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Wednesday, March 29, 2017

Green Spot: Green Annuity

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?


4 Responses to “Green Spot: Green Annuity”
  1. Goalhunter says:

    You are exactly right in your analysis. To select between two projects you value one (paying increasing energy costs into the future) and the other (spending tens of thousands on a geothermal pump) then see which yields a larger number.

    Renewable energy like the goethermal really seem to be priced right around the zero point right now, just like the eco cars, etc. That means it’s pretty much a toss-up whether you pick one or the other from a $ point of view. You’ll be way happier in the future, but you’ll have to spend $20K now. I think these solutions will get way cheaper in the future as the technology becomes more commoditized.

    Another idea is to invest in a power company. Example: Fortis. As they make more money because energy becomes more of a scarce commidity their dividend increases. So your power bill goes up, but so does your dividend. Investing $20K in Fortis would give you a dividend of near $1000/yr, and this would go up probably faster than 4% per year.

  2. Kevin says:

    I have thought about this and came to the same conclusion. Two ways of reducing personal energy costs: 1) install my own alternative energy systems, 2) buy shares of the power company and use the dividends to pay your bills. I agree with Goalhunter, presently the two are a wash on the money side.

    They have their own pros and cons. You have to pay taxes on dividends (at least in the US), but the savings from reducing energy are not taxed. Stock shares are liquid, but home improvements are obviously tied to a house. There is a certain ‘cool factor’ to having your own windmill, but then you have the added responsibility of maintaining and eventually replacing it. When you buy a passive investment you delegate all of the management work to someone else.

    Finally keep in mind that not all energy improvements last forever. For example appliances have a finite operational lifetime. I guess improvements like these resemble a bond with a fixed maturity rather than an annuity or dividend stock.

  3. Traciatim says:

    I just think solar systems are far too costly. Take for example the CanSolAir solar air heating system. This system is simply a thermistor, some air duct, some fans, and a box filled with aluminum cans . . . Just the panel is 2700 bucks, plus the duct work, plus the electrics, plus the labour. You are probably looking at near 8 grand for a 2 panel system after all the taxes or so. The claim is that it will generate 2400 watts of “free” heat.

    Lets assume that you are heating for 6 months a year. Each day you get 4 hours of half sun, and 4 hours of good sun. . . so 1200-2400 watts depending on time, clouds, and all sorts of things. At $0.10 per KW/h you are getting 4.8KWh in the 4 hour periods and 9.6KWh in the peaks. You get 14.4KWh per day, or $1.44 ($2.88 for two panels). That’s 2777 days needed to repay your investment, or 15 years . . . NOT COUNTING CLOUDS OR STORMY DAYS!

    Direct solar heat is one of the most efficient re-payers of local solar/wind power generation too. So unless you are in your final home and will be there for decades, or there is some other cost involved to regular power, don’t bother. If you are talking PV systems or wind the math is even worse.

    Of course if your house is in a remote location and you can’t get power there easily of course local power and heat make sense, but anywhere remotely close to a city it just doesn’t add up.

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