Musing on… the future’s bright, the future’s green

A recent Grauniad article got me musing on energy futures (1).

MrsShrink works in sustainable energy and has had various roles from industrial purchasing to consultancy in the last 10 years. It’s probably the only thing she’d blog about on here, but for now I’ll lay some opinions on you with a big statement. Offshore power could be Britain’s next north sea oil. However, currently it is mainly overseas company investing, creating jobs and getting stuff done on the ground. See the massive investment by Siemens in the Humber region, which has made it ‘the envy of the world’ (2, 3). MrsShrink finds it barmy that as an island nation we can’t be energy independent using the resources around us. For a nice AV update, here’s a recent episode of Fully Charged News that covers some of the current investment:

I’m a great fan of Fully Charged, and plan to become a Patreon for all the hard work Jonny and Robert are doing (4).

The nuclear conundrum

This makes the recent decision by the government to invest massively in new nuclear power stations a bit bizarre. The new Wylfa power station on Anglesey will be built by Hitachi for >£15billion, requiring at least £5billion, but more like £9billion, of UK government money (5, 6). This is on top of the recent strike price of £92.50/MWh and investment in Hinkley Point C, run by EDF, which has been dubbed “the dreadful deal” (7, 8). This is not an argument against nuclear, per se. There is a defence argument for maintaining a number of active nuclear reactors to have the ability to produce military grade munitions (don’t let MrsShrink here me saying that). Hot off the press is commendable investment into new nuclear technology, to the tune of £200m (9). This includes £86m into a UK fusion programme (probably to replace our investment in the EU ITER, ejits), £32m for advance R&D for construction, £30m for supply chain, and commitment to clean up ‘legacy’ sites (10). Intriguingly, it will also see £56m for R&D into ‘advanced modular reactors’, seen by many as a move toward U-batteries; small reactors designed to operate intermittently or independently to decentralise supply (11, 12)

MrsFIREShrink deals with plenty of civil servants who are aware of and pushing for a decentralised grid. She was involved in recent R&D funding pushing the current decrease seen in wind cost /kwh to the grid, with a strike price of £50/MWh achieved (13). While this is likely a temporary artificial low, it follows a decreasing curve in renewable energy prices /kwh and cost for installation. International R&D is driving this. The losers here are UK based ‘big-6’ energy companies, who are mainly invested in traditional power supply methods and only now coming round to renewable sources. Interestingly ‘the city’ is fairly evenly split, probably due to the split of UK-based and world-based investment. The disconnect at a political level is between the current politicians in power and the civil servants. I wonder why…

The issue of baseload is often touted as reasons for energy not to be fully renewable. Hydro and pumped storage are one element of the reply. Building pumped storage plants like Dinorwig will provide robust, large-scale storage back-up (13). More of these are being built in abandoned industrial quarries and workings (14, 15). However this continues to follow a traditional power supply train of thought working with a centralised grid. The energy infrastructure and supply field is changing tremendously quickly, and so 10 year old articles don’t cut the mustard.

The current focus of R&D and rapid development is battery storage to solve the cyclic demand for power. Tesla have opened a massive powerbank in Aus (16), however Tesla gets lots of fanboi hype despite being considered the world leader in energy density for batteries. This work is also going on in California, and with more energy dense Li-ion and potentially solid state batteries in the pipeline, the technology is moving as fast as it can be installed (17). The grid and suppliers are struggling to keep up.

Bring the system down

The wider move to decentralise the grid, utilising the smart grid and home/ industrial supply makes sense from cost to the consumer/ company, and from a strategic point of view. Hard to blow up the power supply to an area if every home and factory is contributing. The top end consumer market is moving to home PV and wind coupled to battery storage. Again the excellent Fully Charged show covers this (18):

It’s difficult to find a clear graph to demonstrate just how fast PV costs have reduced. Most data is based on US, Asian or Australian costs, which says something about uptake. These graphs are taken from submissions made by Friends of the Earth to the old Department of Energy and Climate Change (19). Biased, but the data they’re based on is factually correct:

1605vw06.gif

1605vw07.gif

Wind:

REW_Chart3.png

What’s the picture on the ground?

The actual amount in use is again difficult to calculate. The graphs below run to 2016, and since then the Government has been playing around with the feed-in tariff, reducing and dis-incentivising (20). Capacity can be assessed on the amount of feed-in tariff being utilised and the supply being provided to the grid (21, 22):

As prices come down it will make increasing sense to have a bit of solar PV on your roof and a battery in your house to decrease your energy cost from the grid. This is limited but not prevented somewhat by our old house stock. Industrial energy use is changing more rapidly. To briefly summarise it is currently cheaper for many offices to retrofit solar PV and wind, with a hookup to the grid for peak demand, than to just buy from the grid at standard rates. For larger consumers, Combined Heat and Power (CHP) and microCHP plants running off natural gas with grid electricity sell-back is cheaper and more efficient.

The future?

So to get back to the original point, we are reaching a crossroads where either the ‘big 6’ or others recognise that offshore wind coupled to onshore solar PV and battery storage are most cost effective over lifetime of installation than traditional power plants for supplying grid baseload. The cost cross-over is nicely demonstrated when looking at long-term solar PV changes (23):

To date experts have been astonishingly bad at predicting the uptake and use of renewable energy (24):

IEA Solar Predictions for Global Installations

I like graphs

What we find interesting is who is going to invest in this and when; is it the ‘big 6’ (E.On are starting to), is it foreign energy companies, or will it be a smaller network of UK based suppliers (25). The government can’t seem to decide, but is erring on the big companies side; vis Hinkley C’s strike cost of £92.50/MWh for EDF vs solar PVs £50/MWh strike cost and offshore winds £57.50/MWh (8, 12, 26). Big oil companies like Shell are starting to clue up and get in as a way of surviving the death of fossil fuels (27). We’re looking at using a small renewable-only energy supplier for our home. It’s a time of huge change and potential for the energy industry, with lots of great opportunities for investors and new companies. We just hope the UK can find a way to lead the change again.

Have a great week,

The Shrink

References

  1. https://www.theguardian.com/environment/2018/jun/19/huge-mistake-britain-throwing-away-lead-in-tidal-energy-say-developers
  2. https://www.bbc.co.uk/news/uk-england-humber-43808806
  3. https://www.hulldailymail.co.uk/news/business/siemens-boss-says-humber-become-1513169
  4. https://www.youtube.com/watch?v=HYr7aGf0-wA
  5. https://www.thetimes.co.uk/article/taxpayer-bankrolls-15bn-nuclear-plant-at-wylfa-in-wales-0p7dnxfhq
  6. https://www.theguardian.com/environment/2018/jun/04/uk-takes-5bn-stake-in-welsh-nuclear-power-station-in-policy-u-turn
  7. https://www.ft.com/content/00be1bc4-64c2-11e8-90c2-9563a0613e56
  8. https://www.theguardian.com/news/2017/dec/21/hinkley-point-c-dreadful-deal-behind-worlds-most-expensive-power-plant
  9. https://www.gov.uk/government/news/new-deal-with-industry-to-secure-uk-civil-nuclear-future-and-drive-down-cost-of-energy-for-customers
  10. https://www.bbc.co.uk/news/uk-wales-politics-44634580
  11. https://www.theengineer.co.uk/nuclear-industry-sector-deal/
  12. https://renewablesnow.com/news/solar-pv-gets-lowest-strike-prices-in-uks-cfd-auction-465462/
  13. https://en.wikipedia.org/wiki/Dinorwig_Power_Station
  14. https://www.theengineer.co.uk/first-new-uk-pumped-hydro-scheme-for-30-years-given-go-ahead/
  15. https://www.theengineer.co.uk/pumped-hydro-storage/
  16. https://www.bbc.co.uk/news/world-australia-42190358
  17. https://www.theguardian.com/sustainable-business/2017/sep/15/californias-big-battery-experiment-a-turning-point-for-energy-storage
  18. https://www.youtube.com/watch?v=Ym8emBsYdMs
  19. https://publications.parliament.uk/pa/cm201012/cmselect/cmenergy/1605/1605vw34.htm
  20. https://www.theguardian.com/environment/2018/jun/27/uk-home-solar-power-subsidies-costs-battery-technology
  21. https://www.r-e-a.net/member/uk-solar/feed-in-tariff
  22. https://www.solarpowerportal.co.uk/news/exclusive_uk_installed_1.553gw_in_q1_2016
  23. http://ramblingsdc.net/Australia/SolarPower2.html
  24. http://www.visualcapitalist.com/experts-bad-forecasting-solar/
  25. https://uk.reuters.com/article/uk-rwe-renewables/rwe-ceo-eyes-15-billion-euros-annual-investment-in-green-energy-idUKKBN1JJ00R
  26. https://utilityweek.co.uk/orsted-orders-turbines-record-breaking-offshore-wind-project/
  27. https://www.edie.net/news/10/Shell-collaborates-with-Carbon-Trust-to-drive-lower-offshore-wind-costs/
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The Full English Accompaniment – How do footballers save their cash?

What’s piqued my interest this week?

A poor posting show on my part this week, as renovating our new property is sucking my spare time. In between sanding, painting, chiselling and sawing I’ve watched a bit of the World Cup. I’m not the greatest football fan. For me players spend far too much time finding ways to practice am-dram collapses to the floor, like a lot of very flustered Victorian ladies.

There is of course a huge amount of skill, time and effort required in the game. For this there is an eye-watering amount of money floating about. The received wisdom is that footballers chuck this away. See George Best’s quote:

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.

Some definitely do, with 40% going bankrupt as soon as the cheques stop arriving (1).  Keeping up with the Jones’ is one aspect, with a culture for 4x4s and designer wash bags. Others lose it in bad investment schemes or through gambling. A study in 2014 found football players are three times as likely to have a gambling problem than Joe Public (1). Other qualitative studies have examined the reasons; reportedly the excitement of placing big wagers coupled with the boredom of life away from football (2). Claims litter the broadsheets and tabloids of footballers being fleeced through ‘mis-selling’ of investments, losing millions (3, 4). The argument from the footballers is they don’t have time to examine the nature of the investment fully due to their training schedule (1, 3).

The footballers with boardroom balls

The smarter footballers seem to invest their gains wisely. Liverpool, along with other teams, sits it’s new signings down with investment and tax advisers following signatures meeting dotted lines (1). Broadly footballers investments seem to fall into three categories:

  • Bricks and mortar. Robbie Fowler made millions buying a vast property empire, and now runs a ‘Property Academy’ (5). Current England footballer Marcus Rashford is seeking to follow in his footsteps (6). Ramon Vera, Frank Lampard and Steven Gerrard have also done well out of property (7).
  • Riskier investments. Michael Owen dabbles in Crypto, and also has a race horse stables (8).
  • Running companies. Flamini the current standout here, running a biotech called GF Biochemicals (9, 10). Danny Mills works for a private equity firm turning around SMEs (7). Rio Ferdinand has hands in lots of pies, including restaurants, along with Gary Neville and Ryan Giggs (7). Pubs still seem to be a major feature.

What do we learn? Footballers are getting smarter and investing more wisely. The flash-cash culture remains, but for many putting money away is now seen as a norm. Footballers fall foul of the same errors every other investor does. Do you our research chaps/chapesses.

Have a great weekend,

The Shrink

 

Side Orders

News:

Opinion/ Blogs:

What I’m reading:

Eric by Terry Pratchett – light relief

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.fourfourtwo.com/features/why-do-so-many-footballers-end-broke-fourfourtwo-investigates
  2. https://www.moneynest.co.uk/bankrupt-footballers/
  3. https://www.independent.co.uk/news/people/former-arsenal-and-manchester-united-stars-face-ruin-over-millions-in-unpaid-tax-a6725926.html
  4. https://www.mirror.co.uk/news/uk-news/footballers-caught-30m-investment-scam-9203381
  5. https://www.mirror.co.uk/money/how-robbie-fowler-became-one-6647339
  6. http://www.mortgagesolutions.co.uk/news/2017/09/06/england-footballer-marcus-rashford-sets-property-investment-firm/
  7. https://www.standard.co.uk/lifestyle/esmagazine/net-profits-the-ex-footballers-winning-in-business-9531960.html
  8. https://www.cnbc.com/2018/03/21/michael-owen-former-england-footballer-joining-cryptocurrency-space.html
  9. https://www.ft.com/content/9ce7490c-184e-11e6-bb7d-ee563a5a1cc1
  10. https://bit.ly/2to2Y70 (Google search)
  11. https://www.bbc.co.uk/news/business-44479925
  12. https://www.bbc.co.uk/news/business-44570931
  13. https://www.bbc.co.uk/news/health-44516123
  14. https://www.moneywise.co.uk/news/2018-06-18/equitable-life-shuts-down-what-should-policyholders-do?
  15. https://www.moneywise.co.uk/news/2018-06-19/visa-responds-to-treasury-committee-its-system-failure
  16. https://www.thetimes.co.uk/article/house-prices-set-to-rise-20-in-three-years-3pbdwk2nz
  17. https://www.theguardian.com/environment/2018/jun/19/huge-mistake-britain-throwing-away-lead-in-tidal-energy-say-developers
  18. https://www.theguardian.com/commentisfree/2018/jun/20/millennial-house-home-ownership-renting
  19. http://monevator.com/weekend-reading-brexit-enters-the-terrible-twos/
  20. https://youngfiguy.com/how-i-invest-my-money
  21. http://diyinvestoruk.blogspot.com/2018/06/sipp-drawdown-year-6-update.html
  22. http://www.retirementinvestingtoday.com/2018/06/resignation-in.html
  23. http://financialindependenceuk.com/2018/06/19/1356/
  24. https://littlemissfireblog.wordpress.com/2018/06/19/1179/
  25. https://cashflowcop.com/net-worth-share-not-share/
  26. https://sexhealthmoneydeath.com/2018/06/16/heigh-ho-heigh-ho/
  27. https://simplelivingsomerset.wordpress.com/2018/06/18/shares-beat-housing-even-in-blighty/

The Full English Accompaniment – Question Time Chapter I

What’s piqued my interest this week?

I’d like to start off this week with a little thank you to Weenie, YFG, TI, and a welcome to all new readers. After a few discussions with YFG and Weenie on last week’s Full English, Weenie said some very kind things in her blog (1).  This combined with a mention on Monevator by TI in this week’s weekend reading has meant my readership exposure has shot up (2). When I saw the stats, my eyebrows tried to keep pace with the graph. Hopefully they’ll be return from my hairline soon.

Following our discussions, YFG, Weenie and I all appear to have set up accounts with Starling bank. If you’d like to join too, this link will act as a referral code (3). There’s no monetary reward, but I do get some little hearts in my app. Ain’t that nice. Since Martin Lewis recommended them on his ITV show the application process has slowed a little, but it’s still pretty painless (4).

Back to The Full English proper. This week I’ve been starting to develop an investment strategy. Monevator, as the doyen of passive investing UK blogging, of course started my journey with the guides to passive investing (5). Tim Hale’s Smarter Investing, Intelligent Investor and the essays of Warren Buffett are also in this list and in my reading pile.

Why don’t I just bang my spare cash in a Vanguard LS100 or LS80? Certainly the Evidence-Based Investor further supported the previous analyses that I’d expect better returns than most active funds (6). It’s too simplistic for me; I want more control.

So what about some active funds, which ones to choose? How do you pick your international exposure, and is it (should it be?) something that changes over time? I had a read through Moneywise’s first 50 funds for beginners (7), and started to build a list of active funds which contained interesting companies and investments. This is by no means finalised.

I was led to wonder should I just invest directly in shares, and cut out the middle man. After all, stocks and shares go up over time (8). Some fantastically-timed posts came out from the diy investor UK and John Kingham at the UK Value Investor (9, 10), highlighting the basics of share investments strategies. There was also a guest post over at TheFireStarter about investing outside of the UK and the FTSE100 (11). I started to build a list of companies I’d invest in, mainly in mining – a whole separate blog post.

To balance the risk of shares, I thought about bonds. Good timing as ever, in the week that NS&I cut it’s maximum bond deposit from £1m to £10k (12). I went back to Monevator again to look at corporate bonds (13). A short hop from there to P2P lending, including Ratesetter, and then through TFS again to The House Crowd for property investment (14, 15).

A lot to take in and muse on, without even getting into Cryptocurrency. Five years ago a financially savvy friend suggested I buy some bitcoin. At the time as a student my main financial concerns were the effect on alcohol prices of inflation, the corresponding waistline inflation, and how many pound-a-pint nights my student loan would stretch to.  I continue to prefer the volatility of a works night out to bitcoin valuation.

Which is where this blog ends with a question. Where did you, reader, find the information to guide your investment strategy?

 

Have a great weekend,

The Shrink

Side Orders

News:

Blogs/ Opinion pieces:

What I’m reading:

I’ve recently finished When Breath Becomes Air, by Paul Kalanithi, and would completely recommend it. Wonderfully written, it’s the memoirs of a neurosurgeon who sought to find meaning, fulfilment and an understanding of purpose in his work and through a masters in literature, before finding it as he approached his own death from cancer in his 40s.

Eric by Terry Pratchett – light relief

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor – new to my bedside

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. http://quietlysaving.co.uk/2018/06/14/murmuration/
  2. http://monevator.com/weekend-reading-pervasive-passive-investing-is-becoming-the-reality-of-financial-services/
  3. https://www.starlingbank.com/referral/?token=4M8AJ64A
  4. https://www.thesun.co.uk/money/6517056/starling-bank-account-martin-lewis-recommendation-app-crash/amp/
  5. http://monevator.com/category/investing/passive-investing-investing/
  6. https://www.evidenceinvestor.co.uk/good-vanguards-active-funds/
  7. https://www.moneywise.co.uk/moneywise-first-50-funds
  8. http://awealthofcommonsense.com/2018/06/why-do-stocks-generally-go-up-over-time/
  9. http://diyinvestoruk.blogspot.com/2018/06/become-dragon-owning-shares.html?m=1
  10. https://www.ukvalueinvestor.com/2018/06/stock-market-investors-think-like-property-investors.html/
  11. http://thefirestarter.co.uk/guest-post-dont-invest-ftse-100/
  12. https://www.thetimes.co.uk/article/treasury-backed-bank-national-savings-and-investments-slams-door-on-wealthy-savers-tfmpfz3fr
  13. http://monevator.com/what-are-the-benefits-of-corporate-bonds/
  14. http://thefirestarter.co.uk/may-expensesincome-report-honey-bought-shed/
  15. https://www.thehousecrowd.com/property-investment-opportunities
  16. https://amp.theguardian.com/careers/2018/jun/11/starling-bank-anne-boden-diversity-financial-crisis
  17. http://money.cnn.com/2018/06/15/news/companies/citibank-libor/index.html
  18. https://www.bbc.co.uk/news/business-44466063
  19. https://youngfiguy.com/the-annual-allowance
  20. http://quietlysaving.co.uk/2018/06/08/i-like-driving-in-my-car/
  21. http://thefireeng.com/trialling-fi/
  22. https://deliberatelivinguk.wordpress.com/2018/06/08/may-2018-review/
  23. https://quittingteachingblog.wordpress.com/2018/06/07/may-2018-holiday-spending/#more-202
  24. http://www.thefrugalcottage.com/you-need-to-find-your-why/
  25. https://firevlondon.com/2018/06/11/may-2018-exits-behaving-like-buses/
  26. https://www.ukvalueinvestor.com/2018/06/bt-ceo-jumps-ship.html/
  27. https://rockstarfinance.com/create-your-own-basic-income-before-its-too-late/
  28. http://monevator.com/life-insurance-and-protection-a-primer-or-why-you-should-buy-renewable-term-life-cover-most-of-the-time/
  29. https://www.moneywise.co.uk/scams-rip-offs/fight-your-rights/investment-opportunity-or-load-bull

The Full English Accompaniment – Are banks safe?

 

What’s piqued my interest this week?

One of my threads of thought this week has followed the TSB issues and a Radio4 Moneybox episode a few weeks ago. It transpires that fraudsters used the opportunity to see others bank account information during TSB’s blunders as a a good ticket to cash-out town. This week we had the admission from TSB that at least 1300 customers lost money due to fraud as a result of their IT changeover (1). Nils Pratley at the Guardian sums it up nicely; for all TSB apologises, it doesn’t change the incompetence (2). Between this, and a discussion with YFG on an old Full English about the TSB debacle, I decided to have a chat with some friends who work IT security. One is a white-hat hacker, the other works as an IT security consultant and provides subcontracted coding services (as well as currently writing some code for a little spin-off). Both confirmed what I had read before; that the monolithic goliaths that are the main high street banks have pitiful IT infrastructure.

It makes sense. These are banks founded on the premise of an on-site vault, a list of ledgers and a network of staffed branches. Their IT was adopted ad-hoc, as a necessity, developed or brought in to fit the old model. The old model was anachronistic, it included human foibles and errors, and a degree of leniency to allow for it. Trying to bring in coders, explain and then cram all that into Windows 3.1, then 95, then 2000, etc was never a long term solution. IT departments are not the moneymaking focus of a high street bank, they don’t win all the praise, so the funds will only stretch to essential patching. This is not safe. Threadneedle street is trying to combat this by setting cyber security challenges to recruit IT experts to bolster their security (3)

Sadly, there lies my concern. A bank, by definition, should be a safe place. Your money no longer resides in a huge locked vault. It sits on an online ledger, protected by minimally patched although mostly secure firewalls and security systems. Security systems prone to outages and instability, as Tesco Bank customers found this week (4).

Which is why I find ‘challenger banks’ so tempting. The Starling Bank CIO, John Mountain (strong name), was interviewed last September about working at a bank that is challenging traditional IT thinking (5). Starling have released their API and ran a hackathon of their systems at London Campus in April this year (6). Anne Boden, the Starling CEO, is reported to have said that a bank should not have an IT department, as it’s whole business is now IT. In John Mountain’s words:

“We don’t run a technology function here because the whole business is a tech function”

Will I move all my money into ‘challenger banks’? Probably not. The Rothschilds’ don’t throw their banking system out with the bathwater every time there’s a systemic crisis. Traditional banks will have to learn the hard way, as TSB are doing. For the time being I’ll split my pots as, after all, a bit of diversification can’t help can it?

Have a great weekend,

The Fire Shrink

Side Orders

News:

Blogs/ Opinion pieces:

What I’m reading:

When Breath Becomes Air by Paul Kalanithi – Useful for a sense of perspective

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.theguardian.com/business/2018/jun/06/tsb-admits-1300-customers-lost-money-from-accounts
  2. https://www.theguardian.com/business/nils-pratley-on-finance/2018/jun/06/tsb-apologises-a-lot-but-its-real-problem-is-about-competence
  3. https://www.cio.co.uk/cio-interviews/bank-of-england-cio-robert-elsey-sets-cyber-security-challenge-3678401/
  4. https://www.theguardian.com/business/2018/jun/05/tesco-bank-customers-shut-out-from-online-and-mobile-services
  5. https://www.computerweekly.com/news/450426542/CIO-interview-John-Mountain-Starling-Bank
  6. https://www.starlingbank.com/hackathon/
  7. http://www.bbc.co.uk/news/business-44366731
  8. https://www.telegraph.co.uk/finance/newsbysector/transport/8613090/Crossrail-financed-by-600m-bond.html
  9. https://www.theguardian.com/society/2018/jun/08/nhs-workers-agree-pay-rise-three-years
  10. https://youngfiguy.com/why-having-your-hopes-and-dreams-crushed-can-be-a-good-thing
  11. http://diyinvestoruk.blogspot.com/2018/06/equities-outperform-bonds.html
  12. http://blog.letsventure.com/investor-insights/top-9-tips-to-be-a-successful-angel-investor/
  13. http://www.collaborativefund.com/blog/the-psychology-of-money/

 

Frugal Motoring – The PCP black hole

Sadly not an angel dust-fuelled night club.

Once upon a time you walked into greasy Tony’s car dealership, slapped down your hard saved cash, and walked out with a creaky Lada/ British Leyland motor with build quality as questionable as Katie Hopkins.

Now we walk into a car megamart warehouse to be met by bright young things in shiny suits and pleather brogues. If we feel we are worth it we walk into glass prisms of monochrome and steel to be fed posh coffee by bright young things in shiny suits and pleather brogues who tell us we are definitely worth it, sir.

The world of buying a car has changed a lot, and numerous products now cater to whim and desire to self-indulge. The current petrol on the bonfire of consumer car culture is PCP, or Personal Contract Purchase, sometimes confused with Personal Contract Leasinging which is a more traditional rental option.

What is PCP?

A very clever tool to sell cars.

PCP is essentially a loan on the depreciation on a car you ‘buy’. You don’t really own the car despite assurances to the contrary (although this is a whole other thorny area). You pay a deposit, then a monthly payment on the loan that finances the value the car loses in your use, then hand it back to the finance company at the end or buy it off them. Money Saving Expert says it better than I can (1):

It’s one of the more complex financial products available to help you buy a car, but it can be broken down into three main parts:

The deposit (usually around 10% of the car’s price).Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers’ finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you’re buying a new car but only if you take their finance – eg, VW Finance offers £1,000. The larger the deposit, the less you’ll have to borrow.

The amount you borrow. The amount you’ll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you’ve put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs are 4%-7%.

The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It’s agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.

So far so clever, the difference to a more standard agreement such as Hire Purchase being that you are not paying for the whole of the vehicle, just the depreciation. Therefore the monthly payments are much lower. This, combined with various incentives such as the ‘scrappage scheme’ (hack-spit) have meant that new cars are available to people previously unable to afford them. Often with these contributions and incentives the cost of a new car is lower than a used car for monthly payments. A worked example from Carbuyer (2):

– A new car costs £25,000
– The GMFV after three years is £15,000
– Over three years, you need to cover £10,000
– Subtract the a deposit of £1,000
– You’ll pay the remaining £9,000 over 36 monthly payments of £250

And some from national car retailers:

As Graham Hill, director at the National Association of Commercial Finance Brokers, says (3):

“Drivers who might have been looking at hire purchase on a second-hand Ford Focus can find themselves paying less on PCP for a brand new BMW 1 Series or a Mercedes A-Class”

Which is where some of the warnings begin.

The cautions

PCP is a complex product often used to sell high value items to people who may not be as financially savvy. As a complex financial product, there are often T&C’s to be aware of. A recent survey by the CarGurus found 9 out of 10 people didn’t understand the small print of their PCP contract (4). Though there are many online guides to PCP, that same survey found although 91% of people thought they had a good grasp of car finance, only 47% knew what PCP meant (4, 5).

Two big stings are the condition the car is returned in, and the agreed mileage limit. The condition is a standard agreement that the car will be returned in good condition ready for sale at the end of the term. This is usually assessed by the finance company, and repairs charged at in-house rates. That parking ding can quickly becomes £hundreds to repair, with limited ability to contest. If you happen to crash the car, or it is seriously damaged, you have to buy out of the deal, usually with a penalty. For servicing, some PCP deals require you use the manufacturer/ sellers in house servicing department, placing you over a barrel.

The agreed mileage limit is another bit of small print worth looking at. In seeking a good GMFV most finance companies set low average mileage limits (5-10k common). Go over that and every additional mile can be charged, typically at 5-10p a mile (5). So that 5k extra a year costs you £500 at 10p/mile, but with some bombsite backstreet dealers charging 30-50p/mile (6). Going back to that CarGurus study, more than half of those surveyed didn’t know what the penalty charges were on their contract (4).

The Canary

Warning sounds are beginning to be made about PCP for two reasons. The first is a flashback to 2008’s grim figure, sub-prime lending. It is unclear how many loans made for PCP in the UK were sub-prime, that is to people who will probably default. The car finance industry states it to be around 3% (7), but given the demographic PCP is aimed at this seems low. Outside of those selling PCP, economists at the BOE have privately expressed concern (8). The sale of sub-prime auto loans in the US is already becoming big business (9).

The BOE’s concerns touch on some of my own. PCP leaves the lenders exposed in many ways. An economic downturn could mean a default on that PCP loan (10). The same economic downturn could knock value of second hand car values and residuals, therefore devaluing the asset. The value is highly dependent on the GFMV.

PCP is often sold as ‘this is the minimum it will be worth at the end, but if it’s worth more then the equity can be used on another car’. The issue I have with this is that values are estimated years in advance, while on the ground prices change with fashion, numbers sold and all the other factors that effect car residuals. If most cars are being bought on PCP, as the people who used to buy the cheap secondhand car now buy a new one on PCP, the demand and value drops off in the second handmarket. We’re already seeing that at the bottom end of the market, with a bumper crop of cheap serviceable vehicles. Additionally a car manufacturer may be the focus of a scandle (say relating to falsified emissions results), which knocks consumer trust and desire for the brand and knocks prices. Ultimately someone will be left holding the difference between the predicted value and the actual value; an overexposed lender or a broke consumer. We are beginning to see this, but the train is still coming down the tracks. Rant over.

The final caution is on the reason people buy PCP deals. Some argue they will save on tax or help the environment compared to their old car (false economies for the most part, and a sad endictment of our broken car tax system). Others want a reliable car that’s in warranty that functions as a white good and can just be used. Here the disconnect is new=reliable, which is a cognitive bias that’s not always the case. More on that another time.

TL:DR

PCP is good if:

  • You read the small print
  • Maintain the car impeccably
  • Do less than the mileage limit
  • Don’t mind an unfashionable, unflashy car
  • You can afford to buy out of the PCP if something untoward happens.

PCP is not as good if:

  • You don’t read the T&C’s
  • You do big mileages and work the car hard
  • You want a flashy fashionable car
  • You can only just about afford it

As with any purchase, a car on PCP is a personal choice. There are risks, but with discipline and sense it can work. Just not my cup of tea.

Next time on Frugal Motoring- Bangernomics

Have a great week,

The Fire Shrink

N.B. If you are thinking of getting a car on PCP, check out Ling’s Cars, if only for the WTF.

References:

  1. https://www.moneysavingexpert.com/car-finance/personal-contract-purchase
  2. http://www.carbuyer.co.uk/tips-and-advice/152049/pcp-deals-explained-what-is-pcp-finance
  3. https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://amp.ft.com/content/8bd9da60-0a5d-11e7-ac5a-903b21361b43&ved=2ahUKEwiJ_8Sa6rnbAhXJNcAKHYeaB9kQFjAIegQIARAB&usg=AOvVaw36J7T_jfEnveDLZBnGirde&ampcf=1
  4. http://www.thisismoney.co.uk/money/cars/article-5380867/Britons-oblivious-costs-risks-car-finance-deals.html
  5. https://www.thecarexpert.co.uk/how-to-understand-a-pcp-car-finance-quote/
  6. http://www.thisismoney.co.uk/money/cars/article-5388333/Avoid-mileage-penalties-car-finance-deal.html
  7. https://www.theguardian.com/money/2017/jul/02/car-leasers-publish-sub-prime-lending-figures-mps-charities
  8. https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/
  9. http://www.ifre.com/sub-prime-auto-puts-more-junk-in-trunk/21343681.fullarticle
  10. https://www.theguardian.com/business/2017/jun/10/car-loans-personal-contract-plans-vehicle-financial-crisis-pcp

The Financial Dashboard – May 2018

The goals for this month were:

  • Set up a regular savings account to build an emergency fund. This may either be a regular saver or a high interest bank account Achieved
  • Set up a Starling/ Monzo/ Atom/ Revolut account for day to day transactions. Fail
  • Reduce mortgage and rent outgoings Achieved
  • Sell five items from my hoard Fail
  • Set a monthly budget for hobbies Achieved

 

May 2018 Dash

A very big month in our household for various reasons. Crossing the £20k net worth mark went un-noticed, and for the first time in three years I wasn’t in my overdraft at all. My assets increased:

May 2018 Assets

Goal achieved: I set up a regular savings account. Utilising the Santander 1-2-3 offer to open a 5% interest savings account which I’ve filled to their maximum (£200). I’m not actually sure if I’m going to use this as an emergency fund. I was reading The Fire Engine’s post about emergency funds and thinking about liquidity (1). Although Santander’s documentation specifies sums can be withdrawn, I think I’ll use another high interest current account for rainy day cash. A regular savings account carries too much disincentive with withdrawal.

Goal failed: I didn’t set up a Monzo/ Atom/ Revolut/ Starling account. I looked into it but realised as we’re in the process of moving (twice), it’ll be easier to set up once I have a stable address.

Not much change on the liabilities front, though this is set to change with house moves. The credit card went up and down with wedding expenses, but has started reducing regularly now:

Liabilities May 2018

Goal achieved: Plan was to set a monthly budget for hobbies. I set one for everything.

I read a variety of opinions on budgeting while I was setting my own (2,3,4,5). In the end I opted to use a YFG wall-street-banker style approach, setting goals based off my actual expenses for the past six months (6). The poor rip from my Beast Budget spreadsheet looks a little like this:

 

 

I’ve under-estimated my income, using the approx lowest I received during the six months. Nearly £5k entered my account this month, but that included a refund on the bond of a rented property, refunds of expenses, some sold items and some wedding funds.

Goal failed: I didn’t sell five items from my hoard. I listed five, sold three, one for a fairly substantial sum. I use specific forums to sell these rather than eBay/ Gumtree, so may venture into the general public for the next sales. I have a vast amount of tat hoarded ‘just in case’.

Of my expenses, nearly £1300 went on various items for our property and wedding. Unavoidable. I transferred part of the rental property bond into MrsFireShrink and I’s joint account, which I don’t include in my FI story. MrsFireShrink is very frugal, and all our household expenses go through the joint account. This is also where the Home section goes to, including our rent and mortgage…

Goal achieved: Reduce mortgage and rent outgoings. Done this, with significantly more to come. Having moved across the country for work leaving our lovely home behind, we’ve been renting for quite some time. This meant servicing mortgage AND rent, for a combined total of £1950/month. Once household expenses (gas, electricity, council tax, etc) were added in we were both putting £1250/month into our joint account. We’ve moved into a smaller rental temporarily which will cut £200+ off the outgoings, and once property sales/ purchases complete we’ll be back down to just servicing the mortgage. I’ll adjust the budget appropriately at the time, freeing up around another £400/month for investment.

I bought some new tyres for one of my cars which dented the coffers. I could count the cars under investments or something else, but they’re currently under transport. I suspect I’ll end up making a separate Hobbies category.

We also went out for dinner or got take-away a lot this month. Our excuse was social events and moving house (so not being able to cook), but we need to manage this properly.

Goals for next month:

  • Set up a Starling/ Revolut/ Atom/ Monzo account – carried over
  • Sell five items from my hoard – carried over
  • Reduce daily living (groceries and lunch out) and entertainment expenses to budget
  • Eat out a maximum of once a week
  • Repair or purchase a new bike

Happy June everyone!

The Fire Shrink

References:

  1. http://thefireeng.com/wheres-your-emergency-fund/
  2. http://www.thefrugalcottage.com/how-i-organise-our-finances/
  3. http://thefirestarter.co.uk/question-time-frugality-end-tight-begin/
  4. https://littlemissfireblog.wordpress.com/2018/05/08/frugal-challenge-setting-the-challenge/
  5. https://tuppennysfireplace.com/frugal-people-always-do-organise-finances/
  6. https://youngfiguy.com/how-to-budget-like-a-wall-street-banker

The Full English Accompaniment – Just a quicky

What’s piqued my interest this week?

In short, not a lot, as I’ve not had much time to read the news and I’m currently not enjoying the level of misery journalists seem to revel in. Various big changes in our household have kept me occupied which I’ll blog more about in The Financial Dashboard. One of these is my first budgeting attempt, and in preparation I’ve been reading a few different blogs for opinions/ instruction.

What has caught my eye is the continuing IT debacle of the big banks. TSB’s IT woes/ fraud rumbles on and then on Friday VISA had a wobble (1). Barclays are tightening lending criteria, citing Brexit, but are also launching a ‘Northern Powerhouse’ SME fund (2, 3). Between this and the new US tariffs potentially starting a trade war, it looks like things are going to get a lot less predictable (4).

Finally on a lighter note; Which? have announced that quick washes aren’t cheaper after all, as they don’t clean your clothes, so you have to wash them again (5). Quelle surprise.

Have a great weekend,

FireShrink

Side Orders and Comment:

A mixture  of new blogs and new reference sites this week:

And a Happy Birthday to the Frugal Cottage!

http://www.thefrugalcottage.com/the-frugal-cottage-turns-4/

What I’m reading:

When Breath Becomes Air by Paul Kalanithi – Useful for a sense of perspective

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. http://www.bbc.co.uk/news/uk-44341070
  2. http://www.bbc.co.uk/news/business-44323693
  3. http://www.bmmagazine.co.uk/news/barclays-launches-500m-boost-to-northern-powerhouse/
  4. http://www.bbc.co.uk/news/business-44324565
  5. http://www.bbc.co.uk/news/uk-44340082