Profit from backyard 'green power'

In 1958, Chairman Mao set China's steel production target for the year at 10.7m tons. It wasn't long before it became perfectly clear that the country did not have a hope of meeting it however flat out he demanded that its mills and mines should work.

So Mao roped in the general population with his "backyard furnace" plan. This forced millions of already exceptionally miserable peasants to build mini-furnaces in their villages and chuck in every piece of metal they had from wheels to door handles in a desperate effort to meet their mad dictator's need to "overtake America".

It was, of course, a total disaster. It wasted man-hours (which, given the ongoing famine, could have been better used in the fields). It melted down millions of perfectly good cooking pots. And while the target was eventually hit, as Jung Chang and Jon Halliday point out in their stupendous biography Mao: The Unknown Story (Vintage), even he admitted that only 40% of the steel was of any quality at all.

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All in all, the scheme represented a depressingly massive misallocation of resources in the name of meeting an entirely arbitrary target.

Does this sound familiar to you? Reading the section on the idiocy of it all in Chang and Halliday's book, I suddenly realised why it did to me: renewable energy.

Here in the UK, we have a target, too. We have committed to generating 15% of our electricity from renewable sources by 2020. Right now, we generate 4% of our electricity from renewable sources.

Given that we haven't long to go, that might make you think that we haven't a hope of meeting our target. But that's probably because you haven't taken account of Britain's backyard electricity generation plant plan.

From the beginning of next month, householders will be bribed via the feed-in tariff plan to help the government meet its target by installing some kind of renewable energy production capacity at home be it a mini-wind turbine or a roof full of solar panels.

This won't do much for the nation in the end all the evidence is that small turbines and home solar panels are a ludicrously inefficient and expensive way to produce energy (see www.monbiot.com for the evidence on this) and the bribes will have to be paid for by everyone via their taxes and energy bills.

But while micro-power generation might misallocate resources in a macro sense, it could really work out for anyone who has the cash to buy a few solar panels.

The electricity you buy from your energy company at the moment comes in at around 10p per kWh. But fit a "typical" photovoltaic solar system to your roof and you'll get paid 41.3p per kWh for it. Fit up your own little hydro plant, and you'll get around 20p per kWh. Go for wind, and you'll get up to 34.5p.

There's more. That's just the price you get for the electricity you use yourself. If you have any left over and export it to the grid (the energy companies have to buy it), then you'll get another 3p per kWh. Not that anyone will actually measure how much you export. Instead, in the beginning at least, to save the bother and cost of installing meters, this will just be "estimated", which will be helpful for anyone not actually exporting any.

Overall, says the Department of Energy and Climate Change, anyone installing a "well-sited" 2.5kW solar panel at a cost of around £12,500 is likely to earn £900 and get around £140 a year off their electricity bill from it.

And you won't just get this money for a year. You'll get it for up to 25 years (depending on which technology you install).

It will also be index-linked so your payments will rise every year along with inflation. And, absolutely best of all, for those of us still reeling from the small print of the Budget, it will be entirely tax-free.

So should you start looking into it?

Immediately. But there are risks. Each government should keep the long-term promises of previous governments but, given the state of the UK's public finances, all bets on that are probably off for the next few years.

Then there is the fact that you are risking your capital. Put your money in a savings account and you at least get it back when you want it. Use it to buy a wind turbine and you might not. Sure, a £5,000 turbine and its attached subsidies should add value to your house, should you sell it, particularly given the flow of income it should be offering. But again, given the volatility of our economy, that's not a given.

Still, look at the numbers and the deals look good even so. Let's say you've gone down the pricey solar panel route. You get back your £1,040. You pop that in a savings account every year at an annual 3%. After ten years, you'll have £12,300 and a few second-hand solar panels.

So you'll be a little ahead (by the value of the panels, such as that may be). But you'll still have 15 years ahead of you during which you will be making a real tax-free return of 8% or so a year. Makes you wonder why you'd bother with an Isa this year, doesn't it?

This article was first published in the Financial Times