Investing in solar energy

Investing in solar energy
26 July 2011

IT’S little secret that UK-based large-scale solar systems represent strong investment opportunities: Britain is the latest in a long line of EU countries to have introduced a feed-in tariff to incentivise and promote the generation of renewable energy.

The government-backed scheme guarantees that the owners of micro-generation electricity systems are paid an inflated price for the energy they generate for a period of 25 years. The price is linked to Retail Prices Index – so will rise year-on-year in line with inflation.

In this way, the government aims to reduce carbon emissions in line with objectives outlined, and committed to, in European directives.

The result is that private investors are able to benefit from stable and predictable returns by investing in renewable micro-generation systems.

Net stable returns

Of all renewable energy sources, solar photovoltaic systems offer the most accessible and attractive opportunities for investment. However, as with any financial commitment, it’s important to fully understand the advantages and potential drawbacks.

The primary motivating factor for institutional interest and investment in UK solar systems to date is the level of potential profit to be made from selling the power generated back to the national grid. Many factors affect the level of return on such an investment, but rates of between 6% and 9% can realistically be expected.

These potential returns, coupled with the fact that the rate of tariff paid for each unit of power produced is guaranteed, combine to deliver a compelling investment prospect.

This compares well with equity funds, where there can be a big disparity in performance. For example, over the last three years the best performing cautious fund, CF Ruffer Total Return, returned 47%. The worst performing, Elite LJ Cautious Management Portfolio, is down 13%.

Solar micro generation systems are not subject to the same market forces: they are arguably lower risk and at least equally appropriate for inclusion in cautious investment strategies.

Commit for the long-term

However, one aspect that needs to be fully appreciated from the outset is that a solar system should be viewed as a long-term commitment. A bond could be viewed as a comparable product, offering stable returns on a low-risk basis, but bonds can have short redemption dates; a solar investment does not.

Any capital invested is effectively tied up. Although exit options do exist and will become easier to realise over the coming years, solar investments aren’t suitable for those who are likely to require quick access to their investment.

You must also understand the risk factors. These are that you could potentially pay too much for a low-quality, low-efficiency system positioned in an unsuitable location. However, these mistakes are easily avoidable: deal with a reputable company that should be able to accurately predict the system performance using government-approved calculations.

Club together

The remaining question is: how can you go about investing in a large solar system? There are companies that specialise in facilitating such investments, negotiating leases on commercial properties with suitably large roof spaces to accommodate such systems.

The property owner retains the right to use the power generated, and the system owner receives revenues from the sale of power generated. Multiple investors can club together to buy proportional interests in a system, giving them the right to a portion of the revenues, and putting investing in solar within the reach of most investors.

Pic credit: frankie_8/

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