The community micro hydro scheme at Osney, near the centre of Oxford, has reached its target of £250,000 investment from local shareholders within ten days of starting its fund-raising. Work commences on a 49 kW Archimedes screw at a weir on the River Thames in a few weeks’ time. The target return offered to investors is only 4%. This is more proof that community renewable energy projects can raise money locally at rates well below the cost of bank finance. Many congratulations to the team that have been working on this complex project for several years. And praise to the Environment Agency for making it possible – here and around the country – to develop well-designed river micro hydro. The Osney weir is an expensive project for the electricity it hopes to generate. The full cost is around £600,000 for the 49 kW output with bank debt covering the £350,000 not raised in the share issue. The cost per kilowatt is therefore over £12,000, more than the £8-£10,000 that I estimate for the easiest locations. (Compare this to the price of about £500 a kilowatt for new large power stations using gas as their fuel). Based on five years flow data on the Thames, the output from the Archimedes screw is projected at around 159,000 kWh a year, a capacity factor of around 37%, which is a decent figure for a lowland site.
The Feed In Tariff for a hydro installation of this size is about 21p per kilowatt hour. Most of the electricity produced will be sold to the Environment Agency for local use. Total income from all sources is expected to be about £50,000 a year, or a return of about 8% in total. This will rise with inflation in Feed In Tariffs and in electricity prices.
Earlier this year, I tabulated the prospective rates of return on the community projects I could identify. Rather to my surprise, I found that genuinely community-based projects appeared to be able to finance themselves by offering rates of return as low as 4 or 5% to the investor (and the investment back in twenty years or so). Osney has confirmed this figure. The project is expecting to raise £350,000 in debt at a cost of around 6.5%.
This the strange part of community financing. It is possible to fund projects using shareholders money for less than the cost of bank debt. This is even though shareholders take more risk and have less rights to their capital. Quite sensibly, having raised the minimum sum they need in less than two weeks, the organisers are now asking whether they should raise more money in share capital and less in bank debt. I suspect that they could completely avoid having any bank money at all.
Why are people prepared to put their money into far from risk-free projects for a return that is quite small? The obvious answer is that other opportunities are so limited at the moment. But this doesn’t appear to be the complete reason. Other factors include
a) The corporate structure chosen by the Osney project is an ‘Industrial and Provident Society for the benefit of the community’ or ‘bencom’. This means that investments in a renewable schemes using the Feed In Tariff can offer shareholders what is known as EIS relief, cutting the net cost by 30%. Put in £1,000 and it will only actually cost £700 if you are a UK taxpayer. (To be clear: all hydro projects and anaerobic digestion are always eligible for EIS relief. Wind and solar don’t qualify unless the scheme is an Industrial and Provident Society).
b) The shareholders know and trust the dedicated team that has taken the project this far.
c) The potential return to the wider community is large. Osney intends to return the share capital to investors after twenty years. The weir will continue to work for another twenty, and the cash will all go to community energy and efficiency projects. The total amount given to the community is estimated at over £2m over the whole lifetime of Osney hydro.
It has taken twelve years to bring the project to the current state. Community projects like this need huge (and unpaid) commitment from a team of volunteers battling planning regulations, slow-moving councils and landowners and even, in the Osney case, local environmentalists wanting to protect an individual tree from being lost during the construction of the hydro plant. Nevertheless, this complex scheme shows how scale of the latent demand for genuinely community-based renewable energy.