Amid the threats of soaring energy prices and global climate
change, it gives us every reason to go ahead with ‘Energy Localism’
– community sustainable energy projects – which can stimulate local green
growth and motivate a ‘Big Society’. Unless you are lucky enough to have a
hidden goldmine in your community, it is often the financiers, not any business
angels, who can give an energy project the green light. A legal structure or
company model often carries too many implications.
No doubt that any community organisation has to be incorporated
with a legal form before it can seek financing. For enterprises with social
missions (e.g. social enterprises), the government recognised in the early
noughties that traditional legal forms pose an obstacle to raising finance. Traditional
vehicles like companies limited by guarantee and charities are not allowed to
raise equity which is often essential for a distributed generation project that
needs substantial investment. Their weak brand makes financiers wary and
increases the cost of funds. Introduced in the previous decade, some
‘tailor-made’ legal vehicles such as community interest companies (CIC),
society for the benefit of the community (BenComm) and bona fide co-operative
(Co-op) under the umbrella of industrial and provident society (IPS) are
increasingly adopted by community enterprises. Are these new models really a
blessing for social entrepreneurs when raising finance and tackling local
sustainability agenda?
The answer is not that straight forward. It depends on the
‘bankability’ or robustness of a community energy project. Bankers desire
stable and predictable cash-flows at known risk. Equity funders require
maximised returns to equity at known risk with a pathway to exit or repayment
within a determined horizon, say 5-15 years. If you benefit from the government’s
feed-in tariff and renewable heat incentive, your project will be awarded a
higher score on bankers’ desks. But the scale of a local energy project that is
typically smaller than large infrastructural projects remains a stumbling block
due to the transaction cost being relatively prohibitive. It seems that a CIC
or BenComm, though featuring social responsibility, “asset lock” and democratic
governance, has not gained a clear edge over other competing proposals in the
City.
If so, let’s turn to community financiers looking to invest
in social enterprises and co-operatives. They are looking for ‘robust’ energy
projects which can offer competitive returns in the commercial market whilst pursuingbroader
community benefits. To them, an investment decision is more about the
“substance” than the “legal form” of the enterprise. Funders prefer to support
companies with clearly articulated social objectives as well as the power to
borrow in their governing documents. In the case of Co-ops, they only lend to
those with at least 51% of shares controlled by employees. For instance, even
if there is no “asset lock” in a company’s structure, funders will look for
clear policies regarding dividends, directors’ remuneration, shareholding and
dissolution which reflect the distinctive profile of a community renewable
energy enterprise. In some cases, funders may negotiate with the borrowers to
set up a quasi “asset lock” arrangement or a minority stake in their article.
Thus, in fact, socially responsible financiers do look for the ‘substances’ which
characterise such new models as CIC and BenComm, rather than simply the
‘certificates’ from the FSA or Companies House.
Well, legal structures do matter in terms of asset
allocation – a determinant of the forecast rate of returns, in the
considerations of financiers. Particularly in the context of community-owned
energy projects, a Co-op can, in theory, attract more private capitals than
BenComm and CIC. Both types of IPS, Co-op and BenComm, guarantee community
engagement, one-member-one-vote governance and to pay interest on shares, but
BenComm lures less capitals as all surplus from business is not allowed to go
for dividends. In CIC, no more than 35% of surplus is distributable and the dividend
per share is limited to the Bank of England base lending rate plus 5%. These
restrictions render CIC difficult to invest because the performance-related
income is too low in the eyes of financiers. Therefore, if a CIC is mainly
supported by grants from local authority, the payback period is unattractive in
the market. By comparison, the more attractive financial returns explain why
Co-op dominates in the renewable energy field.
As I have already pointed out in my previous blog article, “Building a Co-operative Economy”,
however, a co-op model is not as perfect as it seems. The trouble with the
Co-op status currently available is that a legal ceiling of £20,000 per-unit investment
in this vehicle means that a community energy co-op, which needs millions of
pounds of investment, must achieve very large size by number of members. There
may be a trade-off with the economies of scale enabled by much larger
investment units for many other traditional plc models. This is obviously a
‘dead loop’ in company law that results in such financing conundrum. Isn’t it
justifiable that we need a new hybrid company model which assimilates the
features of plc into the existing co-op structure?
The Chancellor has announced the Treasury would inject £3
billion of funding into the Green Investment Bank over the period 2012-15.
Let’s not be too complacent now for community energy developers. Just two weeks
ago, I attended a symposium on the Green Investment Bank in Whitehall. A
consensus among participants was that the green bank should act as a portal for
community projects and an informed lender to guide mainstream institutions to
drive credit-worthiness of community renewables. The current arrangement within
the green bank focuses too much on technologies rather than enterprises
desperate for money to kick start and run these community energy schemes.
Even if the government was willing to re-focus the green
bank on community energy, it wouldn’t help shed light to the financing barrier we
are facing. What I have learnt solemnly as a member of a board running a
community generation project in West Midlands is that the “state aid de minimis rule” of the European
Commission is just the killer. It is the government policy that an
installation owner which has benefited from financial aid,
worth more than €200,000 over any period of three fiscal years,
from public funds for the installation is not eligible for receipt of the
Feed-in Tariff and the Renewable Heat Incentive payments, which are the
flagship policies that guarantees predictable profitability of community
generations. This threshold would apply where we are able to
confirm that no electricity will be used in the primary production of agricultural
products.
As the Green Investment Bank is not allowed to borrow in the
market until 2015 or even later, and the £3 billion sitting in the bank now is
public money, it means our green bank is, in Brussels’s logic, no more than
another public fund. Thus, a community energy project developer should forget
the ‘cherries’ of the feed-in tariff and renewable heat incentive if it could secure a loan of
mercy from the green bank. Apparently community energy is in a ridiculous
dilemma unless there is an overhaul in these European regulations soon.
This blog article is adapted from my
editorial which was first published in EG Magazine (Volume 17, Issue
3) by the Global
to Local Foundation in January 2012.
Email me at winstonkm.mark@googlemail.com
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