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.