Posted by Tim Stobbs on January 9, 2009
It occurs to me often people consider the payback period when deciding weather to build a renewable power generation or solar hot water heater or geothermal system on their home. Which is a fairly standard way to determine if an investment is a good idea. Yet in reality a renewable investment actually is somewhat more similar to an inflation adjusted annuity.
By investing into something that will produce energy, you have managed to avoid paying for that energy now and in the future. So are prices for energy rise your investment keep producing with your previous dollars you put into it. So in general the investment is similar to an annuity as you put down a large lump sum payment to have a stream of savings in the future.
The reason I point out this difference is I’m realizing putting aside some cash or investing in renewables might actually be a great idea for early retirees that don’t expect to move for a long period of time. By investing some cash upfront in renewables you can pick projects that keep producing a rate of return that will keep mounting up savings as inflation ramps up your energy costs. For example, if you are getting about a 4% rate of return from your investment that will only increase over time as the energy you are off setting keeps going up in price.
From my limited point of view energy costs are only going to keep rising over the next twenty years or so. Why? In Canada there are been very little new power generation build that isn’t natural gas based in the last decade. ( And natural gas is one of the most expensive ways to produce power, but it has the advantage of being lower in CO2 emissions.) So you will see massive infrastructure overhaul in the next ten years to replacing aging power facilities and deal with CO2 and other emissions (SOx, NOx, Mercury, etc). Both items are going to cost a lot of money and some of it will be passed along to consumers. In addition using more renewable power requires some backup power which natural gas is ideally suited for because you can bring it on line fast. As such natural gas usage for power generation will only increase. So that will put more demand on the natural gas market and cause prices to go up there as well.
So that’s my idea for today. What do you think? Are renewables a good investment choice to avoid future costs? Or am I just dreaming?