Westmill Solar, a 5 megawatt PV farm sited between Swindon and Oxford, is one of the largest arrays in the UK. It was built a year ago to profit from the high feed-in tariffs then available to large PV installations. Adam Twine, the farmer on whose land the 21,000 panels were sited, kept a right to buy back the solar farm from its original financiers. Twine is an enthusiast for community ownership and recently set up a cooperative to purchase the whole array. Small investors can apply to buy shares now, with local residents given priority. If successful, the new cooperative will be the biggest community owned solar farm in the world. The new business announced yesterday that it has raised the minimum £2.5m necessary to take the deal forward to the next stage. Other community should copy Twine’s scheme: the UK needs thousands of renewable energy projects like this one, giving decent returns to local people. (NOTE - on August 1st, Westmill announced it had exceeded its £4m total target and applications are now closed).
The investment opportunity
Westmill Solar is seeking to raise £16.5m to buy the PV farm. The business is looks to finance up to about a quarter of this (£2.5m to £4m) from individual investors. The remainder (from £12.5m to £14m) is being sought from institutional bond holders at an interest rate of about 3.5% above retail price inflation (RPI).
The proposed financing has several unusual features. These make the investment opportunity more difficult to explain than comparable projects. Nevertheless, the innovations should form a model for future renewable energy fundraisings from communities because they improve the returns to small investors.
- The business will buy back 5% of its years each year from year 2 to year 10. This is a tax efficient way of returning capital to shareholders.
- The dividends paid shareholders (as opposed to bond investors) will start low and gradually rise as the bond holders are paid off. By the end of year 24 - when the business is expected to be wound up as the Feed-in Tariffs cease - the returns illustrated in the prospectus appear to be over 50% a year on the shareholder capital remaining in the business.
- The index-linked returns paid on solar PV investments create a very high degree of reliability of cash flow. Compared to wind, PV output is also far more stable from year to year. This means that businesses like Westmill Solar can run themselves with only a thin layer of shareholder capital, enhancing percentage returns on their cash.
The Feed-in Tariffs and revenue from exported electricity will produce a gross income of about £1.7m a year, rising with inflation. At today’s inflation rate, the bondholders will take interest in the first full year of about £0.8m. Running costs are approximately £200,000, leaving about £0.7m to begin to pay back some of the debt and provide a return to the small investors. As bond holders are paid back, an increasing fraction of the total income can be diverted to the shareholders enhancing returns. This isn’t likely to be a particularly good investment for those seeking high dividends in early years but it could be an exceptional opportunity for those seeking to make savings for financial needs in ten to twenty years’ time, such as people wanting to improve their pension plans.
What are the risks?
By 18th July, 660 investors had committed £2.5m (an average of just under £4,000). This means that the equity fund raising has achieved its minimum target. The key remaining risk is that the investment bank seeking to raise the bond finance from institutional investors is unsuccessful in raising this money. If this happens, Westmill Solar’s purchase of the PV farm will not proceed and the private investor money will have to be returned. The prospectus notes that the company will deduct up to 5% of investors’ money to pay for the costs of organising the offer to shareholders.
The other main risk is probably very high levels of inflation in the next few years. The bond holders’ return will be set as a percentage over RPI inflation. If, for example, 2015 RPI inflation is 7%, the interest payable to bond holders will use up almost all the cash coming into the business. Although the income from Feed in Tariffs will also rise, this will only partially compensate for the high interest costs. Until the company has paid back a large fraction of the £12.5-£14m debt to bondholders, very high inflation could represent a serious threat to the viability of the business. How likely is that we will see inflation rates well above today’s levels within the next fifteen years? Who knows, but there is clearly a risk.
The other main risk is much more manageable. Levels of sunshine could be lower than projected. Levels of solar radiation hitting the UK don’t vary much from year to year but there is an obvious concern that the poor summer seasons of recent years might be a long-term pattern. Or a big volcanic eruption might affect sunshine levels for a year or so.
The wider importance of this fund raising
Communities around the UK can copy this scheme. Although the cuts in the Tariffs temporarily destroyed the viability of large scale PV, cost reductions now mean that big solar farms are financeable again. Westmill is financing a total of £16.5m to buy the PV farm but a new venture might well be able to build a similar array for less than £7m. Many prospective solar farms of this size are now in the planning approval process in the south west of England.
Many congratulations to the directors of Westmill, who have done an exceptional job in getting the project to this stage of development. My colleagues at Ebico and I remain keen to work with other communities to develop locally-owned renewable energy projects, providing good returns to smaller investors.
Owned by Eden Project employees, the much smaller PV array we developed in late 2011 was recently made runner-up in the Renewable Energy Association project of the year awards. Either using our model, or copying Westmill’s innovations, every town and village in the UK can now have its own wind, biogas or PV farm.
(Full disclosure: I myself haven’t yet applied for shares in Westmill but will probably do so over the next few days).
 Because the Westmill Solar business is what is known as an ‘Industrial and Provident Society’ the dividends are paid as untaxed interest.