Saturday, 21 June 2014

Investing in wind - reading the small print

I like the idea of investing in renewable energy schemes for several reasons - because renewable energy is a good thing (especially wind, as it is more evenly spread through the year compared to solar), and because they are fairly safe (in my view). However, it is essential to read the small print in all cases. I have recently invested in Wester Derry Wind Co-op, which predicts a 7% return over 20 years and I just looked at a loan offer from E2Energy, offering 7.25% over 3 years (7.5% for early birds). Both of them give you your capital back as well as the interest. Based on those bare facts, the E2Energy offer sounds much better because although the return is similar your capital is only tied up for 3 years. But there are many other significant differences.
Wind turbine at Swaffham, Norfolk

The Wester Derry Wind Co-op is installing a new 250 kW wind turbine on farmland in Perthshire. They already had planning permission before they issued the offer. As with all small renewable energy projects, the main income will be from the Feed in Tariffs and to a lesser extent from electricity sales. The Wester Derry financial model builds up a fund to return member capital over the 20 years - the life of the turbine and the term of the feed in tariffs agreement. That means the profit earned by the wind turbines covers your capital as well as your interest. Your return is variable depending on income - 7% is their best guess. Each year the whole profit is distributed to members, and to a community fund.

The E2Energy offer is a loan secured against five wind turbines (each 50 kW) which are already installed and running. The oldest has been running for 18 months. The money obtained is to be used to build new turbines. Under the E2Energy model your interest rate is fixed and the loan capital is paid back by selling the turbines after 3 years. The 5 turbines are currently valued (by Trillion fund and qualified third parties) at 50% more than the value of the loan. However, who knows how much they will be worth in 3 years time. The profit from the turbines is used to pay your interest but getting back your capital relies on the turbines retaining their value.

Of course there are other risks in both cases - not just the weather. Mechanical problems are arguably a higher risk for Wester Derry because there is only one turbine in that project and five in the other. It is highly unlikely that all five would fail. However, in both cases guarantees and insurance should cover any repair needed. That includes lost revenues if a turbine is out of action for more than a few days.

The Wester Derry financial model also includes an estimate of RPI. Since the Feed in Tariff revenues are linked to RPI this is a key parameter impacting income. Their interest rate estimate is based on RPI at 2.5%. If RPI is higher than this then my returns will also be higher - and if RPI is lower then my returns will be lower. However, the E2Energy offer has a fixed return. I quite like the idea of my investment return being linked to RPI as a sort of hedge against inflation.

I spotted one more important difference - the Wester Derry Wind Co-op will almost certainly qualify for EIS which means if you are a tax payer you get tax relief worth up to 30% of your investment.

The renewable energy sector may be ethically more reliable than others but that does not mean your money is safer. Comparing these two, in my view the Wester Derry Wind Co-op is safer provided you are happy to tie up your money for 20 years. However, I am not a qualified financial advisor - just a moderately savvy investor.

There are many other offers available. I heard about Wester Derry from personal recommendation, E2Energy through Trillion Fund and there are also others on Abundance Generation. All require scrutiny. Rather than investing in individual schemes you can also try funds - there are five listed in this Telegraph article from last year. However they tend to involve much larger projects.

1 comment:

  1. Nice comparison. I invested a few years ago in the Fenland Green Power Co-op. The returns so far are below expectations because of low winds and expensive mechanical problems.
    The bottom line from your article seems to be: if you need the capital back in 3 years, E2Energy is a better deal. If you can wait 20 years, Wester's better. Is this a fair summary?