Calculating Payback and Yield for Private Customers

[The Solar King]

Feed in Tariff and Export Tariff payments are Tax free. When calculating pay back does anyone take this into account? The payment is effectively what would have been received after tax was deducted had it been taxable. For a 20% tax payer, it means the payment is actually worth 25% more. For the 0-4kW band, the combined value of £0.16765/kWh it is actually worth £0.2096/kWh. For someone whose marginal rate of taxation is 40%, it is worth £0.2794/kWh.

Savings in electricity costs, and the cost of maintenance are both from taxed income. The saving in electricty costs allows that income to be spent elsewhere or invested. Therefore I would treat the position as neutral. Maintenance cost (the cost of replacing the inverter spread over the assessment period of calculation - I use 20 years) is the same as the original capital cost, non recoverable and therefore cost is the same.

For a 20% taxpayer, in a full discounted cashflow on a 4kW system costing £6000.00 producing 3900kWh/a with self use of 1450kWh/a, this reduces the payback from 8.2 years to 6.8 years. The yield increases from 14.3% to 17.1%. For a 40% tax payer, payback is 5.3 years and the yield 21.3%

I'd welcome anyone's views and comments on this.

 

[Gavin A]

I don't for domestic as for me it's delving too far into the realms of actual personalised financial advice (for which you'd need to be licensed) as opposed to giving an overview of expected financial performance of the system.

Firstly you'd have to find out what tax rate they're on, which is pretty intrusive, and then you'd have to make an assessment of when they're likely to retire, and if they then end up retiring early the benefits will be less than you'd predicted.

Far more trouble than it's worth IMO, when the figures can be presented and then the customer just told, and these are all tax free, so it's the cherry on top rather than part of the overall package.

I do sometimes include it for SME businesses where they actually are likely to be using the cost as part of their capital tax allowances, but businesses are a bit more savvy on this sort of thing, and it's much easier to get an idea of their tax bracket etc.

 

[The Solar King]

With Regard to the Financial Services Act and financial advice, we have always used this disclaimer with regard to payback periods and returns:
[FONT=Arial, sans-serif]"Please note the analysis does not constitute financial advice as covered by the terms of the Financial Services Act 1986 and is provided for illustrative purposes only. As already stated t[/FONT][FONT=Arial, sans-serif]he performance of Solar PV systems is impossible to predict with certainty due to the variability in the amount of solar radiation (sunlight) from location to location and from year to year. The estimate is based upon the software's calculations and is given as guidance only. It should not be considered as a guarantee of performance or financial return.[/FONT]"

 

[Gavin A]

With Regard to the Financial Services Act and financial advice, we have always used this disclaimer with regard to payback periods and returns:
"Please note the analysis does not constitute financial advice as covered by the terms of the Financial Services Act 1986 and is provided for illustrative purposes only. As already stated the performance of Solar PV systems is impossible to predict with certainty due to the variability in the amount of solar radiation (sunlight) from location to location and from year to year. The estimate is based upon the software's calculations and is given as guidance only. It should not be considered as a guarantee of performance or financial return."

Just stating that it's not covered though doesn't necessarily mean it isn't, and personally I'd be wary that actually including their individual tax status into the figures might well cross the line between generic guidance, and actual financial advice.

It's definitely a grey area, I've discussed this with a financial adviser before now trying to get them on board, and apparently they're not even allowed to make financial projections over a 20 year time scale, so I couldn't even contract him to produce / sign off on this guidance on our behalf (as an aside).

 

[The Solar King]

Take your point. This was based on advice. The RECC guidance in their model quotation etc is pretty naff and could leave you even more exposed as there is no disclaimer what so ever on payback.

 

[Gavin A]

oh yeah, I'd expect whatever the recc model was to be useless.

it's all a grey area / matter of opinion, and as long as you can justify it there shouldn't be an issue, I just prefer to er on the side of caution a little, as despite the disclaimers etc I've just had to spend a few hours checked figures from a previous customers who'se querying the financial projections - mostly because they've missed off the energy savings from their calcs, and had a faulty inverter they failed to spot for half a year, but the RPI figures used back then are seeming a little high now as RPI has dropped significantly (I was using 3.58%, which I think was the average for the last 10 years at that point, but it's actually been quite a bit lower since).

 

[The Solar King]

Still using 3%, which is about the average over the life of the RPI index, but you are right to raise this. I try to be conservative in all projections, so maybe its time to reel that back to 2.75%. It doesn't make a huge difference. The one to watch is fuel price inflation. I use the DECC forward projection figure of 5.6% so can blame them. I have seen figures of 10% used which is clearly bonkers when looking at a 20 year period.

Everything is based on historic trends, but it is the best we have to go on.

 

[Gavin A]

I use 9% for the first 5 years, 5% after that for fuel price, as this is the sort of price rise that's pretty much built in as we transition from coal to gas, though the gov through a temporary spanner in those works last winter by removing a load of environmental / social costs from the bills to temporarily reduce this for one year. Beyond 5 years is much harder to predict, but at some stage around the CFD price the price should start stabilising due to the impact of nuclear, wind, pv etc at that price point.

That said, I've had that for the first 5 years for 18 months now....