An Introduction to Community Energy
Community Energy is a term used to cover a wide range of projects: from a group of individual installations to community wide networks which generate heat or power. It can also mean installations at community centres and facilities.
There are many benefits of such schemes to a community:
A sense of ownership of their energy security and future
A financial return for the community and potential reduced costs
Communities can become stronger, more self reliant and resilient by generating their own energy and using it efficiently.
Setting up a Community Energy scheme
This is a rough guide to the various stages involved in setting up a Community Energy project:
1. Getting started
A community energy project, it has to be said, is likely to be a lot of work, can be very technical and require many diverse skills. These skills can very often be found within the local community, and there is plenty of back up support available.
Working out what is the appropriate technology/technologies. What are the resources available? Is there plenty of local wood, are the roofs south facing, is the wind speed good enough to make it viable, is it a conservation area, or one with other planning restrictions?
Also, the existing energy demand of the buildings in the community may need to be considered.
Is there an opportunity to use existing resources – e.g. using waste heat from an industrial process to heat something else? Is this heat going to be available when others want it? Are the local community behind this – and if not how can you get them on board?
You will need to think about planning and project management and will need a business and financial plan.
Project development will involve gaining the support of local community, deciding what technologies are viable, looking at a suitable legal structure for your group and identifying where the finance will come from.
Project development will involve gaining the support of local community, deciding what technologies are viable, looking at a suitable legal structure for your group and identifying where the finance will come from.
2. Choosing the right technology
An options appraisal will need to be carried out – this means simply establishing:
SOLAR ELECTRICITY - PV (PHOTOVOLTAICS)
What is Solar PV?
Electricity can be generated from the sun using ‘photovoltaic’ or PV panels. They are made of materials that generate electricity when exposed to daylight. There are various types of panel available and the sun does not have to be shining for them to work.
Originally developed for use powering satellites, developments in manufacturing techniques have steadily reduced the cost and improved the performance.
How are they used?
Positioned on roofs facing from Southeast to Southwest, panels can be fixed to the roof, wall or gable end, although they operate best at an incline of 30-70 degrees. Some panels can be used to replace conventional materials such as roofing tiles or cladding.
They are increasingly being used to meet electricity needs worldwide particularly when integrated into buildings. They are particularly useful for providing power in locations that are not grid linked.
How much does it cost?
The costs of PV are still high – roughly in the area of £8/Wp. In new build the costs are less prohibitive. Improvements in the technology and higher volume production are continuing to bring costs down further.
How long will the panels last?
Systems are expected to have a life of 25 years with very low maintenance - routine cleaning forming part of normal building maintenance. Many systems today are provided with operation and power output guarantees for the lifetime of the equipment. The electronic control equipment is the most unreliable part of the system.
Will I need planning permission?
Not usually, but if you live in a listed building or in a conservation area you may need consent. Contact your local authority planning department for advice and also check if building regulations might apply.
If there are problems installing the panels on the roof, it may be possible to put a system in the grounds of your house.
What are the environmental aspects?
PV is emission free and the systems require no fuel or cooling water. It is a silent operation and so is very suitable for installation in urban areas. The manufacture of the panels uses potentially harmful substances but industrial production techniques and equipment are used to minimise this.
SOLAR THERMAL (WATER) HEATING
What is solar water heating?
Solar water panels trap the sun’s heat in panels or tubes for use in homes, other buildings and swimming pools. They need a hot water tank to store the heated water. Because of this there are only a small number of combination (combi) boilers that can be used with this technology, and they can be more expensive. Here in Britain (yes, even here in Yorkshire!), solar water heating can provide 50 to 70% of the hot water for a home. Hot water bills are reduced by at least half and nearly all of the hot water required during the summer is provided. Solar systems usually give at least 20 to 30 years useful service, during which time the money saved more than repays the initial cost.
How does solar water heating work?
A typical system consists of a heat collector, usually mounted on a roof. It needs to face as near to south as possible (SE to SW is ideal). Water is forced through the collector where it is heated by the sun, then through a coil in the hot water cylinder to transfer its heat to the surrounding water, ready for use.
The solar panels are not obtrusive (it’s similar to having a Velux skylight on your roof) and can either sit on an existing roof or can be built into it. They can either be professionally installed or you can do the work yourself. Most modern systems are manufactured to ISO: 9002 quality standards, and come with a warranty of up to 10 years.
How hot does the water get?
On sunny days, temperatures of 70 to 85 degrees are common. Even on cloudy days in winter some hot water will be produced.
How many panels will I need?
A typical installation for a family of four would need about 4 square metres of panels (usually two standard panels).
Will I need planning permission?
Not usually, unless you live in a Listed Building or Conservation Area. Contact your local authority planning department for advice and also check if building regulations might apply. If there are problems installing the panels on the roof, it may be possible to put a system in the grounds of your house.
How much does it cost?
The cost of a professionally installed system can vary from £2,000 to £4,000 depending on the size and type of system. A DIY installation would reduce this cost to a minimum of £1,200.
What is wind energy?
Wind represents a vast source of energy and has been used for hundreds of years in Britain to grind corn and pump water. It can now be used to make electricity and, for onshore installations, it is one of the cheapest sources. As the UK is the windiest place in Europe, wind power is one of the most promising renewable energy technologies and already provides electricity for nearly 250,000 homes.
What is a wind turbine?
Wind turbines range from small units of around 30 watts, used to charge batteries for caravans and boats, to giant structures of 3 Megawatts, with 50 metre long rotors extracting enough energy to run 3000 small homes. A turbine, basically, is a set of blades designed to rotate as the wind blows past them. The shaft to which the blades are attached is coupled to an electrical generator. The more wind that passes the blades, the more energy can be e3xtracted, so we have a situation where doubling the length of the blade increases the “swept area” by a factor of four. The bigger the turbine, the more economic generation of power there is.
Why are wind turbines sited on the tops of hills?
As the wind blows towards a hill it has to rise up the hill to get over it, in doing this the moving lower air joins with the air above it and so more air must pass over the top. The only way that more air can pass over the top of the hill is for its speed to increase.
Every time you double the wind speed, the energy increases eight times. This is the cubed rule and it indicates why we choose high wind speed regions to site wind turbines. Some of the best places in the U.K. are the north west of Scotland, north and south west Wales and Cornwall together with smaller areas of the East Coast. Other areas such as the Pennines and the North York moors are also good for strong winds.
What happens when the wind doesn’t blow?
If the wind isn’t blowing, wind turbines do not produce energy. In fact most wind turbine have a “cut-in” wind speed of around 5 m/s (approx 11 mph). This is why wind energy is known as an “intermittent” energy source and as such it needs to feed into either a storage system, such as a battery (for small scale applications), or into the electricity network – the national grid - where it can be combined with electricity from other sources.
Can I run my house on wind power?
An average house uses 4800 Kilowatt hours of energy in one year. A 300 watt wind generator working at peak output for maybe 30% of the time would provide you with about a quarter of this. Because of the intermittent nature of the wind energy a storage system would be required.
What are the environmental aspects of wind turbines?
Wind turbines occupy very little ground space and so can co-exist with livestock or even cereal crops. The only permanent use of the land is the concrete turbine foundations, service road and the transformer building.
For good wind speeds, the turbines need to be sited on high exposed land. However, as technology has developed and system costs have reduced it has become more feasible to locate wind turbines in less windy sites. The turbines, like other conventional infrastructures and power generation plant, such as power transmission lines and power stations, can be visually intrusive. There is therefore a delicate balance to be struck between the change in the landscape and wind power’s environmental benefits.
Noise from modern turbines is less than from many other everyday activities. Careful design, siting and operation have ensured that the noise is no longer a nuisance. Electromagnetic interference with television reception is not usually a problem and any remedial action is simple and cheap.
How much does it cost?
Typical domestic-scale systems cost £2,500 - £5,000 per kilowatt electricity (kWe) installed.
What is hydro-electric power?
It is electricity generated when we extract energy from falling water. Its use can be traced back to ancient times. Nowadays the power of water is used to generate electricity.
Currently, hydroelectric power accounts for around 2% of the UK’s total installed electricity generating capacity, but this is mostly from large scale systems, which are not likely to be built in the future
How is energy extracted from the falling water?
Electricity is produced when a flow of water, either from a reservoir or river, is channelled through a turbine connected to an electricity generator. The amount of power produced depends on the rate of flow and the volume of water available. Hydroelectric schemes can be divided into two broad categories: large scale – more than 5 MW and small scale – less than 5 MW. Smaller systems of a few tens of kilowatts are called microhydro. These are not usually connected to the electricity network (which is required when selling power).
How do we make the most of the water flows we have available?
The principles of operating a small-scale and large-scale scheme are essentially the same. They both require:
The height of the ‘head’ and amount of water flow available will determine how much power can be produced.
A water intake placed above a weir or behind a dam, although this is not usually required for microhydro schemes.
A pipeline or channel to transport the water from the reservoir or river to the turbine
A turbine, a generator or grid connection and associated building
An outflow, where the water is returned to the main water system
How long will a system last?
Hydroelectric schemes can last for decades with suitable maintenance.
What are the environmental impacts of small-scale hydro power?
Hydro-electric schemes are environmentally attractive because they do not produce pollution during operation. Small-scale schemes, which do not involve collecting water behind dams or in reservoirs, have very little impact on the environment. The principle environmental issues are:
the visual intrusion of the turbine building but this can be hidden by bushes and plants
the ecological impact of diverting water flow
the effect on the fish but they can be protected by close fitting mesh screens
the impact of the scheme’s construction phase especially when temporary dams may be necessary.
Decommissioning at the end of their useful life is simply a matter of removing the equipment.
Do I have to ask permission to install a micro hydro scheme?
Yes, before extracting water from any river or stream, a licence has to be obtained from the Environment Agency or other relevant authority. Planning permission may also be needed.
How much does it cost?
The initial capital outlay depends on the site but with the long lifetime of the equipment, high reliability and no fuel costs the running costs are very low. Initial capital costs can be substantially reduced when using pre-existing infrastructure, e.g. at a former water powered mill site.
Costs are low for schemes with high ‘head’ of water with costs increasing as the height decreases.
What are energy crops?
Perennial crops such as deciduous trees and grasses are grown for use as fuel to be used in biomass power plants to provide heat and power. The most commonly used is willow, grown on a rotation of 2 – 4 years and known as short rotation coppice. Grasses such as miscanthus give a bigger harvest per hectare than willow and can be harvested annually, but are better suited to the more temperate regions of the UK. Straw can also be used.
What is forestry and industrial wood waste?
Forestry waste is the residue from the clearing and management of woodland and forests. It is also possible to use the wood waste from industrial sites such as furniture manufacturers.
How do they work?
For a biomass power plant, the chipped, shredded and dried fuel is fed into a boiler, from where the gas is collected and used to produce electricity or heat by combustion. The growing cycle for short rotation coppice requires a growth period of 3-5 years before effective harvesting can take place.
What is the environmental impact?
Energy crops require very little in the way of pesticides and herbicides and apart from the visual impact of growing coppice, in certain circumstances it could be regarded as beneficial for wildlife. This will, of course, depend on individual site characteristics. There are few environmental issues related to forestry and straw although, after a forestry site has been cleared there could be more water run-off but this is manageable with good forestry practice. Using industrial wood waste avoids land filling and the use of woodland residues can make forests more accessible through better management. The costs involved in transporting fuel to a power plant would need to be taken into account and it could cause an increase in traffic. All power plants would need to meet emissions regulations.
How much does it cost?
At present the total investment costs for biomass boiler plants are estimated at £1800-3000/kW installed. It is estimated that wide scale deployment will bring the costs down considerably and improve the efficiency. Costs for boiler plants for forestry residue will be in the region of £1600/kW installed for a 5MW installation.
What is a heat pump?
A heat pump is an electrically powered unit consisting of a compressor and a pair of heat exchangers which is able to tap the natural thermal energy stored in the earth, air or water and use this to heat your home and provide hot water. They can also provide cooling systems.
How do they work?
They work in a similar way to a fridge, but the other way round. Instead of taking heat from the fridge and putting it into the air, it takes heat from the source and puts it into another environment. They do use some electricity to pump the heat but for each kilowatt of electricity used to run the heat pump, three or four kilowatts are produced.
Can I run my house from a heat pump?
Yes you can but your property should be extremely well insulated to ensure maximum benefit. If there is a lot of heat loss then this can add substantially to the cost of installation.
What are the environmental aspects of heat pumps?
Heat pumps are very environmentally friendly – there are no emissions, and if you use renewable energy from your own sources, or buy it in from your electricity company, then the whole system will be run from clean and renewable sources.
How much does it cost?
This of course depends on the size of your property, how well insulated it is and whether it is new build or will be fitted to an existing building. In a new, well-insulated, medium-sized building, the cost would be around £6000 excluding VAT. Running costs after installation, compare favourably to oil and electric run heating systems. Maintenance costs are minimal.
Other sources of information on the different technologies
Alternative Technology Centre
The Energy Savings Trust
British Hydro Association
Power from the Landscape
British Wind Energy Association
Solar Trade Association
Heat Pump Association
Combined Heat and Power Association
Biomass Energy Centre
Yorkshire and Humber Microgeneration partnership
3. Choosing the right legal form
In order to develop a site, it is necessary to form an organisation that will take responsibility for managing the project – from raising the money to implementing the scheme.
There are a number of options available to communities in terms of legal structure. It is an important decision to make as it can restrict what your organisation can achieve if you chose the wrong one.
A legal structure is, quite simply, a formal method of organising a project so that it is acceptable in law. Different structures will determine the corporate status, governing document or constitution, your governing body, management structure, membership and how you will deal with any profit from your enterprise. There are several types of legal form available:
Company limited by guarantee and company limited by shares
Industrial and provident society
Limited liability partnership
Community Interest Company (CIC) limited by guarantee and Community Interest Company (CIC) limited by shares
Charitable Incorporated Organisation (CIO) – this is a new legal form for a charity which is being developed by the Charity Commission. Progress can be seen here
Which form is appropriate for your organisation?
When considering which legal structure is most suitable for you, it is important to first work out what your aims and purpose and objectives are, what you want to do, how you want to do it, and then choose a structure that is suitable for you, i.e. structure follows strategy, not the other way round.
First of all, you need to decide whether to incorporate at all – register as a company with Companies House or other body. Unincorporated organisations (such as Association, Trust or Partnership) have no legal identity separate from individual members. Members of its management committee will ultimately have personal legal and financial liability.
In an incorporated company, members of the board have a limited liability – if everything goes horribly wrong then they are only liable to the amount of money they put in, a nominal sum - usually not more than £10. (That is unless they can be said to have acted improperly or outside the law, in which case they will be personally liable.)
Any organisation which intends to develop any substantial trading activity should be incorporated as it reduces the personal liability of the members. It is not as onerous as it sounds and is a very simple and quick process. A company can be got up and running in a matter of days.
The most common forms are
Company limited by guarantee
Industrial and provident society
Community Interest Company
This is the simplest form of incorporated company. Limited companies are owned and controlled by their members. They can either be a
This means that any profit will be shared amongst the members of the organisation. As the company grows, its profitability grows and so does the share price, so othe shareholders make money. The share model may be used by Social Enterprises that are employee-owned, but they will not be likely to attract many grants.
Often called 'Not for profit organisations', it doesn't mean that the organisation cannot make a profit, simply that any profit will be reinvested into the company or to assist the beneficiaries. Directors may be able to take a wage if the Memorandum of Association allows. This is the most common form for organisations such as this.
Industrial and Provident Society (IPS)
An IPS can take two forms – they qualify if they carry out an industry, business or trade and are either 'a bona fide co-operative society' or are intended to be conducted 'for the benefit of the community'
IPSs are registered with the Registrar of Friendly Societies under the Industrial and Provident Societies Act 1965.
The 1965 Act does not define what a 'bona fide co-operative society' is but the Registrar of Friendly Societies has issued guidelines which state that:
Business must be conducted for the mutual benefit of the society's members
All members must have an equal say in the running of the society
A society that operates with the object of making private profit cannot be a bona fide co-operative society. Any surplus must be re-invested and the amount of interest members can be paid on the money they have invested in the society is restricted regardless of the level of profit.
The society must have at least 7 members
Membership must be open to all who work in the organisation
Community Interest Company (CIC)
This is a relatively new legal form and seems to be the flavour of the month at the moment. A CIC is not for everyone, it is just the newest of several options for legal structures for social enterprises. They are a sort of halfway house between a business and a charity.
Charity law is centuries old and people have been looking at modernising how they work and coming up with suitable structures that represent the needs of a modern charitable organisation. There is more of a need for charitable organisations to be able to make their own money and charities as such are very restricted in this.
CICs were introduced to offer a modern recognisable form for social enterprises and those organisations wishing to carry out socially motivated objectives. They are based on a model used in America.
Like a Limited Company, they come in two forms – limited by guarantee or by share. A CIC must first be registered as a limited company. The key points of CICs are:
- They must have a lock on assets
- Directors can be paid
- It is possible to access Equity Finance.
They cannot get charitable status, although charities can become CICs (but would lose their charitable status and any assets could not be transferred to the CIC). An alternative is for a charity to establish a separate CIC that donates any profit to the parent charity.
A CIC must provide a 'Community Interest Statement''. This will show that everything it does will contribute in some way to benefiting the community. It considers how you will use any surplus and how you differ from a commercial company. Applying is a very simple process.
For any of these structures the key point is the 'asset lock'. This is a provision that must be present in the memorandum and articles, or constitution. It simply means that any assets of the organisation are locked within the organisation and can only be used to meet the objectives of the organisation, or passed to another organisation with similar aims and objectives. There can be no asset transfers unless at the full value market price, i.e. things cannot be given away, unless you want to transfer to another asset locked body.
For more information:
NCVO Governance and Organisational Structures www.ncvo-vol.org.uk
Community Interest Companies www.cicregulator.gov.uk
Companies House www.companieshouse.gov.uk
Voluntary Action Calderdale www.cvac.org.uk
Co-ops UK http://www.cooperatives-uk.coop/live/cme0.htm
Charity Commission www.charity-commission.gov.uk
NCVO Trading: choosing the right legal forms
Co-operatives UK Simply Legal
Co-operatives UK Simply Governance
4. Financing the scheme
The costs of a scheme can be divided into four main areas:
Equipment. This will be for the renewable equipment itself – turbines, panels etc
Civil works. This includes any work on installing the equipment at the site.
Electrical system. This includes all the necessary electrical equipment – control systems, wiring, and transformer, but also connection to the electric. The cost of the latter is controlled by the local electric distribution company.
Other costs. These could include costs for design and project management, licenses, planning permission etc.
There will also potentially be running costs to consider. These can include:
Any rents payable on the land. If it is agreed with the landowner beforehand, then it could be possible to tie part of the rent in with the income from the property, so that the landowner has a vested interest in it being a successful scheme.
Metering services – monitoring of the meter by an external organisation. Metering is needed to calculate the total generation from the installation, how much is being exported to the grid and how much imported. Eventually, smart meters, due to be rolled out in all homes by 2020, will be used to measure the feed into the grid.
Business rates as renewable energy schemes are classed as businesses unless they are part of a domestic property.
Maintenance of the system.
Insurance costs – should include material damage for the equipment itself, business interruption to cover for any loss of income,
Any public or employers liability
Raising the finance
There are several ways a community can raise the capital to carry out projects.
a. Grants, gifts and donations are all monies that are freely given by donors who support the purpose of the community and where there is no expectation of a return on the money.
b. Loans are monies that are invested by a third party and which must be repaid over an agreed length of time and with an agreed rate of interest.
c. Equity is an investment in return for shares and which give the shareholders legal rights, a dividend on their investment, and also a right to vote. There are three types of equity – withdrawable share capital, ordinary transferable shares and preference shares.
d. Income from the scheme in the form of FITs and RHI
There are several grants that are available for funding schemes – see below for a selection. However, it is worth noting that the use of any grant that is from public money (and this includes Lottery money) will mean that the scheme cannot attract FITs.
The Co-operative Bank
The Co-operative Bank has a track record in funding a wide range of renewable energy projects, including hydro.
The renewable Energy and Asset Finance Team provided £61,000 to help fund the installation of a hydroelectric Archimedean screw at Rorr Weir on the River Gyt at New Mills, Derbyshire
The funding was provided to Torrs Hydro New Mills Ltd (THNM) a company specifically set up to own the scheme at New Mills and install the hydro plant.
Power generated from the Archimedean screw will ultimately be sold, through an electricity supplier, to the Co-operative Group. The electricity will be fed directly into a nearby Co-operative food store
Charity Bank is the UK's only regulated bank that is also a registered charity. Using 100% of depositors' savings, they support voluntary organisations, social enterprises and charities to address society's needs and maximise their social impact.
CO2Sense can offer funding to encourage the development of new renewable electricity generation in the Yorkshire and Humber region.
The funding, known as the Grid Connected Renewables Programme, is available in three streams:
• Emerging renewable technologies. This includes new or existing technologies which are innovative or technologically advanced
• Flagship projects. This is to support projects which can become icons for the region
• Community ownership of renewables. This is dedicated support for projects which are owned by the community.
To be eligible, the generation must take place in the Yorkshire and Humber region and must be connected to the national electricity grid. The selection procedure will be competitive, and a key selection factor will be the quantity of CO2 savings per pound bid.
Funding is available from £20,000 – 500,000, and will be subject to the EU rules on state aid. It is important to note that all funding must be spent by March 2011.
The Sustainable Energy Fund offers grants of up to £20,000 to community groups and not for profit organisations who wish to consider and implement sustainable energy projects in their buildings – from energy efficiency through to micro-generation. Projects that would be considered include: the purchase and installation of one or more renewable energy technologies or the renovation of existing facilities to incorporate micro-generation technology (e.g. the reinstatement of a watermill and the purchase of a turbine to produce hydro-electricity). Application forms are available from the website.
Scottish Power Green Energy Trust
Established in 1998, the independent charitable Green Energy Trust supports the development of new renewable energy sources in the UK helping to reduce our reliance on fossil fuels and combat climate change. Funded by ScottishPower's Green Energy Fund customers and ScottishPower, the Trust offers grants to a wide range of projects that will increase our use and knowledge of renewable energy. The maximum grant is £25,000 for up to 50% of the project costs.
EDF Energy Green Energy Plan This fund is generated by customers of EDF energy switching to a green tariff. It supports the installation of small scale community renewable energy technologies. Potential applicants should contact the green tariff helpline for an application form and greater details concerning the application criteria. Grants of up to £30,000 are available.
Awards for All
A Lottery grants scheme funding small, local community-based projects in the UK.
Ashden Awards for Sustainable Energy
For practical, local energy solutions that cut carbon, protect the environment, reduce poverty and improve people’s lives.
In addition to individual prizes of up to £10,000, with an overall UK Gold Award of £20,000, they make a short, broadcast-quality film about the winning work and offer winners a substantial package of benefits and support to help them grow.
Big Issue Invest
provides finance for social enterprises in the form of loans, participation loans (where repayment is linked to the future performance of the enterprise) and equity. It works closely with social enterprises to tailor the finance to fit with their growth needs and repayment capability. It offers finance between £50,000 and £500,000. BII can also arrange financing in partnership with other social finance institutions for amounts over £500,000. They do not provide grants.
Big Lottery Fund
Operate a number of different grant schemes, see website for details.
Polden Puckham charitable foundation
The Polden-Puckham Charitable Foundation (PPCF) is a grant giving trust with Quaker family roots in the United Kingdom. They support projects that seek to influence values and attitudes, promote equity and social justice, and develop radical alternatives to current economic and social structures and support the work of UK registered charitable NGOs.
The ScottishPower Green Energy Trust supports small scale community based environmental and educational renewable energy projects.
Shell Springboard Trust
The Shell Springboard is a Shell Social Investment Programme which awards £320,000 each year to UK based SMEs, normally in eight awards of £40,000. The programme awards the most commercially viable and innovative business ideas to reduce carbon emissions
b. Loans and investment – approaching a bank or other commercial investor
Any community project would be required to satisfy the following requirements in order to attract a loan or investment, especially from a bank.
A commercial funder will lend money to earn interest and fees and has a responsibility to get the money back. It must cover its overheads and pay investors for the use of their money. It will always be risk averse.
Community projects will be regarded in much the same way as any other development. The project will be expected to make sufficient profit, after the payment of all costs – capital and ongoing running costs, which could include wages.
The community group which wants to borrow must have
The loan would be “non-recourse” project finance - a loan to a company that does nothing other than construct, own and operate a project with no recourse to anything other than the future cashflow and assets of that business.
The owners equity will be at risk, but the lender has no claim on outside assets.
Unlike a domestic mortgage the amount lent normally exceeds the resell value of the component parts of the project
How does a lender value a project?
The strength and value of a project lies in its future projected cashflow - cashflow = energy yield x sale price – operating costs. Consequently, if the project does not work it has very little value.
Therefore a lot of value is contained within the contractual obligations, warranties and insurances comprising the project – far more so than in the physical assets. Lenders base their estimates of value on conservative projections (e.g. a lender will use 90% or 95% energy yield probability estimates for their valuation whilst an equity investor may take 75% or even 50% depending upon their appetite for risk)
Value can have a very different meaning from a project owner’s perspective
The lenders job will be to identify the risk, assess its level and to then manage that risk such that the party most able to manage that risk carries it.
There will be a sensible balance between the risk and the reward. The lender will not expect to act as a shadow director and will only lend if they are certain it is a fully operational project.
Both parties’, the lender and the borrower’s, interests will be the same – that the project is successful and provides a good return after the loan is paid. Those interests will be
The only area in which this alignment does not exist is in negotiating terms and conditions with the lender (the facility agreement) and in establishing the lender’s rights (the security documents).
Step In Agreements
If the borrower defaults on an agreement which then endangers the future of the project, the lender may step in and remedy the fault - for instance with turbine supply/operation and maintenance, land lease and power purchase agreements
Never assume that this is straightforward. All rights to the land and those required to construct, operate and maintain a project, must be secured. This will include
site of turbines & substation
road access and cable / ‘phone connection
wayleaves for adjoining land
The lender will also want to assure themselves that the design and feasibility of the project is robust, that all necessary permissions have been granted, that all parties have the appropriate experience, technical & financial capability and that the contracts dovetail, both technically & legally and that there are clear responsibilities.
The borrower should be a discrete single purpose company so that it’s other activities do not potential endanger the project and of an appropriate legal structure.
If the borrower is also looking to apply for grants, then funders are likely to have their own approaches and requirements, drawdown times, may require invoices to be paid before claiming against them. There may also be a certain amount of inexperience and nervousness on the side of the funder which can affect performance.
Those essential to the operation of the project will take precedence over the loan repayments: discretionary costs will be subordinate to the loan repayments. The borrower should then consider where any payments to the the community will sit in this hierarchy.
What makes a project attractive to a lender?
That there is an established technology, simple contract structure, experienced contractors - clear purpose, responsibilities and decision making.
The borrower has the ability to spot blind spots and seek appropriate support, knows its worth, but chooses its battles.
That relationship matters much more than size and that the smaller the project, the “plainer” the vanilla needs to be or cost of lending and due diligence becomes disproportionate to the cost of the project
When to engage with a lender
to test your economic assumptions and assess funding requirements – at any stage
to test the bankability of a proposed project structure, or the use of particular suppliers – at any stage
you will probably need significant progress with land options, planning consent & grid connection before most suppliers will devote substantial time to a project
a lender would prefer to comment on the whole financial picture or the whole proposed structure rather than receive too many specific questions in isolation
a lender would prefer to be involved prior to final signing of contracts to ensure its considerations are covered
c. Community Share offers
There is a strong history in Yorkshire of people coming together to raise money through the Co-operative movement and building on the tradition of inward investment. There is a growing interest in the principles behind co-operatives and their use as a tool in financing a range of initiatives from bakeries to renewable energy, local shops and pubs. Community shares can be made available to less well off people as the history of the co-operative movement shows – growing from a few people savings small amounts of money on a regular basis to the might of the Co-operative movement which grew to encompass activities such as wholesale, insurance, funeral services, banking and farms worldwide
What is a community share offer
A community share offer can be defined as the offer for sale of more than £10,000 of shares or bonds to communities of at least twenty people, to finance ventures serving a community purpose.
A community can be defined as either:
Shares and Bonds
A share is simply a divided-up unit of the value of a company and gives a legal right to membership and part-ownership of an organisation in return for an investment. There are different types of shares with different rights which are determined partly by the terms and conditions attached to the shares (the share agreement) and partly by the legal form of the organisation itself.
Some types of organisation, such as registered charities or companies limited by guarantee, cannot issue shares. (For this type of organisation the alternative is to issue bonds.)
Organisation types which can issue shares are
Private limited company
Public limited company (plc),
Community Interest Company (CIC)
Industrial and Provident Society (IPS)
A bond is a sort of loan – the legal agreement between the organisation issuing the bond and the person purchasing, which states the amount of interest to be paid on which dates and when the loan will be repaid.
It is a form not commonly used in the third sector and is mainly used when an organisation cannot issue shares e.g. charities.
Bonds carry a fixed rate of interest unlike shares where the interest is decided by the members each year.
Bonds are subject to the same regulation and exemptions as shares.
All types of organisation can issue bonds and it is possible for an eligible organisation to issue shares and bonds.
Legal structures suitable for share offers
An organisation must incorporate in order to be able to raise share capital – form a legal company and register at Company House. There are three main types of legal forms that can be used.
Industrial and Provident Societies (IPS)
IPS have limited liability status (which means that their members are protected to an extent) and have four unique attributes – they work to the principle of one member – one vote. Members elect directors and are fully involved in the running of the organisation.
The share capital held by a member can be withdrawn – sold back to the organisation. (Directors can refuse a request for withdrawal if this is deemed against the interest of the society.) Societies can choose to issue withdrawable shares, transferable shares or shares that are both.
There are limits on the number of shares a member can hold in any one IPS of £20,000. This has been recently under review, with the aim of increasing this figure to £30,000 and has been enabled but not implemented.
There are two main types of IPS: co-operative societies, which are run for the benefit of their members and community benefit societies which are run for the benefit of the wider community
Community Interest Company (CIC)
CICs are a relatively new form of company introduced in 2005. There are no special exemptions for CICs from the regulations covering financial promotions.
As a legal form, charities offer very limited scope for community investment.
Charities cannot issue share capital but can sell bonds and are exempt from regulation under the Financial Services and Markets Act.
An IPS or CIC form is usually suitable legal structures for an organisation which wishes to issue shares. Several things should be considered when deciding which to choose.
Comparison of CICs and IPSs
One share – one vote
One member – one vote
Limits on the amount a person can invest
No upper limit on how much money a person can invest
a £20,000 limit on individual shareholdings
a CIC can distribute no more than 35% of its profits to shareholders in any one year
a flexible limit on the interest paid on share capital
A CIC limited by share can issue transferable shares but not withdrawable shares
Can issue withdrawable or transferable shares
Have asset locks
Only IPS benefit societies can have asset locks
Set up costs
Cheaper to register and maintain
Can be expensive
Are not exempt
Are exempt from regulation when offering shares or bonds
*An asset lock prevents any assets held by a company from being distributed to its members when a company is dissolved
Converting from one form to another
When an organisation is already incorporated in a format which may not be appropriate, then there are two options – to consider converting to a different form or setting up a new organisation. The rules for converting from one to another a re complex and it is best that professional advice is sought but it is worth noting that it is not possible at this time for a CIC to convert to a IPS.
The Financial Services Authority
Offering shares requires that the organisation acts in a professional and responsible manner – people could potentially lose their money! The Financial Services and Markets Act 2000 created a regulatory framework governing the promotion of shares and bonds and the body responsible for overseeing this is the Financial Services Authority (FSA).
This legislation is there to make people aware of the risks and benefits of share issues and to protect them from misleading promotions.
The contents of any promotion of shares to the public must be approved by an FSA authorised person unless it is covered by an exemption. This does not apply not non transferable shares in an IPS.
Publishing a prospectus
Section 85 of the Financial Services and Markets Act 2000 requires organisations making a financial promotion to publish an FSA approved prospectus if they are offering transferable securities. The Act and the FSA’s prospectus rules set out in detail what a prospectus must contain and the approvals required for such a document. http://fsahandbook.info/FSA/html/handbook/PR
This requirement does not apply to non-transferable securities, such as withdrawable share capital in IPSs. There are also exemptions for the following:
Bonds issued by charities. There is also an exemption for non-profit making bodies similar to charities and IPS community benefit societies, which may well describe some CICs.
Transferable shares and bonds issued by IPS community benefit societies, as long as the money raised is used solely for the purposes of the issuer’s objectives.
Offers of transferable securities where the offer is being made to fewer than 100 people or the total being sought is less than €2,500,000.
However, it is important to remember that although an offer might be exempt from having to issue an approved prospectus, the organisation promoting the investment opportunity may still need an FSA authorised person to approve the contents of any communications about the offer.
Although exemption from regulation may make community investment a more affordable option, it is still important that the organisation ensures that community investment is promoted in a responsible way. Even though it might not be necessary to publish an approved prospectus, it is still a matter of good practice to produce some form of offer document for prospective investors that fully sets out the risks as well as the potential rewards. It should also make clear that the offer is made by an organisation that is not authorised by the FSA to conduct regulated activities, and that investors have no right of complaint to the Financial Ombudsman or recourse to the Financial Services Compensation Scheme.
For further information
Co-operatives UK is the national membership organisation for co-operatives of all kinds. It provides information and support on a wide variety of topics relating to the operational duties of IPSs, including those of secretaries and directors. It has a number of model rules for bodies wishing to register as IPSs, including community investment models. www.uk.coop
The Development Trusts Association (DTA) is the leading network of community enterprise practitioners dedicated to helping people set up development trusts and helping existing development trusts learn from each other and work effectively. www.dta.org.uk
Co-operative & Community Finance (C&CF) - Co-operative & Community Finance provides sympathetic loan finance to help people take control of their economic lives and create social benefit. It exclusively serves the co-operative and social enterprise sector, and has supported hundreds of businesses ranging from small community-run enterprises to large award-winning organisations. www.co-opandcommunityfinance.coop
Co-operative and Mutual Solutions Ltd (CMS) Co-operative and Mutual Solutions Ltd is a leading UK consultancy providing business advice to co-operatives and social enterprises. CMS is a worker co-operative. We have a team of specialists with wide ranging skills and knowledge of good practice nationally and internationally. www.cms.coop
Energy4All was formed in 2002 by Baywind Energy Co-op to help communities develop renewable energy schemes, normally through the launch of local share issues. The company is owned by the co-ops it creates www.energy4all.co.uk
Wessex Community Assets Ltd (WCA) Wessex Community Assets (WCA) offers support and advice to organisations wishing to obtain community investment, avoiding reliance on grant funding.www.wessexca.co.uk
Co-operatives UK The practitioners guide to community shares
d. Income from the scheme
Clean Energy Cash Back - FITs (Feed-in tariffs) and Renewable Heat Incentive (RHI)
In April 2010, the Govt. introduced the Feed In Tariff scheme. This is a mechanism whereby there is a guaranteed fixed premium rate paid for electricity generated by from small scale renewable energy schemes – up to 5 MW..
Rates are set for the different technologies and will be subject to 'digression' (the tariff level available for new generators will decrease annually. the rate of digression will vary by renewable energy technology).
The costs for the programme is borne by all UK electricity consumers proportionally - all consumers bear a slight increase in their annual bill, thus allowing electricity utility companies to buy renewable energy generated from green sources at above-market rates.
The next Feed-in Tariff Programme review is scheduled for 2013 when the amount paid out is expected to be reduced by around 15% and continue to be reduced every 2 years.
There is also an additional payment, the export tariff, for every KWh that is exported to the grid. The price for this is 3p/KWh.
The tariff will be guaranteed for 20 years (25 for solar PV).
In March 2011 the new coalition government announced that support for large-scale photovoltaic installations (greater than 50 kW) would be cut after 1st August 2011. This was in response to the large solar farms being established, which would have absorbed disproportionate amounts of the fund -
The Renewable Heat Incentive (the RHI) is a payment system for the generation of heat from renewable energy sources. It is due to start on 30th September 2011 for non domestic schemes and will be extended to domestic schemes in October 2012, but any installation carried out from July 2009 will be eligible.
The RHI will operate in a similar way to the existing Feed-in Tariff system, and was introduced through the same legislation - the Energy Act 2008.
Through the scheme, generators of renewable heat will be paid up to 8.5p/kWhr for hot water and heat which they generate and use themselves. The actual tariff depending on which technology is used and the scale of generation. The annual subsidy will last for 20 years.
The technologies that are eligible under the first phase are solar thermal (water), ground source and water source heat pumps, biomass boilers and bio-methane.
Any installation taking place from September 2011 onwards will be eligible for the RH Premium Payments which will consist of an upfront payment prior to the RHI being introduced, the rates being - Air Source Heat Pumps £850 Ground Source Heat Pumps £1250 Biomass Boiler £950 Solar Thermal £300.
The income from both these schemes is tax free for individuals, but
These schemes will go a long way to making systems financially viable and there is the potential for a renewable energy scheme to bring substantial revenue into a community.
For more details of the schemes, see the DECC website.
Co-operatives UK Simply finance
Energy Savings Trust – Making FITs work for you
Energy Savings Trust - Renewable Heat Incentive
Energy Savings Trust – Funding in England
5. Writing the business plan
Having carried out the technology options appraisal, decided your legal structure and investigated possible financing options, it is time to write the Business Plan. You will need this, a. so that everyone is working to the same plan and b. to show potential investors facts such as why you’ve selected the technology and site, but also to show how you will deliver on your stated objectives – and prove what a good investment your project is, in numerical terms.
The Business Plan should include:
- an initial executive summary, summarising the detail of the business proposal
- a written overview of the business' aims
- its product or service
- management team
- financial forecasts and appendices, such as the CVs of key management members, market research data or technical product information.
The plan should explain in detail the reason the business is being established, what it will do and how that is different from main competitors, marketing key personnel and their experience.
The financial information should include full cost breakdowns, financing options and forecasts.
A full risk assessment should also be included.
There are lots of templates for writing business plans available on line. An example can be seen here.
6. Project Delivery
Good project management is key to a good scheme – controlling the project costs, schedule and quality. It will include
There are some good free tools for effective project management here.
Community Energy Scotland Toolkit
The London Energy Partnership provides examples of different forms of Energy Services Company (ESCo) development in the
Making ESCOs Work: Guidance and advice on setting up and delivering an ESCO, Part A
Developing an Energy Action Area
Planning Portal provides information and support for those navigating the planning system.
Planning Renewables provides up-to-date and useful information for local authority planning officers and councillors when dealing with planning applications for renewable energy developments
Energy4all is an expert in community owner renewable energy schemes. They promote the successful asset-ownership model pioneered by Baywind Energy Cooperative.
Community Renewable Energy (CoRE) is a social enterprise which works with communities to develop renewable energy projects in return for a stake in the companies created, to recoup their support and development costs.
7. Case studies
Talybont on Usk energy
Talybont on Usk Energy is a community company with their own 36kW hydro electric turbine which has been running since 2006. The electricity generated from the scheme is sold and the income (of about £25,000 a year) is invested in energy saving and sustainable living projects in their rural community in the Brecon Beacons such as a Green Community car project and PV panels on the community hall.
Baywind Energy Co-operative Ltd is an Industrial and Provident Society formed in 1996. The first two Baywind projects enabled a community in Cumbria to invest in local wind farms and who now enjoy a competitive return on their investment from the sale of the electricity.
The first share issue raised £1.2 million for two turbines at Harlock Hill, the second issue raising a further £670000 for a turbine at Haverigg II. Preference is for local shareholders.
To encourage more Community Owned wind farms, they have formed a development company Energy4all, who can help in return for a stake in the scheme.
was established as an Industrial and Provident Society with the specific purpose of owning the Settle Weir Hydro Electric Scheme. The aim was to generate income by selling ‘green’ hydro-electricity, with any surplus to be used to benefit the local community.