|Westmill Wind Farm Co-op, Watchfield, Oxfordshire. Photo credit: http://www.energy4all.co.uk.|
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.
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.)
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.