down, producing lower returns on investment.

If you have money on the stock exchange you will find that although most stocks are still producing income, the capital value of them is declining as markets fear that the financial turmoil will hit equities. Property values are falling. Turmoil in the world financial markets causes turmoil in the economies of individuals. Your savings, with which you hoped to provide for your old age, are growing less valuable, your house is getting less valuable, and your income from your savings is declining and in some cases moving into negative areas.  It can be hard to figure out what you should do. 

If you had converted all your savings to cash six months ago you would be in a better position than those did not. Of course some investments will buck the market and rise for the time being, while others will fall. If you can sit out the turmoil and hold onto your cash you will be well placed when markets eventually turn around. Nothing falls forever, just as nothing rises forever. So what should you think about as an investment today?

No one is really wise enough, certainly not me, to be able to provide 100% accurate advice about investments. I often think that investing well requires an understanding of mass hysteria first and foremost. 

If you do have some money and want to make it work for you, and want to be in full control of it why not think about “investing” in a solar thermal system for heating your home or its water? Most solar thermal systems, providing heat for water space or pools will, if you amortise the investment value over the lifetime of the system provide you with a return on your capital that it significantly higher than what you would get depositing the money at the bank in a deposit account. 

You would be making an investment in your own home which not just would save you money over the lifetime of the system but provide a return. Translating this into an investment return is not quite straightforward but here are some tips. 

  • Work out the capital cost of the system; a good Genersys solar thermal system may cost between £4000 and £5000.
  • Strip out the costs that are not solar related. For example a solar system invariably includes a new cylinder, but you would probably have had to replace your existing cylinder anyway. You may also have specified a pressurised cylinder which will deliver hot water under pressure to your bath and shower, obviating the need for pumps, so ignore that part of the price.
  • Figure out future inflation costs and take them into account.
  • Figure out future fuel costs for the fuel that you are using and take them into account. You have to decide on a rate of fuel inflation for say the next ten years. I certainly do not know what this will be but bearing in mind the scarcity of fossil fuel and the increasing use of it by the developing countries you might want to employ an annual rate of between 10% and 20%.
  • If you buy a solar water heating system figure out the cost of heating your water. The average home spends 26% of its energy on water heating, but you must distinguish between the various energy costs in kWh. If you use electricity to heat your water it is a straight 26% of your annual electricity bill.
  • Figure out that your existing fossil fuel heating system will last longer with a solar system because it would have to work less. It will still need servicing but there will be less replacement of parts, which will not wear out so often.
  • If you are replacing your boiler and fitting a solar thermal system at the same time your installer will probably advise you that you can buy a less powerful boiler, which will save you some more money.
  • Size the system to the size of your home. The biggest cost of a system in installation, so it does not make sense to undersize it.

 Genersys has put some more ideas about this and “payback” on its website at http://www.genersys-solar.com/Wise_Investment.asp which might be worth a look. Once that you have done all your calculations you might find that instead of leaving you money in the bank earning 3% subject to tax, your money invested in a solar system will earn you around 10%, all free of tax. 

Of course, you would not want your investment devalue your home, which is probably your largest capital asset, even with falling property prices. There has been very little hard research on how a solar system will affect your home value, but in my view it is likely to increase the value your home by significantly more than the cost of the installation. 

I should stress that my view that solar systems will increase the house price by more than the value of the system is based on anecdotal feedback, not on hard market research. There are probably too few solar systems installed in the UK for a scientifically based survey to be made.

Here I would draw an analogy to what happened in the 1970s in the UK. Then most homes did not have central heating. If two identical homes came on the market, one with central heating and the other without the home with central heating would not achieve a higher price, but it would achieve a price higher than the cost of the installation itself. 

These days with Energy Certificates in Home Information Packs (which will improve and develop over time) and with a greater public awareness of the expense and continuingly increasing expense of fossil fuel heating, solar heat is not longer the province of enthusiastic environmentalists or those that want to make a lifestyle statement, but is the means of getting some heat energy independence and long term savings and as such it is becoming more of a commodity.   

You know that you will be using heat for water or space in any event; with a solar system you are buying a chunk of heat for the lifetime of the system. Obviously look at high performing top quality systems supported by a long guarantee and an industry backed installers guarantee to maximise your investment. 

Investing in your own solar system will not make you as incredibly wealthy as a speculative investment might, but it won’t make you poor and will provide a safe and green tax free return on your ethical investment. If you do not buy one you will spend the money (and more) on water heating anyway. You will also saving tonnes of carbon which will help in the battle against climate change, but that is another story.  

2 Responses

  1. Hi Robert,
    Two years ago when i moved to my present home i installed a Genersy solar system, having just come out of my first two years fixed rate mortgage i’ve had to re-mortgage, when the surveyor put the report into the Building Society, it had risen in value be £45k! i’m not saying this is all due to installing solar but i bet it’s a good share.

  2. Steve

    Thanks for the information. It is typical of what we hear from people. I suspect most homes haven’t risen that much in price over two years.

    Robert

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