fin community, iea retd workshop in london, 26th august 2015
TRANSCRIPT
Cost and financing aspects of community renewable energy projects
Name: Gregory Vaughan-Morris
Date: 27 August 2015
Location: Foreign and Commonwealth Office
FIN-COMMUNITY
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Project objective
The overall objective of the envisaged FIN-COMMUNITY project is to:
“Identify, document and assess the cost and financial impacts faced by community-owned renewable energy projects compared to commercial renewable energy projects.”
Sub contractors
Data contributions
Main contractor
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What is community energy? No standard
National Community Energy Strategy Summary, 2015: “…the wide range of ways that communities can develop, deliver and benefit from sustainable energy. It can involve supply-based projects such as renewable energy installations, storage, and demand side projects such as energy efficiency and demand management. Community energy can even include community-based approaches to selling or distributing energy. Community energy projects encompass a variety of technologies and activities across a range of scales, determined by community needs, availability of local natural resources, technologies and funding, and community support.”
(i) Community members control or exercise material influence on the definition, management and execution of the project, such that the goals of the project align with (or are intended to align with) the goals of the host community. This may include geographic co-location;
(ii) A material share of project ownership resides in the project host community or communities;
(iii) Projects are designed to provide local economic and social benefits rather than primarily to provide economic rents to share-holders; and
(iv) Profitability is not necessary for the project to be deemed a success.
Ripens et al. 2013: Community led projects consist of a group of people who participate in the energy transition by cooperating in the field ofrenewable energy
Bolinger 2001. These projects are initiated, developed, and operated primarily by the local community and often run in the form of “general partnerships”
Leuphana University: Narrow definition (1) Actors: Private persons and/ or small agricultural businesses (along with other legal entities) invest individually or together into RES installations; (2) Form of participation: actors invest equity in the project so have voting rights and rights of control; (3) Participation quota: Citizens hold at least 50% of voting rights; and (4) Regionality: Investing company members come from or live in one region, although that region can cross administrative boundaries.
Wider definition includes lower requirements towards the participation quota (minority participation) and the principle of regionality (communityof interest rather than community of locality).
DECC: “community interest company; or a community benefit society or co-operative society, or a registered charity or a wholly owned trading subsidiary of a registered charity, other than such a company or society with more than 50 employees.”
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Project objective - detail
To answer seven questions1. What types/size of common and specific costs of project development and technology
deployment are faced by existing local renewable energy projects broken down by model (community-led, shared ownership, fully commercial) and scale?
2. What are the external factors that could impact the costs of community-led renewable energy projects (e.g. tax relief, government incentives)?
3. Are there specific constraints and related cost/financing implications that could apply only to community-led/shared ownership projects, but not to commercial ones?
4. Of the types of cost which were common to all model types, are there any invariably higher cost for community-led and/or shared ownership projects than for commercial projects? If so, why?
5. Are there any costs that are lower for community-led projects? For example, does government backing to community projects reduce perceptions of risk and therefore lower capital in some respects?
6. What might these costs be in the years up to 2020, assuming the sector expands in line with the expected potential?
7. Where community-led and/or shared ownership projects faced additional or higher costs, are there opportunities to reduce or avoid them for future projects? How can this be achieved?
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Shared ownership – what forms are there?
Key question: How do negotiations take place? Open book or not?
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Missing question: Are the revenue drivers different?
Missing question: Are the revenue drivers different?
Profitability of any renewable energy project depends on two factors:• What are the costs (interest rates, taxes, operating costs)?• What are the annual revenues?
The difference is net cash flow (akin to profit) which can be distributed to community investors and to other community beneficiaries (as is common in the UK for example).
Commercial developers will look for optimal locations for siting their assets, which are locations that meet a ‘sweet spot’ of:1. Favourable environmental factors to maximise electricity generation per year:
• For wind projects, windy throughout the year• For solar projects, locations facing the sun with high levels of insolation and low
cloud cover2. Low costs of connecting the assets, e.g. low grid connection costs, minimal costs to
prepare the land for the installation, low rentals, etc.
Community developments will tend to be located near to the community in question, which means their proposed location is unlikely to be optimal, e.g. there may be a sunnier site 50 miles away, or a windier hilltop 4 miles away.
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Answers: Q 1
1. What types/size of common and specific costs of project development and technology deployment are faced by existing local renewable energy projects broken down by model (community-led, shared ownership, fully commercial) and scale?
CommunityShared
community involvement
Shared commercial involvement
Commercial
Development costs
Initial feasibility
Planning permission preparation
Project management costs
Other advisory
Community consultation
Construction costs
Operations costs
Taxation costs ? ?
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Answers: Q 6
6. What might these costs be in the years up to 2020, assuming the sector expands in line with the expected potential?
When we asked communities whether they thought a commercial developer developing a project of the same size in the same location would have been able to build and operate a solar or wind projects more cheaply than the community the general response was no, there will not be a material difference. This is backed up by some of the cost numbers communities gave compared to the limited data we had for small scale commercial projects.
Therefore, there is no reason not to believe that operating and construction costs for community and shared ownership projects will not mirror the general trends for construction and operating costs for commercial projects, namely:• onshore wind costs falling by about 10% in real terms from a Levelised Cost of Energy of
€2,570/kW to €2,300/kW based on an exchange rate of USD$1 = EUR €0.87• solar costs 1MW+ falling by about 20% in real terms from a Levelised Cost of Energy of
€1,740/kW to €1,390/kW based on an exchange rate of USD$1 = EUR €0.87 • solar <1MW falling by about 18% in real terms from a Levelised Cost of Energy of €1,910/kW to
€1,570/kW)
Nevertheless, the area where there may be reductions is in development costs if communities do a second project or where communities are given assistance or helpful how-to guides to avoid wasted time.
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Answers: Q 6
Wind Cost Projections 2015 - 2050 IEA.
Source: IEA. “Technology Roadmap. Wind Energy. 2013 edition, Figure 13, p.23.
USD$ 1 = EUR €0.87
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Answers: Q 6
Solar PV Cost Projections 2015 - 2050 IEA.
Source: IEA. “Technology Roadmap. Solar Photovoltaic Energy. 2014 edition, Figure 11, p.23.
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Australia: Policy background
The Australian energy sector is dominated by centralised fossil fuel generation, with coal-fired electricity making up an average of 75% of electricity demand. The remaining 25% has been predominantly sourced from gas-fired generators and large hydro-electric power schemes, but 7% is solar and 5% is wind.
Community energy is a challenging environment, where apart from a few grants there is no particular support for community energy. There are currently 22 operating community renewable energy projects. The renewable energy market is targeted with towards larger projects with Large-scale Generation Certificates (LGCs) 100kW+, but there are also Small Technology Certificates (STCs) <100kWs.
Nevertheless, community energy projects exist, by being innovative and going behind the meter (“net meter”). Electricity costs in Australia are falling and are currently about AUD$60/MWh (€37/MWh), but retail costs can reach AUD$180/MWh (€111/MWh) or more. Deals are structured where communities set up “development companies” that offer companies the opportunity to have solar panels installed on their roofs. For the electricity generated the company pays the community development company the same electricity bill they normally would have paid for the first 7-10 years (so the community is receiving a revenue stream at about AUD$180/MWh), and at the end of the term the solar panels are given ‘for free’ to the company. There is no, or little, community benefit, but local people can invest in local solar panels, earning a return of 5%-6%.
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Canada: Policy background
Canada generates two thirds of its electricity from RES installations:• Hydro is approximately 60%• Wind is approximately 5% (6GW)• Solar is approximately 1%
There is little support for community renewable electricity with no national support. However, at the Provincial level there is support in:• Ontario with the Green Energy and Green Economy Act giving a FiT and recognising the
importance of community power. For example, if developments have >50% of their shares owned by local individuals they can claim FiTs. There are about 20 community projects, mostly solar in the 50kW – 500kW range.
• Nova Scotia has had a favourable FiT for community renewable electricity generation, and income tax breaks for local investors. However, Nova Scotia has recently announced the end of this support, stating the FiT has met its target of increasing RES and FiTs would only increase electricity bills if it were to continue.
In addition there is special support for Aboriginal and Northern Communities for First Nation and remote (off-grid) communities to establish energy self-sufficiency; tackle high energy prices and reduce local environmental impacts. Electricity prices in these areas are heavily subsidised by Government, e.g. costs of CAD$ 250/MWh but communities only pay CAD$120/MWh.
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Denmark: Policy background
Denmark has been a leader in community energy with many projects from the late 1980s to 2002 when a feed-in tariff (FiT) regime was removed. From 2003 to 2009 the Community Energy sector was moribund.
However, since 2009 community energy has started again, with reform of the Promotion of Renewable Energy Sources Act which increased the market premium (like a UK Contract for Differences). However, since 2009 community projects have tended to be shared ownership projects with commercial developers or municipalities, either because:• Cooperatives found it the only way to be able make profits; or• The Danish Promotion of Renewable Energy Act, 2009 makes it a statutory regulation
that at least 20% ownership of new wind projects must offered to local residents in the municipality (with those within 4.5km given preference over those living further than 4.5km from the wind turbines)
Wind energy (onshore and offshore) accounts for 4,855MW of installed capacity (circa 35% of the country’s electrical energy demand). PV adds another 500MW of so.
Danish Promotion of Renewable Energy Act, 2009“13.-(1) Any person who erects one or more wind turbines of at least 25m in height onshore, or offshore wind turbines established without a tendering procedure, cf. section 23(4), shall, prior to commencement of erection, offer for sale at least 20 per cent of the ownership shares to the persons entitled to make an offer pursuant to section 15.”
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Germany: Policy background
RES generation in Germany is very significant, with many community energy projects especially energy cooperatives. However, at the national level there is no particular support for community energy, although some municipalities help community projects find roofs for solar PV projects.
Like many other countries, community RES is more about local ownership, rather than community benefit.
Traditionally Germany has relied on a FiT, but this is now being reduced to <100kW projects from 2016 onwards. For projects >100kW there is direct marketing (where generators have to find energy companies to sell electricity to) and tendering (like the UK CfDs) is being tested for future projects.
In the first round of tendering no community or civil law partnership organisations were selected.
The German Government backed bank KfWoffers communities or commercial developers loans of up to €25m at very attractive rates, c. 1.3%-4%.
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UK: Policy background
The UK has a rapidly expanding renewable energy market with renewable electricity now representing 19.2% of electricity generation capacity with approximately 24,226MW installed.
Of the 24,226MW of installed capacity, 18,264MW (75%) is from generators with a capacity greater than 5MW –nearly all commercial developers with only a handful being 5MW+ (e.g. Westmill Solar Park). From 2017 this 5MW+ will be supported by Contracts for Difference (CfD).
There is estimated to be around 66MW of community renewable electricity capacity installed. There are many support mechanisms for community energy – see over.
For projects <5MW these have historically been supported by a Feed in Tariff (FiT) although there is currently a review of FiTs. Since its introduction in 2010 the FiTs for newly accredited projects have fallen in most years (degression). As can be seen in 2011 and 2012 there was a very large reduction in FIT support to solar PV projects as a result of the rapidly declining cost of PV units.
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UK: Support structures
Fiscal incentives Legal structures Grid connection Planning Other
Like commercial projects FiT for projects less than 5MW and CfD
for 5MW+ projects
Different legal structures in Table 1,
many of which enable dividends to be passed tax-free for community
benefit
DECC Grid Connection Working Group
Varies by each Local Authority
Encouragement for shared ownership, with
differences between England and Wales and
Scotland
Pre-accreditation for FiTs six months longer for communities (e.g.
12 months for solar and 18 months for wind)
DECC Planning Working Group
DECC Shared Ownership Working Group
Ability for a community project up to 5MW and another project up to 5MW to share a grid connection and both
receive FiTs
Licence Lite route to sell electricity to households
Tax incentives for investors, e.g. EIS and
SITR
DECC Hydro Working Group
Grants, e.g. £20k pre-planning grants from UCEF, RCEF, Ynni’r Fro
and CARES Attractive loans, e.g.
from the Green Investment Bank or Renewable Energy Investment Fund
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Answers: Q 2
2. What are the external factors that could impact the costs of community-led renewable energy projects (e.g. tax relief, government incentives)?
+ No particular support, although the Coalition for Community Energy (C4CE) has developed a National Community Energy Strategy to grow the community energy sector in Australia
+ Some States are now starting to develop community energy policies
+ In the Province of Ontario there is a special FiT for renewable energy projects with >50% local share ownership
+ Historically Nova Scotia also had a special FiT for community renewable energy projects, and income tax breaks
+ Grants for the feasibility and development phases, e.g. in Ontario and for Aboriginal and Northern Communities
+ Some State backed loans (guaranteed financing), e.g. Farm Credit Canada
+ Obligation to offer 20% of commercial wind farm projects to local people, encouraging developers to be open with their costings
+ Grants for some cooperatives, e.g. Danish Climate and Energy Ministry grants and loans for the development phase
+ Subsidies for some small scale RES technologies deemed of strategic importance by the Government
+ Little support available, apart from the low interest kFW loans and a very active cooperative market where cooperative members are willing to accept low dividends (approx. 4-5%)
+ Grants (e.g. CARES, UCEF, RCEF, big lottery) and attractive loans (e.g. Scottish Government loans, REIF, CO2 Sense)
+ How-to guides and free technical support
+ Longer pre-accreditation for FiTs with pre-accreditation enabling communities to approach commercial banks
+ Income tax breaks for investors
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Answers: Q 3
3. Are there specific constraints and related cost/financing implications that could apply only to community-led/shared ownership projects, but not to commercial ones?
+ Internal community organisation procedures can slow down the development phase
+ Internal community organisation procedures can slow down the development phase
+ Harder to raise bank finance if no FiT – sometimes communities have to sell some of their projects to private developers to generate sufficient cash flows
+ Internal community organisation procedures can slow down the development phase
+ Few new 100% community owned projects exist now, rather they are shared ownership projects with local investors. nevertheless, the finance raising process for the local investors may take longer than the commercial investor
+ Internal community organisation procedures can slow down the development phase
+ Lack of experience with direct marketing or the new tendering process which are both complicated
+ Commercial banks are more reluctant to lend to communities that have no assets (£s) or will do so with lower gearing
+ Internal community organisation procedures can slow down the development phase
+ Communities can’t raise money quickly again slowing down development phase
+ Weak negotiating strength for shared ownership projects, or lack of knowledge about third party netting and sleeving
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Answers: Q 4
4. Of the types of cost which were common to all model types, are there any invariably higher cost for community-led and/or shared ownership projects than for commercial projects? If so, why?
+ None noted
+ Higher development costs
+ Poor reputation making bank lending harder
+ 100% community ownership doesn’t exist to the same extent
+ Existing 100% community owned projects are able to broker deals through an independent, non-profit trading cooperative (Vindenergi DK) helping to reduce start up costs and costs of selling electricity
+ Maybe construction costs a little higher as communities not able to negotiate such good terms
+ Before financial close is reached grid connections and deposits are often needed – communities do not have ready access to money for this, and until they have FiT pre-accreditation banks won’t engage.
+ Negotiating for shared ownership structures where the developer does not provide open book accounting
+ Development costs (even excluding ‘free’ volunteer time) tend to be higher
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Answers: Q 5
5. Are there any costs that are lower for community-led projects? For example, does government backing to community projects reduce perceptions of risk and therefore lower capital in some respects?
+ No, apart from volunteer time.
+ For first nation PV projects no rentals for roofs, and insurance and legal costs are non existent
+ For 100% community owned projects equity may be raised more cheaply than commercial developers
+ Operating costs may be a little lower, as maintenance for solar PV carried out by for free, and commercial companies may artificially set high operational costs to reduce their corporate tax burden
+ Coops may be able to negotiate attractive deals with municipalities to rent roofs cheaply
+ Can structure vehicles to be tax free
+ Community share offerings can be sourced more cheaply than commercial loans
+ Some commercial bank lenders will lend more cheaply if project supported by a soft lender
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Answers: Q 7
7. Where community-led and/or shared ownership projects faced additional or higher costs, are there opportunities to reduce or avoid them for future projects? How can this be achieved?
+ Communities encouraged to develop more projects as is already happening in the solar market
+ Encourage communities to develop more than one scheme
+ Long-term/stable support
+ More development phase grants in Provinces, and more how-to guide and technical/ financial support to communities developing new projects
+ Encourage more community benefit as outside aboriginal communities does not seem to exist
+ None considered, apart from if communities can develop more than one scheme
+ Communities to be encouraged to develop more than one scheme
+ Communities to be encouraged to develop more than one scheme
+ How-to guides are welcomed as if free technical assistance, with consideration of standardised contracts for shared ownership
+ More encouragement for large developer led projects to offer shared ownership, and more encouragement for open book accounting for shared ownership options (e.g. as is sometimes achieved when Government backed banks pressure developers)
+ Consider the cost effectiveness of income tax breaks for wealthy investors
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Policy recommendations: Current situation analysed
Decide what community energy policy is about? Is it about subsidising projects in unfavourable locations or encouraging community involvement in favourable locations (e.g. through shared ownership)?
Neither, as policy is
emerging.Community
projects need to go behind the
meter
Seems to be more about subsidising
unfavourable locations
Seems to be more about favourable
locations, i.e. large shared ownership
projects
Seems to be about
favourablelocations as no
special support
Mix of favourable + unfavourable
locations (sometimes
going behind the meter)
Who is community energy meant to benefit? Seems to be local investors,
with minor community
benefit
Local investors + first nation
communities
Local investors within 4.5km or in municipality
Local investors Local investors + wider
communitybenefit
Predictable Feed in Tariff type support No In Ontario yes, elsewhere no
Some, but focusis large scale
Yes, but now only <100kW
Yes, but now questions
Sources of grants and favourable loans to help cover the risky development phase costs
No Some, e.g. 1st
Nation, OntarioSome Few Plenty
How to guides to reduce development costs (and importantly time), free technical support, standardised agreements, etc.
No No TBC No Yes
Support to allow for longer development times, and ability to secure pre-financial close loans for grid connections, turbine deposits
No No No No Yes, with FiTpre-
accreditation
Government backed banks (junior lenders)encourage commercial banks to offer better terms
No No No No, but KfWloans v. cheap
Yes
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Germany: Results
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UK: Detailed data gathering (1 of 3)
We collected data for 24 projects, summing to 15.2MW of wind and 5.3MW of solar. Ricardo-AEA collected data for 17 projects where we conducted interviews. We chose to collect dataon completed projects – so that the cost data represented actual, rather than predicted,costs. We obtained data for seven Scottish community projects that was gathered by theJames Hutton Institute and Scene Consulting. This data was part of a ClimateXChange projectentitled ‘The Comparative Costs of Community and Commercial Renewable Energy Projects inScotland’ funded by the Scottish Government.
Whilst sometimes people and companies responding to surveys may not state correct valuesif they perceive benefits to understating or overstating results (e.g. to overstate costs toportray a worse financial position than the reality) the respondents were very open and webelieve very honest with the information they provided.
We also obtained data from two shared ownership projects:
1. A 2013 shared revenue model where the commercial developer used open bookaccounting so the community and commercial developer get similar equity returns givinga equity IRR of circa 10% (which is different from the post-tax pre-finance IRRs whichwould only be available if the community had access to the model used to finance thewhole project)
2. A 2013 Joint Venture model where the community owns a percentage of the shares in thecompany using open book accounting so the community and commercial developer getsimilar equity returns with an equity IRR of circa 24%.
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UK: Detailed data gathering (2 of 3)
Comparison of the time from project planning to commissioning for
community v commercial wind projects
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Community average Commercial average
Source: ClimateXChange. Comparative Costs of Renewable
Development: Community vs Commercial Projects. July 2015.
Figure 13: Average cost £/MW for 9 community wind projects and 11
commercial projects
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Commercial Projects (ClimateXChange)
Data from Renewable UK*
DECC Commercial (1-5 MW) assuming 10% ofproject costs are development costs **
Sources: * Figure 6 ** DECC. Electricity Generation Costs 2013. July
2013. p.66.
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UK: Detailed data gathering (3 of 3)
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Community wind post-tax IRR (%) versus commercial wind hurdle rate (%)
Community returns Commercial hurdle rate
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Community solar post-tax IRR (%) versus commercial solar hurdle rate (%)
Community returns Commercial hurdle rate
Using the data on costs and income we have calculated the post-tax pre-financing Internal Rate ofReturn (IRR) for each community project (which happen to be the same as the pre-tax pre-financingIRRs as all community projects were structured to be tax free), shown below:
19 of the 24 100% community projects pass the commercial hurdle rate is evidence that the sample ofcommunity projects is self-selecting.
Even though from a returns perspective they would be attractive to commercial perspective, this is notto say a commercial developer would have invested in the project. This is for two main reasons:• Commercial developers will have a choice of projects,• Commercial developers will want to focus big ticket projects.This therefore means that in some cases without the community engagement the project, or a similarproject near that location, would not have gone ahead. This is especially true for the projects with alower IRR, as they have a lower safety margin.