There are a number of different types of finance that groups can call upon to assist with their community energy projects, but no single financial product is likely to fund the development costs of a scheme outright. Generally speaking, projects will need to access different types of funding at different times, and this needs to be thought about and prepared for early on in the development process.
Whichever technology you are interested in developing, the key consideration is whether it is financially viable or not. This means balancing the costs of getting your scheme built, against the potential income that it will generate over the life time of its operation. All energy production, whether it is power or heat, has two main sources of income. One is the direct sale / export of the power or heat generated, which carries a market value, the second is the incentive payments that are available – the Feed in Tariff (FITs) in the case of renewable electricity, and the Renewable Heat Incentive (RHI) in the case of heat.
The rates at which these incentives are paid is set by Ofgem. They are in fact a subsidy or State Aid, paid to encourage the development of renewable energy schemes. Different rates apply for different technologies and scales of production. Once your scheme qualifies for one of these incentives, it is payable at a fixed price (linked to inflation) on every unit of energy produced, for twenty years. It is this guaranteed income that makes investment in community energy generation worthwhile, and will be the chief means of paying off any investment capital raised for your scheme through loans and shares.
But, be warned. The rates at which you can qualify for these incentives is reducing year on year through a process known as degression. This means that a scheme granted a FIT rate tomorrow, will be paid more for each unit of electricity it generates than an identical scheme that qualifies one year from now. Degression can seriously affect the financial viability of your project, so you need to be aware of when new rates fall due and ensure that your scheme makes allowance for potential future lessoning of the rate at which incentives are paid. Don’t underestimate the length of time it will take to get your scheme into a position where it can register for these incentives
Another calculation to bear in mind is that where your renewable energy project is situated near, in or on a community asset, there is a further financial benefit in the fuel saving arising from the operation of your technology.
There are a number of grant funding organisations that can support the initial stages of scheme development. The European funded Ynni’r fro programme has done much work in this area, and it is anticipated that both the successor to Ynni’r fro, and the LEADER programme of the Wales Rural Development Plan, will continue to dedicate funding for initial feasibility. However, as a State Aid, there are implications attached to receiving too much of this type of funding that may prevent schemes from qualifying for FITs of RHI. Use of grant money should be maximised in the early stages of scheme development whilst proving that there is a viable project in your area, with other types of finance being used if and when you proceed to developing your scheme.
There are two types of loan finance required by groups developing community energy schemes. The first covers the costs of developing your project and meeting the up-front costs of getting planning permission, negotiating licences and securing grid connectivity before you are in a position to install your scheme and generate income. These costs are high risk, as you might fail to secure planning, or your scheme might be delayed. Generally speaking then, this is the most expensive finance that you will need to borrow, and the level of risk is reflected in the interest rate or fees that you will be charged.
Community Energy Wales, in conjunction with Robert Owen Community Banking and BIG Lottery have developed a form of ‘mezzanine finance’ that can cover the up front development costs of community energy projects in Wales. Details about how this finance works can be found on the Robert Owen Community Banking website.
Once you have all your permissions in place and you are ready to install your scheme, the guaranteed income that it will generate means that it has the ability to pay back its construction costs within a set number of years. This gives you the ability to negotiate conventional loan finance to cover the cost of construction, typically based on an APR of around 7% over a term of 10 to 15yrs.
Instead of, or in addition to the ‘debt’ equity of a traditional loan, your project might be able to benefit from the sale of shares in the future profits of the scheme. Most share offers attract small scale individual investors who are seeking to invest in schemes that give them a better rate of return than traditional savings accounts. There are also tax incentives linked to investing in companies that can make such investments attractive, over and above the rate of annual dividend suggested in the share offer.
Share offers are a good way of involving local people directly in the ownership of the scheme you have developed for the benefit of their community. Ownership of a share gives each shareholder both a stake and a say in the management of the company that operates the scheme – each shareholding having an equality of votes, whether they have purchased just one share or a hundred. You will need to take early advice about the form of your operating company should you wish to pursue a share offer.
Though generally reserved for raising finance to install schemes, share offers can also be used to raise the money required to undertake the initial development of schemes. The risk to investors money of these ‘pioneer’ share offers are clearly greater and you may need to offer enhanced benefits to ‘early’ investors over and above the dividends offered when you seek to install your scheme.
For more information on developing share offer proposals, we recommend that you consult a specialist company, such as Sharenergy.
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