Briefing Paper from NIFES OPET

Preamble

As governments throughout the European Union (EU), and beyond, devise and implement new environmental policies to mitigate the impact of climate change as a consequence of fossil fuel combustion emissions, so sustainable energy is gaining a higher priority.  New investment in methods of generating electricity from renewable energy sources is necessary, if national, EU and international targets are to be reached.

Background

Throughout Europe there is a burgeoning renewable energy industry which is creating new clean generating capacity; creating new jobs and being driven by the need to displace fossil fuel consumption. The European Commission has published its ‘Campaign for take-off” with ambitious targets for new generating capacity; 1m new photovoltaic systems; 10,000MW of large wind farms; 10,000MW_th of biomass capacity. This new capacity would double the existing renewable energy capacity in the EU and the objective is to achieve this by 2010.

In some other EU countries (notably Germany) the new investment in renewable energy has been marked – particularly in windfarms. In the UK, the growth rate and economic impact of the renewable energy industry has been less spectacular. However, renewable electricity projects of £1bn capital value are likely to be built in the UK over the next three years. In all these cases there is an electricity purchase contract for 15 years and the project finance is committed against the forecast income from the sale of electricity at known price over the 15 years. The project finance comes from finance houses and developers.

Project Risk/Return

The renewable energy business is seen as carrying high risks for investors. However the range of renewable energy technologies present a range of risks. These are presented in the following table.

	Risk rating	IRRe  %	Rated Output MW	Capital Value    £m	p/kWh
Biomass	0.71	24.8	1	4	5.10
Municipal Waste Incineration	0.63	14.5	12	47.3	3.23
Small wind (1x600kW)	0.61	6.2	0.6	0.42	4.57
Large wind (20MW)	0.51	16.7	20	13	3.53
Small hydro (<1MW)	0.48	10.5	0.89	1.3	4.25
CCGT	0.46	14.0	475	142	2.50
Large hydro (<5MW)	0.42	24.8	4.35	4.3	4.25
Landfill gas	0.39	17.1	1	0.78	3.01

(source:  Ernst & Young, ref.K/FR/00090/REP)

Table 1: - comparing the risk ratings of various renewable energy technologies and the discount rates on cashflows available to equity holders (NPV=0) for specific examples of each technology.

Table 1 shows indicative figures for the risks, returns and relative scale of various renewable energy schemes compared to the industry standard power generation from gas-fired combined cycle gas turbines. These figures are based on electricity prices from the earlier rounds of the Non Fossil Fuel Obligation (NFFO), which pays premium prices for electricity from renewable sources. The electricity prices in the later rounds of NFFO, and the similar Scottish Renewables Obligation (SRO), were lower.  The NFFO and SRO contracts remove some of the business risk of such projects by providing a long-term, inflation-linked, guaranteed price for electricity produced. The technical risk can be offset by technical warranties and maintenance agreements with equipment manufacturers.

Local Community Funds

In addition to large-scale investments by finance houses and project developers, precedents have been established in other EU countries, where individuals have joined together to form local associations, which fund new renewable energy schemes for their local benefit. In the Netherlands there are many wind energy co-operatives. Some of these own and operate a few small wind turbines, others have shares in larger windfarms operated by other co-operatives. The general pattern is the same; individuals become members of the co-operative by lending money (minimum about £60). The co-operative uses the funds to install one or more turbines. The electricity produced is sold to the local electricity utility and the income is used to pay the members a return on their loan capital. In one example, a wind co-operative has provided its members with a return of 8% for the last 5 years. There are similar wind energy associations in Denmark.

Several of the Dutch wind energy cooperatives began about 10 years ago. Some have several hundred members each. Many of the wind turbine investments use relatively small turbines (80kW rated output) or they share ownership with other investors, such as electric utilities or wind turbine manufacturers.

Similar arrangements also exist in a more formal financial context through the Triodos Bank, which set up a special fund for investors in renewable energy in the Netherlands in 1993. Triodos Bank was founded in 1980 as a social bank and began operations in the UK in 1995. Triodos has launched The Wind Fund plc as an investment fund for renewable energy schemes – principally windfarms and small-scale hydro.

To date, there have been two share issues by The Wind Fund; individuals and institutions were invited to apply for shares. The minimum individual shareholding was set at £260 (200 shares at £1.30).

Under the first share issue, investments were made in a windfarm in Cumbria (4 wind turbines for Haverigg II) and a small hydro scheme in Argyll (950kW at Beochlich by Loch Awe). Both schemes have long-term (15 years) index-linked power purchase contracts under the NFFO and SRO.

The first renewable energy cooperative in the UK is the Baywind Energy Co-operative, which has 1100 members, of whom 600 live in Cumbria, where Baywind part-owns the Harlock Hill wind farm (NFFO-3; 3.46MW rated)

Other renewable energy community funds are likely in future.  Fenland Green Power Investments is to be launched as a local community fund in Cambridgeshire to part-finance the development of three wind clusters, each of 3 turbines, to be built by Eastern Generation. The full scheme, comprising 9 turbines, has a capital value of £4.5m. The local community, through Fenland Green Power Investments, will be able to own 10% of the equity (equivalent to £150k).

Many renewable energy schemes have been delayed and some abandoned in the face of protracted objections to planning applications. By developing community funds to part-finance a project, in conjunction with a credible partner, so the local community can assume part-ownership of renewable energy schemes. This means that some of the benefit can be returned to those whose communities host the projects. Often, objections are raised to renewable energy schemes being imposed by external organisations with no local connection. Community funds offer one means of diffusing some objections by involving local people.

There is a substantial capacity of new renewable energy schemes, which have secured long-term power purchase contracts under the SRO and NFFO, which have yet to secure planning permission or be built. Opportunities could exist to create new community funds in Scotland in order to share the ownership of some of these renewable energy schemes.

Conclusion

Community renewable energy funds are beginning to be established in the UK. There is a lot of experience with this type of co-operative in the Netherlands and in Denmark. Community funds share the ownership in renewable energy schemes and so promote the development and use of renewable energy. By investing in conjunction with an experienced development company, a community fund can achieve its aim without taking the whole business and technical risks of developing a complete small scheme. Community funds in Scotland could be the basis of stimulating greater positive interest in all uses of renewable energy.

Contacts

The Wind Fund plc                                         www.windfund.co.uk

Wind Prospect Ltd                                          www.windprospect.com/fenland/index.html

Frisse Wind (Amsterdam Wind Turbine        www.design.nl/friswind

Co-operative)

NIFES OPET                                                  www.nifes.co.uk

This briefing paper has been produced with support from the European Commission OPET Programme. NIFES is the OPET for Scotland (Organisation for the Promotion of Energy Technology).