Solar Power Investing - 3 Years On
This post was requested by long time Tribal Fi community member Gary Martin who asked me to follow up on a post I did some time back on investing in solar power. If you missed that post, you can read that here.
I made my first investment in solar power back in December 2019 so just slightly less than 3 years ago. I invested in a project to put solar panels on top of a Spar supermarket in Belfast, Mpumalanga in South Africa. Mpumalanga is one of the sunnier, hotter parts of South Africa in the North East. Just in case you don't know who Spar are (if you've been living in a cave or some such) , they're one of the leading supermarket chains in South Africa.
My first investment was for R9,144 / $600 / £450 which wasn't a small amount but enough to get a fairly meaningful return. For my hard earned cash, I received 127 solar cells. The solar panels used in the project contained 72 cells per panel so I had actually bought 1.76 solar panels. There were 39,888 cells sold in that project so for my money I became the proud owner of 0.3% of Spar Belfast's new sun driven power supply!
That project went live some 3 months later on the 17th March 2020 and to date has produced 1,739 kilowatt hours of electricity from my 127 solar cells. The project as a whole has produced 546,214 kwh, which to give you an idea of how much electricity that is, it would power the average small family home for around 99 years! For any one who struggles to picture what a kilowatt hour is in terms of size, 1 kwh of electricity would power the average 55" flat screen TV for about 12 hours, which is about the same time that one episode of Mrs H's favourite show "Married At First Sight" feels like to me.
In terms of the commercial returns, I invested R9,144 and have received 32 monthly rental payments totalling R1,412 so far. So I have received around 15% of my investment back (and reinvested it in other projects). The life of the project is 20 years (with the potential to extend to 25 if the solar panels are still good). I expect to break even at around year 9 and then will have a further 11-16 years of "Free" income from those solar panels
The forecasted return for this investment is that I should receive a total of R30,358 for my initial investment of R9,144 over 20 years which means I'll receive a total return of around 332% or 11.6% per year. Regular readers know that my personal investment return target is 9.5% so this investment ticks the boxes and has some margin for error. Most importantly, every day the sun comes up and Spar Supermarket Belfast, Mpumalanga is still standing, I'm making money. I don't need to put in may more effort on my part.
Obviously returns are only a forecast as nobody can predict how bright the sun is or for how long over 20 years but despite having a couple of underperforming and a few overperforming projects, as a whole, the forecasts have been pretty accurate (I guess people have been predicting the weather for a while now!)
So that was how it all started, so how is it going 3 years on?
Well it would be fair to say I've become a bit of a sun worshipper despite the fact I can't lay in the sun for more than 5 minutes without being bored and complaining that it's too hot!
As at the time of typing I have invested a total of R4,400,000 / $275,000 / £220,000 of our life savings in solar panels. Which is right around a quarter of our net worth. So you could say I'm kind of into it. I'll do my best to explain why with the benefit of a few years experience.
Before I do that, let me write a quick disclaimer. This is not advice, I'm not suggesting this is the right investment for everyone or that you should invest in it, this is my opinions based on my experience and financial goals and position. I am not a financial adviser so if you are thinking of investing based on what you read, speak to someone much cleverer than me first, I'm not particularly bright!
OK, on with the show:
It feels like it's lower risk than traditional investments
You are buying a physical asset, the solar cell (or panel if you own more than 72). If things go wrong you will still own the asset. Now that doesn't necessarily work as you would need to go get it and remove it and bring it home and how do you divide up the cells if you only own a few? However, now that I own somewhere in the region of 650 solar panels, you could argue there is some level of security in that.
There are three point of risk as I see it, 1. Will the sun shine? - Answer: Yes, probably, it's been managing to do that for a few million years and South Africa has some of the most intense sun hours in the world. 2. Is the building still standing? - Answer: Yes, buildings tend to last a while and the installation is insured against things like storm damage anyway. Is the company still in business? - Answer: Yes, the projects are mostly on long existing and financially stable buildings like supermarket chains, schools, wine farms, old peoples homes etc. These buildings often have the same tenants for decades, I only need that to continue for 2 of those and if they do go out of business I can sign a rental agreement with the new tenant or get my panels back and deploy them somewhere else.
Look, it's not without risk but based on what happened in crypto this year and the stock market crash, it doesn't feel more risky than either of those to me.
The Returns Are Better Than The Bank
In South Africa on a good day I can get around 8% on a fixed deposit savings account which is pretty good and about as low risk as it can get, but its not enough, I need 9.5% and I like to get a bit more for a margin of error or any unexpected costs that may crop up in the future. My solar investments have average internal rates of return of 12.7% which is great, The FIRE 4% rule says you need inflation + 5% to never run out of money if you live on 4% of your net worth. The South Arica inflation rate for the past decade has averaged around 5% so 12.7% is enough and then some.
It's the equivalent of buying a salary
The rental you receive from solar investing rises by inflation plus a little bit extra each year so for an early retiree it's ideal because the returns are predictable and you don't need to factor in inflationary increases. To bring that to life, our monthly expenses are right around R70,000 / $4000 / £3,500 per month so if I buy enough solar panels that the rental offsets our living expenses I can guarantee our future income for 20 years and not have to worry about inflation. For us, that means I would need to grow my solar investment to around R10,000,000 / $625,000 / £500,000 so I'm right about half way. That will be achieved by re-investing our rental income and investing the profit from our side-hustles for the next 3-5 years. If I can achieve that by the time I'm 50, that's our living costs covered until I'm 70 and that's without any of my other investments all which will keep growing. Imagine that for a minute, the income for the rest of our lives taken care of by the sun, the bloody sun!
It requires almost no effort
I invest my money in a project, the project gets installed by the investment company, the investment company sorts out the rent, maintenance, insurance and everything else. I never meet the customer, in fact I never have to do anything except withdraw my rent and account for the tax in my return.
Its a compounding machine of note
Most investments work on this simple basis: You invest some money, you wait and after some time, you get your money back with interest. Its a transaction in and a transaction out and you repeat the process until you have lots of money, simples. Rental investing is slightly different, you invest your money and after a short installation period, you start to receive some of your money back each month, this means you can reinvest that money in more solar cells in other projects, compounding your returns and spreading your risk. This is essentially the same as the first example except you reinvest your returns much more quickly and the compounding happens much faster, Don't forget that the 12.7% IRR is based on you taking your money out and not re-investing it. Now I'm not clever enough to do a meaningful calculation to work out what 12.7% becomes over 20 years if I reinvest my returns for say, 5, 10, 15 or even 20 years but if one of my readers is a spreadsheet analytics jockey and would like to figure it out, I'd love to know and would happily provide data to calculate it (anyone?). What I do know from trying to work it out is that the magic of compound interest is fairly astounding when you're starting with 12.7% and reinvesting returns monthly.
It's tax efficient
If you live in South Africa, there is a little known section in the tax rules called Section 12b and it exists to encourage investment into renewable energy. If you make an investment in solar panels, you can depreciate the cost of those panels ( in the year they were installed ) 100% in year 1. So what does that mean in English? Well, if you're a high rate tax payer at 45% in SA and you buy R100,000 worth of solar panels, You can then claim 45% of the cost back in tax relief (R45,000) in the year you bought them. This means you have an effective cost of R55,000 but the equivalent rental of solar cells worth R100,000. Bearing in mind that doesn't factor in the calculation for 12.7% returns so using the roughest math ever, that would theoretically turn 12.7% into 23%. Now SARS and I have an understanding; they stay out of the management consulting business and I stay out of the tax business so take all of this with a pinch of salt and speak to a proper bona fide tax consultant before you wade in all macho like!
It's not for everyone
You may at this point have figured out that I really like this mode of investing and you'd be right, I bloody love it in fact. But it's not for everyone and there's some things you need to know to be eyes wide open. Firstly, there's no way of getting your money out once you put it in. There's no secondary market, you can't cancel and you can't ask for a refund. You are resigned to receiving rental income for the next 20 years. If you get into financial difficulty and need to liquidate your assets, the only way to do this would be to find someone willing to buy your investment and as you will have already taken the tax relief bit and they couldn't do it again, you are likely to get a lot less than you paid for it. I have bought some cells from other people looking to get out but it literally cost me money, not saved me. Secondly, it's boring It's not going to suddenly have a great year and out perform your expectation and make you rich like finding the new Tesla or Amazon. You're becoming an electricity company and they are boring! Thirdly and probably a culmination of the first two, if a new opportunity comes along, you can't pivot to it as you're stuck with solar. This could also be considered a risk, if someone invents hydrogen home power or wireless electricity tomorrow, your solar panels will become redundant and probably worthless within a short time. I'm betting that won't happen but what I am worried about is that the price of solar is coming down and the efficiency of solar panels is going up. This means that I'm putting solar panels that cost around R4,000 per panel and produce 350w on top of buildings today and in 5 years, maybe they're making 1000w panels that sell for R1000 each. Why would my customers not want to upgrade their panels to save more money and where does that leave my panel and in turn, me? I've thought all of these things through and I still like the investment but these are real limitations you need to understand before committing your child's inheritance.
The other "good to know" points are that it can take 3-6 months for your project to go live after you buy cells, This means it can easily be 7-9 months before you see rental coming back in. These are real solar panels being installed on real roofs and it takes time. Smaller projects are quicker and can take as little as 6-12 weeks but patience is required as nobody gets paid until the customer has used the electricity
Finally, this is a real business, pretty much the same as buying a property and renting it out (with less of the hassle). That means real things can go wrong, like covid! During covid, nobody was in schools and offices so they used less electricity, this means rent went down. Nobody's fault but it affected my returns for a year by around 20-30%. Investing in solar is no different than starting a business so you need the mindset to match, Spread your risk across investments and accept it's your business, not anyone else's. If it's going wrong, you can't blame anyone else and you can't do much about it but ride it out.
It helps the planet
Something that is becoming more important to me as I grow older is that I want to leave the planet in better shape than I arrived on it. That is to offset my entire life's impact on the eco system from the fossil fuels I've burned, the single use plastic demand I've created, the deforestation my braaiing created and the global warming my farts contributed to! Maybe then my grandchildren and their grandchildren can still have a planet earth to live on. I know this all sounds a bit "Eco-Warrior" and that's really not me but my career has been in the energy industry and I still consult for them today and that industry has survived on unknowingly (or who knows, knowingly) aging our planet permanently and it's not going to live forever. I have some reparations to make for my contribution to that and this is one of the ways I want to pay back. At the time of typing, my solar investments have prevented the creation of 250,988 kilograms of CO2. 1 ton of CO2 is the equivalent of a car driving 37,000 kilometres which is once around the world. So I've already saved the equivalent of driving 10,212,000 kilometres in a car. That's just the beginning.
Anyone can do it
My fire journey has taught me that the saying "you need to have money to make money" is often true in that I was locked out of so many high return investments because I was too "Small Fry" when I was trying to save up for retirement and while that has improved a bit, I'm still not able to participate in some of the most lucrative investments like Private Equity or Venture Capital but solar investing does not discriminate. A quick look at the investing platform I use tells me you can buy 1 cell in a project in a Cape Town residential block of flats that I drive past regularly and has been standing for over 50 years for R71 / $4 / £3 and has a 20 year forecasted IRR of 11.99%. Its currently 20% sold and has 266 buyers already (of which I am one). So if you don't have much money but want to start investing, you could do worse than skip the morning coffee this week and pick up a cell and see how it works.
Also, you don't have to be in South Africa to invest. While I'm a bit anti-crypto right now, you can pay for and receive your rental income in Bitcoin anywhere in the world. This is a real example of what Bitcoin was intended for and I do use it that way for some of my projects as if you convert your cash to bitcoin and immediately buy into a project, the value of bitcoin and it's massive fluctuations is not really a concern. Obviously, you would need to do the same with your rental and convert to cash as soon as you get it to avoid exposing yourself to crypto fluctuations but it manes you can be anywhere in the world and own solar. This appeals to me as I love living in South Africa but a lot can happen in 20 years so knowing I can continue to own the investment and have it paid to me in any country has some serious appeal.
It takes 5 minutes to get started
There are a couple of different platforms in South Africa and a couple more globally. I'm invested in both of the South African ones but I find my favourite by far is the Sun Exchange. It has a great active community, they're Cape Town based so I've been lucky enough to meet them and see that they're real and they communicate regularly and effectively regardless of if the news is good or bad (There was one problematic project this year that got cancelled after investment which has now been fully refunded) and they are happy to answer questions. Their platform is constantly improving and has a great dashboard where you can see all of your projects and how they're doing. Buying cells is as simple as transferring funds you your online wallet and buying cells on live projects. You get paid your rental automatically at the start of the month and you can either re-invest in projects, withdraw to your bank account or leave it in your wallet until you're ready to make your next move.
3 years in and still going strong
Well I think that little download covers most of what I've learned in the last 3 years. It doesn't take a genius to figure out this is close to being the ideal investment for me and I continue to invest my returns from other investments as well as the profits from my side gigs and plan to stop when I'm 60 (as with 20 years to enjoy the income, any later feels a bit pointless, without being too morbid!). I see it as a highly strategic tool in my FIRE arsenal which could have a profound affect on our future lifestyle and financial security. I also see it as a great safety net for when the markets are going down or we're in the middle of a crash. If I can live off my solar income I don't need to draw down under performing investments which is one of the biggest risks for an early retiree. Do I think it's a good option for everyone? Probably not but had it been around when I was 16 and starting my first job, I would have retired much earlier than 43. As always, do your own research and if you have a burning question I haven't covered, even on my own solar financials, as regular readers will tell you, I'm an open book so have at it in the comments and I'll try to answer any questions.
Finally, Gary, I hope this is what you were after and helps you with your decision. If any other readers have a topic or subject they'd like covered on Tribal Fi or would like me to update on a previous post, just let me know in the comments and I'll do my best to deliver.
Until next time, keep living.