The return on investment argument....

[Nocturn]

...I don't understand it

The typical argument is: "I'll only install solar panels, if I can get my ROI in reasonable time".

I don't understand that reasoning because first of all, what would your "ROI" be if you continue to simply pay for the electricity? Second, even if your ROI would be 15 years, you'd still have about 10-15 years left of completely free electricity.

Keeping in mind also that any ROI calculation is done by comparing how much you paid for your electricity THIS year. Sure, electricity prices won't go up in the next 30 years....right...

So suddenly your projected 10-15 year ROI (even if it will be that long), is suddenly 7-10 years, and after that you'll still have another 20 years of free electricity. But somehow, this still doesn't make sense to people.

Same with solar thermal. If you heat your water with gas, you have to first pay for the gas heater installation, pay for the gas, and in another 15 years, you probably have to get a brand new installation. So nothing but losses, where's the "ROI" here? And yet, solar thermal doesn't make sense to people either.....ONLY if the ROI is within "reasonable time."

So...what's going on? What is this obsession with ROI? Just would like to better comprehend peoples attitudes.

[bruce]

This is an interesting question and one I havn't looked at in depth, so I decided to crunch some numbers. Firstly we need to look at electricity prices over a ten year period.

The average bill in the UK this year will be £383 according to here, which is a rise of 58% since 2003.

If you carry that trend on for the next 10 years your electricity bill for that period will be around £6,102.50.

Now then to look into the costs and benefits of a solar panel. According to Green Energy a 2 kWp system works out at between £12,000 and £14,000. Apparently half of this can be saved with grants, so lets assume a cost of between £6,000 and £7,000 to purchase your solar cell.

Now then, the average UK electricity consumption is 3,300 kWh, which works out at approximately 11.5pence per kWh.

According to Green Energy again a typical 2kWp system will generate approximately 1,500 kWh per year or around 45% of your average annual consumption.

Ok, so now we're getting there. If you multiply these savings across the ten year period you're likely to save £2746.13 on your electricity bills. Add in the cost of your solar panel and you will have paid an extra £2643.63 for your electricity over that 10 year period.

To completely pay back the cost of your initial £6,000 investment would take around 17 years (not taking into account inflation).

Hopefully this should provide some baseline figures if people want to play around a bit more.

[seven]

Great work Bruce, cheers mate. Those figures make it easy to work out the benefits of a wind turbine as well.

[roqchiq]

I've heard that having solar panels or a wind turbine etc can also increase the value of your house which is encouraging. I've always been worried about the issue of moving on before I've recouped the cost of such things but if you regard it as an investment in your property which makes it more valuable (like a new bathroom or kitchen) then renewable energy becomes a lot more attractive - and easier to sell to the not-so-green among us

[Nocturn]

bruce, thanks for those numbers. It makes it pretty clear that solar wouldn't make too much sense in most of the UK, unless the price of solar panels drops, which with the new Nanosolar panels will hopefully offer a much cheaper alternative in about 2 years.

But for many other countries in Europe, since the same number of panels could cover your whole electricity consumption, to me there's no question that a solar installation makes sense. Personally I don't want to see windmills all over the landscape and besides the most efficient is to produce the electricity as close as possible to your home.

I see many people in relatively sunny areas in the US (well relatively speaking to most of the UK) that still aren't sure and bring up the issues of ROI. This to me makes no sense when in most cases your ROI would be around 5-8 years, and for the next 20 (at least!) you would have completely free electricity.

Well, lets see what happens in the coming years Personally I think solar will become a very popular option in the near future. There are the common fears and concerns of any "new" tech that people have. You have to remind them there are solar panels around since the late 70s that have only lost 10% of their capacity, or that solar is becoming affordable and very practical and not just an expensive geek toy.

One interesting fact: every day there falls more solar energy on the earth than the entire planets population will use in 27 years...

[Claire]

Mmm, interesting figures.
I have dim and vague recollections of working out ROI figures on some work-related courses and I think if you're strictly talking of financial benefits you have to somehow subtract the interest you'd be likely to earn on the money if invested it, don't you?
Of course, at the moment there's no real way to "monetise" environmental benefits though.... Although another reason why solar panels might not be the best idea for the UK is that the environmental benefit of their electricity production over their useful life is only marginally more (at the moment - until we get improved products and processes) than the environmental "cost" of their production. Sorry to bang on about this yet again, but it's an important point and one that Nocturn (who I believe is a relatively new member?) may not be aware of.

[Richard]

Originally Posted by Claire

I have dim and vague recollections of working out ROI figures on some work-related courses and I think if you're strictly talking of financial benefits you have to somehow subtract the interest you'd be likely to earn on the money if invested it, don't you?

Yeh you need to discount future benefits because as an alternative to buying a wind turbine/solar panel/whatever you could just take your capital and invest it in a bank account.

For example, you could spend say £3,000 on some PV panels or you could invest the same £3,000 in a bank account at 5% interest a year. So if you buy some PV panels you need to take into account the fact that you can no longer invest that £3,000 at 5% compound interest a year and so you need to discount any future savings also at 5% a year, compounded (everyone still with me? ). This is called the Discount Rate.

Usually a higher figure than 5% is used because you also need to factor in things like risk and uncertainty...a figure of 10% would be more usual. This has a huge impact on the value of future savings though. For example, suppose you have a wonderful system that saves you £1,000 a year on your electricity bill. You have to discount those savings back to an equivalent "present value", so at a discount rate of 5% we'd have yearly savings of:

£1000
£952
£907
£864
£823
£784
£746
£711
£677
£645
-----
£8108 - £3000 capital cost = £5108 (total savings over 10 years at Present Value)

So your £10,000 saving over 10 years is really only worth £5108. Still, that's not too shabby. It would be more usual to discount at a higher rate though, say 10%, which gives yearly savings of:

£1000
£909
£826
£751
£683
£621
£564
£513
£467
£424
-----
£6759 - £3000 capital cost = £3759 (total savings over 10 years at Present Value).

So it's not looking so good now. It gets even worse the longer the time period that you are considering e.g. at a Discount Rate of 10% per year, £1,000 saved in 20 years time is only worth the equivalent of £149.

In order to carry out a proper financial assessment, you absolutely do have to take the Discount Rate into account (it's not optional if you want to do it properly) but it's something that lay-people hardly ever do. It's also one of the reasons why it's hard to get governments to think about the long-term implications of environmental problems. E.g. if a problem is going to cost, say, £1million to fix in 50 years time then at a 10% Discount Rate, this cost is only worth the equivalent of £8,500 in todays money i.e. it's almost worthless and so would not be considered worth worrying about.

It's actually a bit more complicated than I've explained here, but that's the basic idea anyway. I'm sure Imp could provide more details about how it works if someone wanted to know.

[Richard]

Keeping in mind also that any ROI calculation is done by comparing how much you paid for your electricity THIS year. Sure, electricity prices won't go up in the next 30 years....right...

A good assessment would try and take this into account, though I'm willing to bet it's hardly ever done. Ideally you'd run an assessment several times using different values on a number of different parameters e.g. cost of electricity, likely energy generation from wind turbine/PV panels, rate of household electricity usage and so forth. Then you'd end up with a range of results which would allow you to make a more informed decision.

You're probably right about electricity prices (and energy prices in general) being on a long-term upward trend, although it's impossible to predict exactly how things will pan out. It's still something that should be taken into account though, at least as much as possible.

[Nocturn]

But Richard, if you're going to do that, why not take into account the £1000/year in savings on electricity? Every year for at least 30 years, so you would be saving £30 000, NOT even taking into account the rise in price of electricity. So every year you could be putting that £1000 into a bank account at 5% interest, could you not?

Claire, I am aware of those factors, they seem largely exagerated. It depends also on what kind of solar panels we are talking about. New thin film panels are manufactured like a printing process, with a conductive "paint" sprayed on a very thin film of metal. Doesn't take nearly the same amount of energy as multicrystalline panels.

Even with present day multicrystialline panels, the aluminium frame can be entirely recycled. I find it very hard to believe that a product with a lifespan of over 30 years just "barely" produces enough electricity to offset the energy needed to produce it. If you have some figures I'd be interested to see what they say

[Richard]

Originally Posted by Nocturn

But Richard, if you're going to do that, why not take into account the £1000/year in savings on electricity? Every year for at least 30 years, so you would be saving £30 000, NOT even taking into account the rise in price of electricity. So every year you could be putting that £1000 into a bank account at 5% interest, could you not?

The Discount Rate takes that into account, although I didn't cover that part. As I said, it's a bit more complicated than I explained in my post but basically it comes down to the fact that money saved/spent in the future isn't worth the same as money saved/spent in the present. Even money saved in the future which is then re-invested is not worth as much as money now.

Same with solar thermal. If you heat your water with gas, you have to first pay for the gas heater installation, pay for the gas, and in another 15 years, you probably have to get a brand new installation. So nothing but losses, where's the "ROI" here? And yet, solar thermal doesn't make sense to people either.....ONLY if the ROI is within "reasonable time."

In this situation I expect that you'd also have to take into account all the items associated with using gas even if you had a solar heater, unless you had a solar heater that could totally replace the gas system. I.e. your choices are likely to be between a gas-only system or a gas system with a solar heater. So the costs associated with the gas-system apply to both options.

ROI isn't really applicable to a gas-only system since people don't have one because they want to make a profit from it, they have one because of the service it provides. It's not really an investment option.