November 23, 2007

More Thoughts on the Solar Water Utility

After my post about encouraging take-up of solar water-heating, self-confessed professional sceptic Jeff raised some interesting questions. Rather than have them languish in the comments section of that entry, I thought I'd pull them into a new one and offer some form of response.

Here's what Jeff said:

Some obvious problems:

1. The biggest problem is probably financing the operation: you are tying up the capital and cost of installation for the payoff time. It could work if the cost was cheap, and payoff was short, but if the payoff was over 5 years and it was £2500, I think you'd have a problem. Being below the interest rate provided by banks is a sure-fire way to make sure that the company is not going to be financed. You probably need to be hitting about 10% return per year. Not that much different from the rates on credit cards.

2. Energy users can swtich at any time. What if they switch 1 week after installation. You need a good contract. What if the house is re-possessed? You lose your investment.

3. UK government grants are not likely to pay for it. I think I've heard that they usually get all taken up on the first day that each grant season opens.

I'm not all doom and gloom, but I might be a professional skeptic. There are probably ways to make it work, but I think that the cost of the units and of installation have to come down.

I think they're all valid concerns, with the first one being the biggest and the one that I'm going to address here (given that I've thought the most about it).

I'm going to assume that the second point can, as Jeff suggests, be sorted out with the right contract - with the worst-case scenario being that the equipment lies dormant until you persuade a future householder to start paying you again. The third point just makes the first one harder, and wasn't something I was relying on - if "free money" is available, it makes sense to try to claim some.

Some Numbers

I figured all this was a pretty pointless exercise if it was conducted with hand-wavy guesses as to the costs, payback period, etc. so I've done some very rough-and-ready calculations to give it a grounding in the real world.

Installation cost. Going on the price of a DIY-kit from this supplier and a throwaway comment on their FAQ (if I remember correctly), I reckon that each installation would be somewhere between £1500 and £2500.

Energy saved. A while back I came across some government research (warning: pdf) into the effectiveness of solar water-heating. That showed (averaging the results from table 7.7) that solar panels can provide about two-thirds of a household's hot water, or around 1050 kWh-worth of energy. That's the equivalent of around 117 litres of petrol, or 14 days of non-stop kettle boiling. The research is almost a decade old, so current technology should be better - however, the "old" solar panels were already providing more energy than could be used during the summer, so any gains would only help in the winter months.

Payback: replacing gas. npower charge 4p/kWh for the first 1000 kWhs, and only 2p/kWh after that. Solar energy is only likely to affect the second, lower pricing band which means it would save you a woeful £21 each year! Even if you assume that the price will almost quadruple over the next 30 years (pretty much what happened over the past 30 years) you wouldn't pay off even a £1500 installation cost over a twenty-five year lifespan of the panels.

Payback: replacing electricity. As electricity costs around 8p/kWh, it's easier to make a case for replacing it with solar water-heating. Even with no price increase you could payback a £1500 installation cost within 18 years, and given the same 30-year increase as we did in the gas example, the lower end installation would be paid off in eleven years and the £2500 installation cost in sixteen.

Carbon saved. Each year the solar water-heating system will save about 415kg of CO2 from being released, so over an expected system lifetime of 25 years that will add up to just over 10 tonnes of CO2. If you sold that today as a carbon offset it would be worth about £15.

Some Conclusions?

To be honest I'm rather disappointed with the way the figures stack up, regardless of any business opportunity. Whether there's any decent profit to be made will depend on how the energy prices change over the coming years; particularly the price of gas, given the popularity of gas-fired central heating in the UK and its highly competitive current pricing.

I think there's still scope for a business that isn't entirely profit-driven in this area, although as Jeff points out, funding would be a huge issue. Could some form of hybrid charity/business be formed with the mission to remove our reliance on the energy grid?

As a charity (or charity-like entity) it could raise some of the funding from people who just believe in the goal and want to help out. It could add to the pot by selling the carbon-savings as carbon offsets - there's debate over how useful carbon offsets are, but if they can be used to help finance endeavours such as this then that's fine by me.

That won't solve the money problem, so if I was trying to start this myself I'd bootstrap it. Start small, and operate as a regular solar water-heating installer at the same time. That must be profitable because people are doing it, and the profits would be used to pay for the long-term investments.

If nothing changes then it continues slowly making the world a better place, but if the costs come down or gas/electricity prices soar you're perfectly placed to take advantage and scale things up.


Posted by Adrian at November 23, 2007 11:02 AM | TrackBack

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