There are companies building wind and solar farms that appear to be offering a significant rate of return for investments over £5,000. The rates are between 8% and 12%, which is very generous compared to the low rates banks are offering on savings, though they do ask to tie your money up for several years, with the interest paid after the first year. Are they a safe investment?
While the returns from these investments can appear very attractive, particularly with interest rates at such low levels, it would be a mistake to compare them directly with those from savings accounts. These investments advertise much higher returns because they are much higher risk.
Many renewable energy projects, while seemingly a good story, have not yet demonstrated that they make reliable investment opportunities and so potential investors must approach with caution. The challenges for these investments are even greater if we have a sustained environment with a low oil price and lower energy costs generally.
The most reliable form of renewable energy is probably solar, and this is where many investments have been focused. There isn’t a huge differential in the number of sunlight hours year on year, and solar investments can benefit from low maintenance costs, consistent earnings and projects can last over the long term. However, we’ve seen solar firms going into administration, in part due to cut backs in government subsidies, which could demonstrate how much of the renewable energy sector still needs external support.
There is liquidity risk as these investments aren’t typically traded on any listed exchange, meaning investors are unlikely to be able to access their capital during the term. You also need to be aware that, unlike with most UK-based savings accounts, investors cannot usually fall back on the Financial Services Compensation Scheme (FSCS) if it all goes horribly wrong and their provider is unable to pay interest or repay their capital.
So while there is the potential for good returns, these cannot be considered as safe investments and those who do invest need to have a clear understanding of the risks they’re taking.