Nov 11, 2015 Is Solar Power a Good Investment?

by Canadian MoneySaver

Readers Write

In times of stock market volatility, low and sometimes negative interest rates solar power with its high yield and low volatility can be very tempting. While every province offers some form of solar subsidy the one I’m most familiar with is the Ontario microFIT program. In short is it provides homeowners with the opportunity to develop small or “micro” renewable electricity. For doing this you are paid above market tariffs.

While panel prices have come down you are still looking at an investment of around $30,000 and can expect to earn between 3000 and 4000 dollars (8%-12% yield) a year depending on the tariff. Another important consideration is residual value, the panels themselves do not have much value on the secondary market but recouping the full investment when you sell the property shouldn’t be a problem. The amount added in value will depend on the contract conditions, as the better the tariff, the higher the resale value.

Taxation

One cannot discuss investing without talking about taxation, but as always, make sure that you confirm everything with an accountant. Income from solar panels is taxed as regular income, which means you pay income tax at your top rate unlike capital gains and dividends, which attract a lower tax rate. You are allowed to deduct initial setup costs, interest and depreciation but unfortunately, you cannot claim any other expenses such as mortgage interest, home office or general upkeep unless it is specific to maintaining the panels.

With deprecation it is important to note that: while it is tempting to deprecate the panels when you file your taxes as it can offset the income earned it is important to understand that if you are planning on selling your place down the road then Capital Cost recapture, a nasty bit of tax code, may apply. If you are thinking of selling then it’s best to get an opinion from an accountant on any possible tax implications.

Risk

While the yields are quite interesting (north of 10%), I do see a number of risks involved. For one, they are an illiquid investment meaning that they can’t be sold (short of selling your house) should a better investment opportunity come along. Secondly and more importantly, the guaranteed 20-year government contracts could fall through if provincial budget concerns necessitate extreme measures. In addition, the solvencies of the manufacturer guaranteeing the panels’ performance are far from guaranteed over the next 20 years.

Finally

The best way to view this is to think of it as an annuity. In simple terms an annuity is a contract between a person and a company. The person gives the company a sum of money, and in return is promised a monthly payout, generally for the rest of their life. This option was more popular when interest rates were higher as the higher the rate was, the more money you received. So it is possible to think of this as a lifetime annuity, as long as you understand that rates will fall with time. Many people have installed solar panels for environmental reasons rather than for financial reasons and are ok with the risks. However, to this writer if you want to help the environment, just drive less. Overall, solar panels are an interesting investment with the potential for decent yield, as long as you understand the risks involved.
Update: NPRs Planet Money just did a show on solar power. Some interesting differences on how solar power has played out in America vs Canada.  http://n.pr/1FBJv4G

Robert Lederman, a Canadian, living in Europe since 199

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