Friday, September 4, 2009

Payback... or Payback... which is it?

The moment you mention solar panels or any other green initiative, people ask about Payback. But if they are taking a holiday abroad, or considering a change of car, they never consider that those expenditures can also be considered in terms of payback - in economics it is called Opportunity Cost. A car that gets you to work more reliably than a cheaper banger, or enables you to get a job a further distance away is opportunity cost - by existing, it enables you to increase your 'revenue'.
  There is also the concept of Compounding. If something is increasing by 2% annually, it will double in 35 years. An income of £1200 indexed from 2010 at 2.5% will be well over £2000 after 25 years and will cumulatively have added to £41k not the £30k you expected.
And some things, we do not need payback, we just do them for Quality of Life reasons. Bicycling to work or the railway station is better for health than using a taxi.

Now on our PV installation, the payback is 12.5 years if prices stay level (would be shorter if we had a south facing roof). The reality we all know is that over 12 years, prices of purchased electricity will only go up. If the Feed-in-tariff is near enough pegged to the average purchase price, then our payback time will shorten with every price rise. On a Compounding basis, every rise in Gas prices will also speed up our payback as the alternative to the Heatpump would have been a Gasfired condensing boiler with radiators. The contract for the feed in tariff is for 25 yrs for PV - so what will the cost of electricity be in 2030 or 2035?

The next aspect of Payback is Capital Return. In West Bridgford, the standard bargaining unit of currency in house prices is 10 grand - with some final subdivisions to 5 grand to close the deal. House prices rise and fall arbitrarily, eg the opening of a good new school nearby, or the opening of a Sainsburys, a road widening. Another aspect of house price is the EPC, the Energy Performance Certificate, and the HIPs, home information packs.
   In future, a house with an A or B energy rating will be worth a LOT more in valuation than an older unimproved house.
   If future Council Tax assessment is linked to the energy rating, the payback will be even quicker. Buyers who are conscientious would rather buy a house where the hard work of going green has already been done, than to face the costs of converting a house themselves. We are reasonably happy that providing we live here a few years, the house value will overwhelmingly provide enough capital value payback to meet our spending on the Photovoltaic panels. If the next purchaser would not recognise the value of the panels, it is actually possible to have them dismantled and moved to the next house.
   But meanwhile the panels will earn approx £ 1200 a year, compounding... that's nice too!

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