What rate of return does it take to attract money into community renewable energy?

Scores of towns and villages around the UK are working on community energy projects. Micro-hydro is planned in Sheffield, more wind turbines are promised in the Forest of Dean and PV in Newport is in the middle of fund raising. To get local people to invest, the schemes need to offer a return on the capital employed. Rates offered to investors vary from about 3% to over 10%. What is the right level to pitch the projected returns on your project? I’ve put together a table of many of the successfully financed projects over the last couple of years to help deliberations.

Most UK community renewables projects use an unusual form of corporate organisation for their schemes. Quaintly called an ‘Industrial And Provident Society’ or ‘IPS’, this structure has offers several advantages to communities

  • It is quick and cheap to set up and run.
  • One variant – usually  called a ‘BenCom’ because it must be conducted for the ‘benefit of the community’ – restricts the owners from benefiting from the sale of assets. This means the community can be sure that the assets of the company, such as a wind turbine, cannot be sold for a profit and the company dissolved to the benefit of investors.
  • It does not need FSA authorisation to issue a prospectus
  • Perhaps most importantly, it can offer investors in renewable energy the chance to claim Enterprise Investment Allowance (EIS) relief of 30% of sums invested.
  • Both variants, the Bencom and the Cooperative form of IPS, are able to devote some of their resources to pursuing aims that are not simply to return profits to shareholders.

Against these advantages, there is one crucial restriction placed on IPS companies. They are obliged to offer ‘interest on capital (that) will not exceed a rate necessary to obtain and retain sufficient capital to carry out the society’s objects. In other words, an IPS cannot propose to pay – or indeed actually pay – a very high return because to do so would exceed the percentage return required to attract investment.

As far as I can see, neither case law nor regulators have ever defined what an excess rate might be. Perhaps the best judge is the marketplace: if a renewable energy venture struggles to raise money despite a clear and promising business plan, then it is probably not offering a high enough return. This may be because the project isn’t fundamentally very profitable or it may be that  too much is being devoted to the worthwhile altruism. If the IPS is planning to divert a substantial part of its free cash flow to community benefit, then perhaps some of this money will need to be promised as shareholder return instead.

Bluntly put, most potential investors want to see a reasonable return. If the IPS is being too altruistic to the local community, the project may never get financed because funders aren’t happy with the interest rate that is promised.

The table below summarises the prospective returns offered on recent projects run by communities in the field of renewable energy. One major caveat: the prospective returns mentioned in the prospectuses of these companies often cannot easily be reduced to single number. When I write ‘4%’, this number may only be offered (always in a forecast, of course) after year 3 or it may qualified in some another way. Second reservation: some ventures are also buying back shares over the life of the project. But the return offered may be on the full original investment. The buyback of shares in later years will increase what financiers call the ‘internal rate of return’ or ‘IRR’ of the project. I’ve tried to adjust for this but may have done so inappropriately. (Any corrections, or additions, please email at chris@carboncommentary.com)

 

Year Project Tech Amount Rate of Note
an IPS? type raised or return
to be raised offered
Westmill Solar (Swindon) 2012 Yes PV £4m 11% (IRR)
Abundance Generation/REGD (Gloucs) 2012/13 No Wind £1.15m 6.75-8% Debt, not equity
Gen Community (Newport, S Wales) 2012/13 Yes PV £1m 11.2% (IRR) Not fully funded yet
Bath and West Community Energy 2011 Yes PV £0.72m 7%
Ovesco (Lewes) 2011 Yes PV £0.3m 4%
Jordan Dam (Sheffield) 2013 Yes Hydro £0.21m 3%
Brighton Energy Coop 2012 Yes PV £0.2m 4% Increasing with RPI
Leominster Community Solar 2011 Yes PV £0.15m 6%
Oncore (Oxford) 2012 Yes PV £0.15m 4.20% Lower return withdrawable shares
Community Power Cornwall 2011 Yes Wind £0.14m 7% Lower returns pre year 5
Eden Solarfair (Cornwall) 2011 No PV £0.14m 10% (IRR)
WOCR (Oxford) not final Yes Hydro/

wind/PV

not known <5% Only after year 5

How do I interpret this table? (Your views may very well be different)

  • Large projects seem to think that returns of 7% + are needed to attract capital. These schemes will usually need investors well outside the band of committed local activists behind the project.
  • Smaller schemes (perhaps sub £200k or so) may be able to raise money at 4% or so. Is the difference that investors will tend to be very local, value the community benefits highly and personally trust the individuals driving the project?

Comments on this post will be very gratefully received.

 

 

 

  1. Andre Pinho’s avatar

    Hi Chris,

    “Is the difference that investors will tend to be very local, value the community benefits highly and personally trust the individuals driving the project?” <– Think you answered your own question.

    In fact our projects are a very good measurable example as they include a voluntary forfeit of the return towards a community energy efficiency fund. In our first project 8 investors (accounting 15% of total investment) chose to forfeit their returns.

    In smaller projects the buzz tends to be local and people want to own invest on it because the benefit is perceived to stay within the community, and there is a feel good factor about this. Whereas in large scale projects the money needs to come outside of the community therefore investors tend to look at this more (but not exclusively) as a financial investment rather than a social one and the economies of scale help the large projects achieve the higher returns they need.
    Most of these projects have only come to light in the last 1-2 years so the track record is not there yet to give investor confidence that the returns are real and safe. Therefore professional investors tend to keep away from these projects.
    However in the US as we can see from Solar Mosaic the mindset looks different they haven't needed the community bottom up approach.
    Key for this has been they are willing to take investment from as low as $25, but this will (or should) have a big impact on their admin costs, however this has certainly helped attract the typical crowd funder who will chuck some change at a good idea.
    And an interesting fact is that their first projects actually only promised the investment back without any returns.

    Admin costs are an important issue for these projects. Many groups are reluctant to publicly share the financial projection, in most cases to protect the work they developed. But in some cases the budget for management/admin of the project is small and reliant on voluntaries for the length of the project (25 years for the early projects). This needs to be addressed and solutions should be developed to submit readings for the FIT and exports automatically and software to make the bank transfer automatically for the returns to investors (rather than someone manually processing all this to each investor). This will enable community energy projects to accept lower investment values and attract members of the community who may not necessarily have the current minimum value requested by projects of £250 to lock in for 25 years.

    Another thing worth noting is that some of those returns mentioned in that table might already include the EIS or SEIS, which can significantly boost the returns for the investor. But not all investors qualify for this, in fact many investors in our projects will not benefit from this. They may either not be 100% aware of this or do not want (or cannot afford) to commit the minimum £500 required to fulfill the HMRC threshold for the relief.

    Community Energy in the UK is a space to watch as there is pressure to decentralise the current energy supplier monopoly and there are some community energy groups doing some great things!

  2. Damon Hart-Davis’s avatar

    We’re still tweaking the numbers on this for our current community PV project: I suspect that with SEIS we will be around your ‘small project’ return figure.

    http://www.earth.org.uk/community-energy-for-Kingston.html

    Rgds

    Damon

  3. Andy Heald’s avatar

    Hi Chris,

    I agree with the sentiment ‘the best judge is the marketplace,’ and Andre’s comments, where projects attract investment outside of the targeted geographical area, it can not solely rely on a ‘social return.’

    A correction for your table, and I understand the difficulties of comparing schemes. For our Newport Solar Share offer, we have projected a 7% annual return. If the investor claims EIS relief (we have advance assurance) and stays the 20 years, receiving 75% of the initial share capital back over this period, the equivalent internal rate of return is 10.22%, not 11.2% as quoted in the table. If you strip out the EIS relief the lifetime IRR is 6.21% (this includes the 75% share buy back, and can be found on the projected returns table P15 of our offer document). Why is this figure lower than the 7% projected annual returns? Internal rate of return is calculated using the ‘time value of money’ and with a 20 year project this is decreases the headline rate. The point of when your share capital is repaid affects the IRR, as does the EIS relief (which makes the IRR higher because the EIS 30% relief is in the first year).

    The IRR is used to measure and compare the profitability of investments. Perhaps we don’t need it at this stage in community projects if it is going to cause confusion, although not all community projects have the same predicted cash flows, with returns differing throughout the years, and hence some lifetime figure is helpful to some as a guide. Or a table is not suitable to compare like with like, and potential investors should read each offer document individually.

    In layman’s terms I would explain our offer like this – if you invest in the Newport Solar share offer the projected annual return is 7% per annum. Some years, like the lousy summer we have just had, might result in a 6.5% return, and other years might be a 7.5% return, but over the lifetime of the project the projected returns are the equivalent of 7% annually. On top of this, if you claim back the EIS relief, you will receive 30% of your investment back in the first year (and then I would have to point the layman in the direction of the EIS rules for them/or their advisor to make their own mind’s up to understand the EIS Rules). Over the 20 year period Gen Community aims to buy (the share buy back) up to 75% of your initial investment, whilst still paying 7% annually on the retained investment, over the lifetime of the project.

    Please may I point anyone to our online offer document to read ‘the offer’ in full, and not make any decisions on the table above or my comments alone. And my apologies if this comes across as a bit formal, and the comparison table is the first I have seen, and welcome, but combining renewables/low carbon with finance is full of different variables per project which sometimes can not be measured by a table alone.

  4. Andy in Hawick’s avatar

    We live in exciting times! These movemnets are very encouraging.

    The table would benefit from adding a column to differentiate between Co-ops and bencoms as the rates of return tend to be noticably different, particularly due to the bencoms using the major part of their profit for community projects rather than to benefit the [invested] members.

    EIS and SEIS are certainly important for individual investors but, as already mentioned, it can be difficult and confusing to compare different schemes with different criteria in play.

    There are other schemes that could also be included in this table, eg,
    Saddleworth Community Hydro raised £120k last year by offering 4% (SEIS eligible) on a bencom basis.

    Admin costs are certainly a key to these projects and schemes like Microgenius are helping that happen by enabling online registration and providing the tools to handle the financial admin for groups. (microgenius.org.uk)

    As someone who has invested in a number of these scheme, my interest is in supporting communities, helping install locally-owned infrastructure across the country, putting my money where it can at least retain it’s value in the current financial climate, and not letting my money be used for practices that I do not want to support.

    There are various movements coming up whereby people are looking at where their investments (eg, pensions) are and taking a critical look at those. This community investment movement fits in with that dynamic and gives people an alternative investment possibility. One question that I like to ask is, “if something goes horribly wrong and I don’t get my money back, will I feel that it has been wasted or will it have brought other benefits that I value?”

  5. Andy Maybury’s avatar

    I have charted the data from these and other IPS share offers that I am aware of, marking bencoms and bona fide co-ops separately. It is clear that bencoms can attract more for a given interest rate and that co-ops can raise larger amounts in total. If I could upload an image, I would show the graph.

    I have set up a survey to capture data on this question and get a hopefully more accurate representation of how things are playing out. If you have details about a share offer that has now closed, please fill in the data in this survey:
    https://www.surveymonkey.com/s/RZ9C7XZ

    Many thanks

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