Transition Culture

An Evolving Exploration into the Head, Heart and Hands of Energy Descent

Transition Culture has moved

After eight years of frenzied blogging at this site, Transition Culture has moved to its new home. Do come and join us, but feel free to also browse this now-archived site and use the shop. Thanks for all your support, comments and input so far, and see you soon.


18 Oct 2011

Community Renewable Energy Finance 2.0

Today’s post is by Fraser Durham of Anahat Energy, and suggests a different model for community renewable energy finance, which could be very useful for Transition initiatives. 

In a world where income disparity is increasing and social regression is inherent in the current structure of the UK’s Feed-In Tariff (FIT), we need to rethink how community renewable energy projects are structured & financed to ensure full community benefit lies at the heart of the process and that energy reduction is still focused upon as part of a community “power down” process.

Community renewable energy projects generally follow one of two structures: developer led or community led. In the former, a developer takes the pre-construction risk and a majority ownership stake in the renewable energy project. If the project receives planning permission then the developer will invite the community to fund the balance of the project up to their agreed equity value.  In the latter, the community raises the finance, takes the planning risk and tenders different parts of the project development to professional advisors.

In both cases, the predominant form of finance is equity-based – typically, for the community, via an Industrial Provident Society (IPS).  In the first structural option, a developer (probably not based within the community) takes a majority share of the profits. In the second, the community investors would receive all / the majority of the project’s profit, yet taking a higher level of risk.

The key message is this- in both cases, it is only those with the capital to invest that receive the benefits (read profit) of the project.

The problem with this is 2-fold.

Firstly, the returns that the developer / community investors receive from the FIT is a result of a slightly increased energy cost for the 20 million plus homes in the UK – socially regressive as anecdotally it is the wealthy who have the money to invest, and the least well-off who do not.

Secondly, investors are focused on energy generation. There is no focus on using their money to solve the real problem of reducing our current energy demand – particularly in the homes of those who are least well-off and do not have the capital to invest in energy efficiencies.

What about the Green Deal? Well, this will only provide loans of up to £10,000 and this will only be for those investments that meet the “golden rule” of savings equalling costs. The average house probably needs investments in the order of £25,000. Hence, more capital will be required to do the job properly and most of the capital investment required will be for investments that are unable to meet the golden rule

But, let me get back to the point.  We need structures that benefit the wider community – especially those that are unable to invest. By taking a slightly different approach to financing community renewable energy projects we can start to generate income for those households that really need help.

The key “tweak” in the current model is to start debt financing a larger proportion of the community renewable energy projects – what I call community renewable energy finance (CREF) 2.0.

Imagine the following renewable energy project. It has a total cost of £500,000 and will generate £100,000 per year in FIT income. By raising 25% via an equity offering (via the local community to pay for development costs) and borrowing the rest (let’s say at 5% via social loans) then the high-level numbers are as follows:

  • Equity: £125,000
  • Debt: £375,000
  • Debt Repayment for 10 years (capital + interest): £56,250 1st year. & decreasing
  • Sinking fund (for a new project after 20 years): £25,000 p.a.
  • Profit in year 1 (before other costs): £18,750

In the current model, the entire £18,750 would be distributed to those investors who had capital to invest, leaving none to be re-invested into those areas that find finance difficult to access. In CREF 2.0 there will be 75% of this figure (about £14,000) left to re-distribute where required.

This is the money that can be used to invest in energy efficiency and reduction in those homes that do not have the capital to invest – a radical opportunity from a not-so-radical change in the financing model. In essence, those households within the community that cannot afford to invest, still receive the benefit from the local renewable resources which they generally share i.e. sun, wind, wood etc.

It requires communities to start taking the harder route i.e. not giving up equity stakes to development businesses and maybe taking on more of the risk. This can be mitigated by pre-agreements to buy developments at “cost plus” or by taking on more of the risk of the development themselves – lowering the risk through using affordable renewable energy development businesses.

It does not take a genius to work out that grants are a thing of the past and that we have to get smarter as communities to create structures that have maximum benefit for the maximum number of people.  CREF 2.0 also has an added benefit 9which I have discussed before in other blogs).  The more money that you can keep local, the greater the economic multiplier and the the economic benefits of cash injections into the local economy.

Let’s start getting smarter about the way we finance renewable energy projects at the community level and ensure we all benefit.

Comments are now closed on this site, please visit Rob Hopkins' blog at Transition Network to read new posts and take part in discussions.

8 Comments

Kevin Frea
18 Oct 9:08am

The importance of focussing the benefits of community energy projects on those in ‘fuel poverty’ cannot be overstated and I agree that the current system of community investment doesn’t often do that, although many projects balance the need for offering a competitive return to investors with the need to raise money to invest in such projects, as we are doing in Gloucestershire Community Energy Coop.
There was (and possibly still is) an opportunity to use community investment to install solar panels on low income household roofs. If anyone is interested in exploring this then do contact me, though with a dramatic cut in the FIT forecast for next April time is very short.

ChrisB
18 Oct 9:53am

Fraser – I was awake half of the night coughing and thinking about these very issues and here is your piece on Rob’s Blog giving me the opportunity to comment!
You are absolutely right to identify the inequity of FiT and discuss how we could address this but if this is the best we can do it’s just a drop in the ocean. Let’s take a typical town of 10,000 people as an example.
That’s around 4,000 homes at an average cost of £25,000 to retrofit them to levels of energy efficiency needed to meet even the government target of cutting carbon by 80% by 2050. If we assume 25% of those households are low income and without the means to fund the improvements themselves then that adds up to over £25,000,000! And how much do we get from a single turbine – just £14,000 per annum! So it only takes a little under 1800 years to solve the problem. I don’t guarantee these figures or my maths but you get the idea – there’s a big gap.
I would suggest a few changes to address this disparity;
* Do we really need to set aside sinking funds to build a new turbine in 20 years? If we haven’t broken the back of climate emissions well before then we’ll already be past the climate change tipping points and playing the role of King Canute.
* Better surely to invest in more community renewable energy projects that create a surplus for community retrofits and worry about the future when it happens. Using Frasers model this would provide enough equity every five years to kickstart another project.
* We have to make the most of every suitable site. Nobody would drill an oil well and then only take half the oil out – well, I suppose we might so that’s a bad example but you get what I mean. If a site supports a 1MW turbine we shouldn’t squander it on a 250KW model unless we really don’t have a choice. If a river can drive a 500KW generator lets not waste the site on anything less.
* We have to find a way to do things faster. 3 years for a wind project? If that’s what it takes we have to start projects 2 and 3 before the first one is finished and have number 4 lined up. How can we do this? I don’t know but that’s where we need to be heading.

Finn Jensen
18 Oct 10:00am

The model Fraser outlines is very much the model we in Blackshaw Environmental Action Team (BEAT) is using. We would be interested in exchanging experiences with other groups trying to do the same. Feel free to contact me via finn.jensen@rocketmail.com.
For those of you who do not know Blackshaw Head we are based near Hebden Bridge in West Yorkshire.

Alexis Rowell
18 Oct 11:50am

Two problems I can see with this:

1) nobody’s lending at the moment; and
2) the creation of credit or debt by private banks is one of the biggest problems of the current economic model.

I still think it’s better to spread the risk and the rewards far and wide among the community. You don’t have to use a community equity model – you can use a community bond model.

Alexis Rowell

Finn Jensen
18 Oct 12:19pm

Just to let you know that there are foundations, charities and social enterprises who are willing to lend money to community energy projects. The National Energy Foundation is just one of them. Some of them will lend the money as risk capital (for planning applications, wild life surveys, etc) and will only ask for repayments if the project goes ahead. Some of them set their interest rate on the loan depending on what they see as their risk with such a loan.

Grants are not completely impossible to get these days. If you are a village with less than 3000 residents you have two days left to apply for between £10,000 and £30,000 from Village SOS. Just be aware of the European rules on state funding and the possiblity of getting Feed-In-Tariff and RHI. If you have public funding/grants (and the Lottery is public funds) you cannot have over 200,000 Euroes in any given three-year period from public funds/FIT/RHI. Grants from the energy companies, foundations, charities, etc are obviously not public funds.

Brad K.
18 Oct 1:02pm

I wonder if inviting external, restricted investment (debt) builds in an ongoing dependency on stability of the world and national economy. If times get worse, this could put the physical parts of the energy plant at risk to outside legal and financial forces.

John Weber
18 Oct 2:49pm

I challenge the continued call for so-called renewable energy. As I have written various places: the devices to capture the sun or wind take lots of fossil fuels to manufacture with the consequence of serious environmental degradation. To continue in this direction, misuses vital resources and environment; more importantly in creates false hopes further traumatizing people at the truly new world order. Better to face reality and begin moving quickly to a very low per capita energy level. There is a certain elitism and classism in this call for renewables since billions of people will never have access but will still experience the environmental degradation and the continued neocolonialism in the guise of development. See:

Energy in the Real World with pictures of proof.
http://sunweber.blogspot.com/2011/01/energy-in-real-world.html

http://sunweber.blogspot.com/2011/10/to-make-light-bulb.html

http://sunweber.blogspot.com/2011/05/new-middle-ages.html

Adrian
18 Oct 5:34pm

This looks like a good idea. I have felt that the FiT scheme is unfair and although I might have installed PV panels this has put me off. Do I want some eco-bling on my roof demonstrating I’ve got more money than others who’ll have to help me pay for it? (even though the cost per household is very low).

Of course I don’t expect the high FiT rates to last, certainly not 25 years so I’d wouldn’t expect to benefit by the FiT in the long term anyway.

I’m a little worried that if community projects take on much debt they could be in a very dangerous situation in a few years time if FiT rates are dramatically cut. They better insure they are not in much debt.