Making hay while the sun shines

Posted in Investors by Sebastian Miller on Mon, 31 Oct 2011

Sunlight takes just 8 minutes to reach the earth and, in just 1 hour, more sunlight energy falls on the earth than is used by the entire population in one year? You may have noticed a growing number of column inches in the investment press about the UK’s solar energy sector which is experiencing rapid growth. Odd for a country best known for its fog and rain!

For much of 2011, the solar sector has failed to shine as brightly as many hoped and dark clouds hung over the sector as a result of uncertainty over changes to the legislation governing the famed Feed In Tariffs (FITs). Back in February, there were even a few roars of thunder as Chris Huhne announced sweeping changes to legislation effectively shutting down over £1 billion of planned investment into large scale solar plants. But a handful of developers managed to move at lightning speed to get their large scale projects up and running ahead of the 1 August deadline. Thames Water recently announced that it was one of the owners of large scale solar plants which will create a massive saving of 6% of their total energy bill.

For now a period of calm returns to the solar investment sector. Projects of less than 50kW will continue to attract generous subsidies under the FIT scheme, with the highest rates paid to small scale installations of under 4kW, which is large enough for a typical residential installation. Each installation will attract a maximum 43.3p /kWh and save hundreds of pounds off an electricity bill each year.

Across the UK, thousands of home owners and businesses are signing up to get solar panels fitted to their rooftops. Despite our reputation for bad weather, Britain is poised to become one of the highest growth markets for solar in Europe this year. However, demand may exceed supply and installation capacity and already many are concerned about getting their panels fitted before 12 December 2010 after which the FIT rate will drop sharply.

Installing solar panels on your own roof can typically generate a total yield of around 10% per annum for 25 years and the cost of doing so is around £10-12,000. For those HNW investors who are seeking to invest larger amounts in this unusual opportunity, there exist a handful of investment vehicles which are aggregating solar assets. Some of the most interesting concern EIS and VCT funds which combine tax advantages (30% income tax relief, etc) with the Government-backed FIT revenue streams from solar assets, effectively attracting a double whammy of Government-backed incentives.

Sounds too good? Well therein lie the tell tale signs of a new storm is brewing over the horizon. The Government has announced that beyond 5 April 2012, just a few months away, companies generating over 80% of their revenues though FITs will no longer qualify for EIS tax advantages. In the calm before the storms of March and April this year, many observers had forecast that investment in Solar EIS and VCTs would attract the bulk of tax efficient investments in the UK, but in the end even the top rated offering only secured a disappointing £5m of investment. But now the skies ahead are clearer. Climate Change Minister Greg Barker has confirmed the new FIT rates which will come into effect on 12 December 2011, and stated that there will not be retrospective changes to FIT rates. The Chancellor has also indicated his strong support for EIS as a way of stimulating private sector investment into the enterprise economy as to help the UK meets its increasingly ambitious targets of generating 15% of its energy from renewables by 2020 (just over 8 years away). Already, the same observers are dusting off their 2010 predictions and issuing them again.

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