The hydro site on the River Thames at Osney. Image source: Oxford Times.

Many viable UK projects to generate renewable electricity are not being financed because of shortages of credit from banks. At the same time, individual savers are only able to get tiny returns on their savings. In recent days a number of schemes for linking the UK surplus from household savings to the deficit in renewable financing have surfaced.

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Tim Helweg-Larsen presented at the Manchester Report conference. (Disclosure: I was a judging panel member – Chris Goodall.) His scheme for energy bonds focused on the obvious need to bridge the gap between the savings looking for a home among ordinary householders and the shortage of investment funds for large-scale energy projects. He put forward several persuasive schemes for matching cash needs with savers’ money.

In this spirit, Low Carbon West Oxford has developed (July 2009) a portfolio of renewable energy projects that will be funded by local savers and others. It has plans for a micro-hydro plant on the Thames in Osney, just outside central Oxford. In addition, a battery of PV panels will sit on a local warehouse roof and a large wind turbine is going to be sited at a local school.

These schemes have been bundled into a co-operative venture. The idea is that individuals – local and far-away – will buy shares in the venture and eventually get a return from the profits. Lois Muddiman, one of the originators of the scheme, tells me that the financial return to an investment will be about 10% (matching the dividend that I calculated in the article on feed-in tariffs for wind turbines). In the first few years, all the spare cash will be spent on eco-refurbishing the elegant Victorian housing stock in West Oxford, an area that was badly affected by the summer floods of 2007. Later, the co-operative hopes to pay a dividend of about 5% to investors, far more than is currently available from banks.

The projects that the scheme has in its development portfolio are as follows:

* FiT = feed-in tariff.

Source: West Oxford Community Renewables, a venture of Low Carbon West Oxford.

Lois Muddiman writes about the plans to raise money:

Can you say that you don’t have to live in West Oxford to buy shares? They are available in blocks of 10, 250, 1,000 and 20,000 and cost £1 each. You can request a prospectus by emailing us at lowcarbon.hotmail.co.uk and one will be sent to you. (We are sending them by Royal Mail, so we need home addresses.) Please include the details of our website – which goes live later this week www.lowcarbonwestoxford.org.uk.

As the UK government is now belatedly acknowledging, renewable electricity generation will be encouraged if community groups have the freedom to use local resources to build PV, hydro and wind installations. Low Carbon West Oxford is one of the best community carbon reduction initiatives in the UK and is well placed to develop good generation schemes because of its wonderful reputation in the local community. If all goes well, the co-op will both reduce local emissions by a significant amount and return reasonable returns to investors.

Copyright: SyB – Fotolia.com.

We didn’t make much progress reducing emissions when times were good. Will the looming depression makes things worse or better? The discussion of this issue, at least in the UK, tends to be superficial. The only question asked seems to be ‘will people buy less eco-bling when times are hard?’

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Of course they will. ‘Voluntary environmentalism’ may be in decline. Being ‘green’ might not be as fashionable. People may be much less likely to waste money on showy demonstrations of environmental virtue. But this is not the real question. Consciously or unconsciously, will the world emit less – now and in the future – because growth rates have fallen everywhere and capital is in short supply?

Here is the case for the pessimists:

1. Green energy sources will require vast sums of capital. Nobody has any money. So we will continue with the old and well-established means of electricity and heat generation. Petrol will still fill the tanks of our cars.
2. In times of consumer gloom, households will buy the cheapest alternative and ignore the environmental quality of their prospective purchases.
3. The poor state of public finances will mean that governments will not themselves invest in low-carbon technologies, or provide financial support for their introduction elsewhere.
4. Regulations demanding higher energy efficiency standards will be dropped as manufacturers struggle to survive. The car makers are the prime example.
5. When what Keynes called ‘animal spirits’ are low, fewer speculative and venturesome investments take place. So householders are less likely to go for a truly eco-friendly house extension and companies will not risk investing in that interesting but untried new technology.

The arguments in favour of a prolonged recession being good for the future path of emissions are more numerous:

1. Many environmental improvements, of which housing insulation is the most important, make clear financial sense. People or companies facing a decline in income may choose to make more investments in energy saving technologies. The list of large UK companies making substantial and plausible promises to reduce their energy use lengthens by the day. Although energy prices are lower than a year ago, the onset of recession has made all companies sharply aware of how much they could save through simple measures. Whether it is replacing halophosphate tubes with triphosphor lights or insulating pipework, energy use is now – and will remain – a subject of greater interest to top management. Where homeowners were happy to live with high gas bills when times were good, economising is now common.
2. Interest rates are lower so capital investment becomes easier to justify. Many companies demand payback on their investments in two or three years and relatively few ‘low-carbon’ capital expenditures repaid their investors that quickly. As interests have fallen those businesses that have access to cash now face much lower funding costs for useful investments in energy reductions. It now makes much more financial sense to invest in longer payback projects.
3. Similarly, the lack of need for capacity-enhancing projects (such as building a new factory) means that companies are freer to invest in cost-reducing actions, many of which will focus on cutting energy use.
4. Companies and consumers are more likely to purchase longer-lived goods. Whether it is the teenage girl deciding to buy one high quality T-shirt rather than two inferior items or the company weighing up whether to replace lease cars after three or after four years, low interest and consumer gloom make it more likely that the buyer will go for the longer-lived product. Product longevity will be the new black.
5. Waste, whether household or business, becomes more visible and signifies inefficiency. Whether it is throwing away uneaten food, or clearing out over-bought stationery, people will be more sensitive to the need not to waste unnecessarily. By reducing the things they buy, they are cutting their carbon footprint. Conservation will replace throwing away.
6. People and companies don’t show off as much in a recession. Driving up to the door in a large and expensive car is always going to be what people want to do. But they are less likely actually to buy showy goods and services when others are suffering. When hundreds of people are being fired, the CEO doesn’t go out and buy a new Mercedes. Or shouldn’t do.
7. Marginal units of income tend to be spent on high-carbon goods and services. For example, the bottom 50% of the UK’s income earners don’t generally take holidays abroad. This means that their footprint from air travel tends to be low. Extra pounds of income tend to go on carbon-intensive activities. In a recession, as the incomes of people sink they will travel less, spend less money on imported goods (which are generally made in countries with less efficient use of energy, such as China), and replace some purchases with their own labour. They might make their own meals, for example, rather than buying them from a supermarket. Supermarket foods tend to be much more ‘carbon-intensive’ than the same goods made at home. Prepared food needs more energy to make, chill, transport, and then refrigerate at the supermarket. Or they might simply buy less meat and more lentils. This alone could have a major impact on a person’s responsibility for emissions.
8. Activities are slightly more likely to be done communally in a recession. You might share a car-ride for example. Or arrange a shared meal for lunch at the church.
9. When the tide is high, most companies float. When it falls, the most vulnerable companies go aground. As we are seeing most spectacularly in China and Detroit today, it is the least energy-efficient who sink.
10. At the most general level, units of GDP all take energy to create. All other things being equal, lower rates of GDP growth, or even a decline, mean lower emissions. In the language of climate-change buffs, a recession will ‘bend the curve’ of emissions downwards.

While the future impact of the likely depression remains difficult to predict, there is surprisingly little a priori evidence to support the view that this is bad for emissions growth. This area is a good subject for an economics Master’s thesis. Please would someone volunteer to do some work on it, so we can have something to throw at the newspaper columnists who say that green behaviour will disappear?



* A footnote on car use:

I looked at the data on how petrol consumption varies with the expenditure patterns of UK households. Unsurprisingly, fuel use rises with income. People have bigger cars and can afford to drive more. Above median incomes the increase is less marked, but continues nevertheless. If a family’s income declines, the fuel purchased will therefore tend to fall. Broadly speaking a loss of £1,000 of annual household income will reduce carbon emissions from fuel use by about 30kg per person or about a quarter of one percent of the total. Detailed figures available to anyone interested.

Community-owned wind farms are a rarity in the UK, despite their popularity in other parts of northern Europe. So should we welcome an opportunity for individual investors to invest in a newly built wind project in northern Scotland? Yes and no. The prospectus promises reasonable returns. But the protections to investors are limited and the information about the mechanism by which shareholders get their returns is sadly lacking. Even enthusiasts for individual investments in wind power need to be very cautious about investing in the Great Glen Energy Co-operative.

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Buy a share in a conventional company and you normally acquire a right to participate directly in its success or failure. The Great Glen Energy Co-operative is different. It is raising up to £1.8m so that it can buy what it calls a ‘Royalty Instrument’. The Great Glen prospectus says that this Instrument gives the company the right to some of the profits from a big new wind farm, owned by an unrelated third party, Millenium, a wholly-owned subsidiary of Falck Renewables. This is a financial contract that gives the holder payments dependent on the performance of the third party. In effect this is a ‘derivative’ arrangement.

There’s nothing necessarily wrong with this scheme. If a reasonable share of the profits of the wind farm flow to Great Glen and its shareholders, no one will complain. But the Great Glen prospectus is very unusual. It states that the company is trying to raise £1.8m but it never actually says what rights the Instrument is buying with this money. You would expect that the prospectus might say that the £1.8m buys, for example, a 3% share in the profits of the Falck wind farm. But the prospectus makes no such statement. It does contain a simple financial table that provides an illustration of the returns to members, but provides very little detail on how these projected returns are calculated. At one point the prospectus implies that the backers of the Great Glen Co-op do not even know the price which Falck believes it will obtain for the electricity from the wind farm. Frankly, anyone putting money into the Great Glen Co-op is investing on trust.

The table of projected returns shows shareholders in Great Glen achieving an average yearly return of 10% on their money over the 25-year life of the wind farm. The prospectus further states that the parent company, Falck Renewables, guarantees a minimum return of 6.5% per annum, even if the wind farm itself is unable to pay its obligations under the Royalty Instrument. Based on today’s wholesale power prices, I calculate that the returns to Falck from this investment are about 27%, vastly greater than the returns offered to Great Glen investors.

I have asked Great Glen and its backers for details of what the Royalty Instrument is buying and how the projections in the prospectus are calculated. I have been told that all the terms of the Instrument are confidential. Shareholders and potential investors are not entitled to know any of its contents. This means that even simple questions about the risks and returns to Great Glen shareholders cannot be answered. Here’s a list of entirely reasonable queries which potential investors in Great Glen will never know the answer to:

• a) What share of the profits of the Falck wind farm is Great Glen entitled to?
• b) What assumption is made about the sale price of the electricity generated from the site?
• c) What happens to shareholder’s returns if the price of electricity falls from today’s historically high levels?
• d) What would be the impact of a fall or a rise in the price of Renewable Obligation Certificates, the second principal source of revenue from a wind farm?
• e) Is the return to Great Glen ‘geared’ in any way to the performance of the wind farm? If, for example, Falck decided to raise a substantial amount of debt secured on the wind farm’s revenues, would this affect the flow of cash to Great Glen?

These are crucially important questions, vital to an understanding of the likely financial performance of Great Glen. Great Glen’s backers, Energy4All, told me that one of the reasons was that the Royalty Instrument contained intellectual property that Falck wanted to keep secret. Energy4All also says that Falck insisted that the full wind speed projections for the wind farm site were confidential, although the average projected wind speed is contained in the prospectus. So outsiders cannot even check that the projected electricity generation figures for the site are reasonable.

These are serious issues, particularly since the Great Glen investment opportunity is targeted at ordinary people living close to the wind farm and not professional investors. But perhaps more important, I am concerned that the prospectus is misleading in the way it describes the investment. The prospectus implies that the offer enables investors to own a stake in the wind farm. For example, it states that:

• a) ‘Great Glen Energy Co-op was established in 2008 for the specific purpose of owning a stake in a wind farm being constructed in the hills north of Invergarry in the Great Glen, Scotland’.
• b) ‘Falck wished to offer a degree of local public involvement in the Project and approached Energy4All at the beginning of 2003 to explore the idea of offering partial ownership of the Wind Farm to local people’.
• c) ‘The Royalty Instrument provides Great Glen Energy Co-op with the right [...] to purchase a stake in the Wind Farm’.
• d) ‘The Royalty Instrument Agreement provides for a[n] interest in the Wind Farm [...]’.
• e) ‘Falck approached Energy4All at the beginning of 2003 to explore the idea of offering partial ownership of their Wind Farms in the North of Scotland’.
• f) ‘Community ownership of part of a wind farm is good from a social and environmental perspective’.

It seems to me that actually the Royalty Instrument does not give the Great Glen investors a stake in the wind farm. Rather, it provides for Great Glen to have certain rights over a portion the cash flow from the operation. This is very different from owning a share in the business itself. Falck remains in total control of the wind farm. In particular, as far as one can tell, it can sell the wind farm at any time and simply repay the money invested by Great Glen. It also appears to be able to raise debt secured on the wind farm without restriction, and the bankers involved could refuse to allow further payments to the Co-op. (Falck has however guaranteed the minimum return of 6.5% if this happened.)

These are very unusual terms for people who have a ‘stake’ in a business. I think it would be much more accurate to say that the Great Glen shareholders are, in effect, unsecured creditors of the wind farm company, ranking behind banks and other financiers. This would be acceptable if fully explained to shareholders and if Great Glen shared in the upside if the wind farm did well. But the upside appears to be limited: although Great Glen appears to benefit if electricity prices rise (though we don’t know this for sure), shareholders will not benefit if the wind farm is sold at a profit.

This is an attractive deal for Falck. The Great Glen investment gives it the prospect of cheap financing (the guarantee of 6.5% is far less than it would pay for unsecured debt in today’s capital markets) and it appears to have unrestricted rights to sell the wind farm or to load it with debt at any debt, much like a householder might remortgage a house. (I may be exaggerating the poor quality of the protection afforded to Great Glen, but the lack of detail in the prospectus makes it impossible to tell.)

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Energy4All has responded to these criticism by saying, inter alia, that I am wrong to focus on Falck and Great Glen. Falck is the only significant wind farm developer in the UK willing to grant any participation to community interests. It is therefore unfair to comment unfavourably on their arrangements with Great Glen. I hesitate to say this because of the admiration I have for Energy4All, but I think that this is the wrong attitude. Although the Great Glen arrangement may have been the best one Energy4All could obtain from Falck, this does not make it necessarily a good deal or one that is robust enough to present to private individuals.