Misleading Sunday Times Article on PV

[Gavin A]

this is ongoing with EST, they've had this problem with their calcs for over a year now, we discussed it with them after which used their figures last year to condemn solar, and they changed the pricing they used, but not the way they calculated the payback.

Problem is that people trust the EST and WHich a hell of a lot more than the sunday times, so I'm a little baffled why the sunday times article has caused such a commotion. Surely the STA hadn't missed the way EST have been calculating their payback estimates for the last year to 18 months have they?

ps Solar King, you may be right, maybe I should get involved with STA, I'm just so narked with the general shoddy performance of all our supposedly representative bodies on a large number of issues over the last 2 years that I've lost all confidence in all of them.

 

[jerriais]

EST have to realise that the argument, "we can't predict inflation so we won't include it" is not correct. They are just predicting it at 0%

Anyway, the same argument could be used for almost any variable in a future payback scenario, system performance, climate data etc. So they could just as well say, "we don't know the annual irradiance figures for the next 20 years so we'll just assume the sun won't shine".

 

[BruceB]

I might be in a minority of one here because I think we have discussed it before, but I think it is correct NOT to include rpi inflation in the payback calculations. By leaving it out you get a reasonable approximation of the net present value of an installation when you look at it in discounted cash flow terms.

When you increase a return by rpi for a future payment you are giving it an inflated value which does not reflect its actual worth in today's money.

If rpi is at a steady 5%, so FIT rates are steadily increasing by 5% and say for example electricity prices are increasing by 5%, then your apparently increasing profit in future years is not an increase in real terms because the cash will be worth less because of inflation. The increase in prices that should be factored in is the expected increase in electricity prices ABOVE inflation, not the absolute increase.

This of course makes returns look worse and many customers will not have heard of net present value or discounted cash flow, but it is the way your accountant would look at it if you were considering a business investment.

 

[Gavin A]

I might be in a minority of one here because I think we have discussed it before, but I think it is correct NOT to include rpi inflation in the payback calculations. By leaving it out you get a reasonable approximation of the net present value of an installation when you look at it in discounted cash flow terms.

When you increase a return by rpi for a future payment you are giving it an inflated value which does not reflect its actual worth in today's money.

If rpi is at a steady 5%, so FIT rates are steadily increasing by 5% and say for example electricity prices are increasing by 5%, then your apparently increasing profit in future years is not an increase in real terms because the cash will be worth less because of inflation. The increase in prices that should be factored in is the expected increase in electricity prices ABOVE inflation, not the absolute increase.

This of course makes returns look worse and many customers will not have heard of net present value or discounted cash flow, but it is the way your accountant would look at it if you were considering a business investment.

Bruce, one question for you on this.

Can you point me in the direction of any other financial products available to most domestic customers that provide their financial estimates on an RPI inflation + x% rate of return basis?

If not, then the flaw in your method should be pretty obvious as you're asking customers to compare the investment potential of different options on 2 entirely different basis.

A bank that offers a bond with an interest rate of 3% doesn't mean 3% in real terms after inflation adjustment, it means 3%, and if inflation happens to be 3.5% then you've lost money in real terms and that's just how it works. Solar PV on the other hand, gets an inflation linked return, so why not spell this difference out to people in the figures?

 

[BruceB]

My pension from the government is always expressed in current day numbers. Future years payments will be increased by cpi.
Many annuities are index linked.
Index linked bonds are available Why I?m buying index-linked bonds - MoneyWeek

So, I do understand the point you are making by asking the question. Mostly, the cost of inflation is not pointed out to punters. But I have always felt that investment in pv is quite like buying an indexed linked annuity: you put a lump sum in and get an index linked income for 20 years, perhaps slightly ahead of index if energy prices rise.

 

[Gavin A]

My pension from the government is always expressed in current day numbers. Future years payments will be increased by cpi.
Many annuities are index linked.
Index linked bonds are available Why I?m buying index-linked bonds - MoneyWeek

So, I do understand the point you are making by asking the question. Mostly, the cost of inflation is not pointed out to punters. But I have always felt that investment in pv is quite like buying an indexed linked annuity: you put a lump sum in and get an index linked income for 20 years, perhaps slightly ahead of index if energy prices rise.

lol - ok, so I'll agree that if we were to also include the returns shown in this graph for inflation linked bonds as the comparison with solar PV then it could be a fair point to give the investment return for PV without the RPI inflation linking in it.

So the inflation linked bonds you mention are currently achieving negative real money yields of around -1% + inflation.

But the vast majority of the public have no clue at all about that sort of thing, and the articles such as the sunday times one above don't compare the 2 products, they compare the headline rates of return only and ignore the inflation linked aspect entirely.

 

[BruceB]

I think you are right that the vast majority of the public do not understand that sort of thing, which I appreciate undermines my point a bit. But most of my PV customers from a year ago who had the money sitting there available were probably comfortable using terms like NPV and DCF as they would have come across them in their professional lives. The accountant of one doctors surgery I quoted for did go through the figures in detail so I was glad I had not made the proposal any more glowing than I had.

 

[Gavin A]

the other point being that it's not just inflation linked, it's also linked to the rise in energy prices, which has been running at around 9% a year for the last 7 years or so.

So even if you compare solar on an inflation linked basis it's still underselling it, as no other product is linked to the energy price rises as well.

The only way I can see that you can fairly reflect the likely value of a solar PV investment is by directly incorporating reasonable estimates of RPI inflation and energy price rises into the projections.