At the beginning of this year I thought the UK might see 25 completed financings of community energy projects in 2014. As the pace of fundraisings increases, this estimate now looks too low. 30-40 might be possible.
Wester Derry turbine is a typical example. A 250kW model will be installed on farmland near Alyth in Angus, north-west of Dundee. Boosted by the continuing availability of EIS tax relief on the investment, prospective investors are given indications that average returns over 25 years will be more than 10%. Investors putting their money in immediately may do better – though their risks will be somewhat greater. In addition, there'll be a yearly payment to local good causes more generous than commercial wind farms.
There’s nothing particularly exceptional about this community financing but it is a useful example of how groups of people anywhere around the country can get to set up their own energy project and earn very decent possible returns. Wester Derry turbine is a simple, efficiently-organised cooperative that can serve as a good model for schemes anywhere in a reasonably windy location around the UK.
The farmers who own the land completed their planning application in 2011. The application was approved, despite some local opposition. Alongside the usual concerns about visual impact, noise and the effect on property prices, opponents often commented that while a turbine generating power for a landowner’s own use was fine, ‘commercial’ developments are inappropriate. Even the people who oppose wind often do so because of unhappiness with profits disappearing to an energy company rather than a root-and-branch hatred of all turbines.
Wester Derry may placate some people who initially opposed the scheme because it is not a conventional commercial project. Aided by Sharenergy, a business that has helped many communities and landowners build renewable energy projects, the landowners set up a cooperative in late 2013 that now seeks to raise £800,000 to erect the turbine before the end of the year.
Most of the community projects currently being financed are established as ‘bencoms’ or, more correctly, Industrial and Provident Societies for the BENefit of the COMmunity. Wester Derry is set up instead as a cooperative. Cooperatives are owned by shareholders (each with one vote, irrespective of the size of their holding) and are less restricted than bencoms in the returns that they can pay to investors. Like Bencoms, they benefit from eligibility for tax relief that is denied to conventional companies. And they can also give part of their income to the local community.
The turbine and its output
A 250kW turbine from German manufacturers WTN will stand 30 metres at hub height on a piece of upland. WTN has been used by several other recent community ventures.
Output is projected to average about 400 MWh a year, roughly equivalent to the usage of 130 homes. The expected electricity production works out at a capacity factor of about 18%. That is, 400 MWh is about 18% of what the turbine would produce if it were working flat out all year. 18% is quite low for a turbine in Scotland and this is a result of wind speeds averaging around an unexceptional 5.7 metres per second. It’s probably worth noting that we would need almost one million turbines of this size and wind speed to replace all the electricity generation currently needed in the UK
In contrast to the lowish projected output at Wester Derry, the successfully financed community turbine on windy Islay off the west coast of Scotland is projecting a capacity factor of 39%, over twice as much. The average wind speed at the Islay site is over 8.4 metres per second. (The power in the wind is the cube of the speed meaning that quite small differences in wind speed really affect the amount of electricity that can be generated).
The finances of the turbine
The current fundraising is only possible because of the loans made available by Scottish government institutions to help get the project this far. (The same was true on Islay). Getting a community wind project through the planning process and ready to be financed is time-consuming and costly. The Wester Derry project needed a loan worth almost £100,000 from CARES to get to this point. This is about an eighth of the total cost.
In common with most other ventures of this type, investors are offered a relatively low initial return which rises in line with inflation of feed-in tariffs and in power prices. Personally, I think Wester Derry’s prospectus is a little too aggressive in forecasting that the price it can get for its power will rise by 4% a year for the next 20 years but the impact of shaving this figure to, say, 2.5% would be quite small.
Most financing of wind turbines give average projections for electricity output and a more conservative figure that assumes the turbine produces 90% of that power. Wester Derry uses a more pessimistic assumption of 85%. As the world warms up we cannot be sure that current wind patterns will be maintained and it makes good sense to test whether the finances still work at lower average wind speeds.
Most investors in the turbine will receive tax relief under the EIS scheme. This means that the real cost is 70% of what the shareholder put in. At the expected wind speed (not the more conservative 85% figure) and 2.5% annual inflation in feed-in-tariffs, the annual returns and capital repayments after year 4 will give an investor an average return of 10.4%, weighted towards the later years. (This is what is known as the Internal Rate of Return for the shareholder).
Of course things can wrong. Turbines can break or wind speeds drop. But community offerings of this type can produce decent returns over long periods. I’m not qualified to give advice but these schemes do seem as though they are worth examining as part of a savings portfolio.
The earliest investors in Wester Derry will be putting their money into a more risky venture. Their money will be spent ordering the turbine from Germany and preparing the site. In certain circumstances, the tax rules allow the first £150,000 on money in to the company to attract a 50% tax relief. This means that £1,000 of shares will actually only cost the investor £500. As of 25th April, Wester Derry has almost raised its first £150,000 so investors eager to get the 50% relief would need to act fast.
The Shrewsbury-based firm Sharenergy has helped organised the offer of shares to the community (and to anybody else who might want to invest). The prospectus is simply and clearly written. The offer is well-structured and appealing. Congratulations to Sharenergy and to the Wester Derry board for putting in place this model opportunity.