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Investing in solar through Enterprise Investment Schemes

Ever since the UK government announced the introduction of Feed-In Tariff (FiT) subsidies for renewable energy projects in 2010, the race was on to maximise the investment opportunity, particularly within solar energy installations. After all, the UK has been lagging the rest of the world for years when it comes to solar power, a well-established, clean and reliable form of renewable energy technology that also drastically reduces CO2 emissions. 

Take Germany for example, hardly a holiday hot spot, but the world’s leading exponent of solar energy generation nonetheless. That’s because solar panels rely on daylight rather than sunshine to generate electricity. Since Germany began its own programme of FiT incentives for renewable energy installations just over a decade ago it has increased its solar energy production by over 800%.

It seemed that the UK Government was keen to follow Germany’s lead. No surprise given the UK needs to do something major in order to meet its deadline of increasing the UK’s renewable energy output from 5.5% today to 15% by 2020. FiTs are a great way to stimulate private investment into an area of the market that has been neglected for too long.

So how does the FiT work? It’s quite simple. It’s a payment made to homeowners or businesses that generate their own electricity through renewable energy installations such as solar panels, either on rooftops or in dedicated solar farms. Not only do the site owners receive a payment for the electricity generated, reducing the burden on the National Grid, but they also stand to receive an amount for any electricity exported back to the Grid. At times when site owners are producing less electricity than they are using, the shortfall can still be imported from the National Grid and paid for in the usual way.

Importantly, once a site is connected the FiT is guaranteed for 25 years and because it is pegged to the Retail Price Index, the payments will continue to rise in line with inflation. Clearly a guaranteed return that rises alongside inflation is something not to be sniffed at. No wonder then that investors large and small were quick to recognise the investment potential.

One of the better ways to maximise the returns from solar came via Enterprise Investment Schemes (EIS). Through these products, investors benefit not only from income tax relief, capital gains tax deferral and inheritance tax relief, as well as the potential for some capital growth. Some EIS schemes invest solely in qualifying companies from the solar energy sector. These companies install solar panels and receive the 25 year inflation proof FiT payments. As a result, they offer predictable income streams and a clear path of long-term returns, making them well suited for inclusion within EIS.

Sadly Government-backed schemes always have the potential to be revised or reduced, particularly if they start to become too popular or expensive. It seemed that no sooner had the Government announced the FiT than it was deciding that tariffs needed to be reduced. In June this year it announced it was reducing the FiT for large scale solar farms, a move which would restrict large-scale solar investment. The Government suggested this would help to preserve FiT funds for individual households to fit solar roofs.

The Government also announced that from April next year, solar companies would no longer be considered as qualifying investments into EIS or VCT products, which means that investors who would like to take advantage of the long-term returns from solar in tax-efficient vehicles need to invest before the next tax year begins.

One of the biggest investors into solar via this route is Octopus Investments. So far it has invested more than £100 million into solar installations in sites across England, thanks to the support of its EIS and also Venture Capital Trusts (VCT) investors. Octopus started by developing a number of large-scale solar farms, but now these are complete it has also turned its attention to investing into smaller schemes where, for now the FiT remain untouched. The Government has given assurances that once a solar site is connected it will continue to receive the FIT at the rate that was announced at the time. Changing the FiT involves a lengthy consultation process and it is not expected that any future changes in FiTs will affect those solar sites already built or in the process of being built.  

Initial concerns raised by the government, that solar FiTs would be snapped up by wealthy City investors, has so far proven unfounded. In fact, solar-focused EIS vehicles are gaining popularity with people of all ages, whether they’re planning for retirement, seeking tax-free capital gains, or simply interested in an investment with a reliable income that avoids the volatility of the stock market. Government incentives for solar investment may have been reduced, but there are still considerable returns to be had from solar, providing investors know where to look.

Solar seminars – book your place now

This autumn Octopus Investments is running a series of nationwide seminars on the unique investment opportunity presented by solar. If you are a financial adviser and would like to book your place, please visit our web page.

This is a sponsored article from Octopus Investments.

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Author: LifeTalk Admin (Bella)
Posted: Friday, September 09, 2011 | 8:10:52 AM