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 email@example.com)
|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%|
|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/
|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.