Wednesday, 17 September 2014

Changes coming for community energy investment

The ground is shifting for community energy projects - up to earthquake scale. On the one hand investors are almost certain to lose tax relief and community energy projects aren't allowed to be co-ops any more. On the other hand (and from a different government department) developers are being strong armed into giving local people a chance to invest in their projects. I learned all this at the Community Energy Conference 2014 on Saturday (organised by Co-operative Energy). It was a real eye opener. Let's take these changes one by one.

Tax relief

Currently, community energy projects can usually get tax relief from SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme). Normally, organisations getting income from Feed in Tariffs would be excluded - and that would apply to all community energy projects - but Community Benefit Societies, Co-op Societies and Community Interest Companies are explicitly allowed. Most community energy projects take one of those forms.

However, HMRC intends to remove this benefit on the grounds that this tax relief is for entrepreneurs to encourage them to take risks, whereas community energy projects are not that risky. They have announced Social Investment Tax Relief (SITR) to replace it which is not as good. The table below compares the schemes. Typically wind turbine projects and large solar arrays cost upwards of £1 million, way over the SITR limit so they would not benefit much at all. However, most rooftop PV schemes could be totally covered by SITR so investors would get 30% tax relief instead of 50%.

SchemeTax reliefFund rasing limitNotes
SEIS (Seed Enterprise Investment Scheme)50%£150,000, once onlyDisappearing
EIS (Enterprise Investment Scheme)30%£5,000,000 in 12 monthsDisappearing
SITR (Social Investment Tax Relief)30%£290,000 over 3 yearsComing

No more co-ops

At the moment there are three ways that a community energy scheme can incorporate and get tax relief as above.

  • Industrial Provident Society - what we normally think of as a co-op. In this case the members are the investors.
  • Community Benefit Society - similar to a co-op but benefitting the wider community, and with restricted benefits to the members.
  • Community Interest Company - a conventional company, private or public, that has defined benefit to the community, restricted benefits to shareholders and an asset lock so that if the company winds up the assets are used to the benefit of the community.

The first two of these have to be approved by the FCA (Financial Conduct Authority) and whereas they used to be happy for IPSs to have investors as members (rather than staff or customers), that seems to have changed recently. Being a Community Benefit Society is rather different because but your rules have to include something about using profits to benefit the community and your returns to shareholders are limited. The HMRC discusses the differences here. Returns are also limited for a Community Interest Company. For a company limited by shares it must not pay out more than 35% of profits to shareholders.

Why not be a community benefit society then?
Consider a PV rooftop type scheme, installing say 100 kWp. That will cost something like £120,000 to install, plus legal and other startup costs - say £130,000. You could get something like £13,000/year from the FiTs etc. However, unless you have someone prepared to provide pro bono accounting and administration (and we are talking about a 20 year commitment here) you will pay say £2,000/year in admin. Plus you have to pay for insurance, monitoring and maintenance (at some point you will probably have to replace some of the inverters) - say another £1,500/year - that leaves £9,500/year. If you want to repay the capital over 20 years and pay 4% interest on top, that would be £11,700/year, which is £2,200 more than you are getting. Oh dear. Well actually it isn't quite as bad as that because your income goes up with inflation so the investor returns start low and increase over time. However, that isn't guaranteed and even when you work it in there isn't much left over for community benefit spending. You are unlikely to find more than a few hundred spare - certainly less than £1000/year. What this means is that for smallish schemes like this (and this is substantial for a PV rooftop scheme) it is a stretch to meet the requirements of a community benefit society and you certainly won't qualify as a CIC.

Losing the tax relief will make a big difference to investment
Large schemes won't qualify for much tax relief because of the SITR fund raising limit and small schemes that would qualify don't have much cash left over for community benefit so may not qualify either. Can we do without the tax relief? After all, it sounds perfectly reasonable that you shouldn't get tax relief unless there is a community benefit.

A poll conducted by the Co-op UK of community energy investors found that 37% would have invested less without tax relief and 38% would not have invested at all - they estimate there would be 59% less investment overall if EIS is withdrawn. They have drafted a response to the consultation about this which will go in on Thursday.

Are these investors being unreasonable? Well what interest rate would you expect for a scheme with moderate risk and no guarantee that you can take your money back for 20 years? 4% may sound like a lot now but who knows what interest rates will be like in 10 years time. Right now the US government is offering 20-year T-bills paying a guaranteed 3%.

Right to Invest

At the same time, another part of the government - the Department of Energy and Climate Change - has determined that it is good thing for communities to get involved in renewable energy projects and local people should have a chance to invest. Accordingly they set up a task force to establish some rules. The consultation on their draft report is just finished. The main points are that:

  • It will apply to all onshore renewable energy projects above a certain size e.g. £2.5 million
  • Developers should give the community the opportunity to invest a reasonable proportion of the total e.g. at least 5%.
  • They can use any of a number of possible models but all involving a community enterprise - not just a bunch of individuals who happen to live locally. This ensures that the whole community benefits, not just people with cash to invest.

The expectation is that community involvement will increase support for renewable energy projects and help to educate and motivate people about energy issues generally as well as bringing direct benefits.

What I particularly like about this model is that it allows local people to invest without increasing energy bills. Subsidies such as Feed in Tariffs are much larger for smaller schemes (and need to be, as I have explained above). That means having lots of small community investment schemes getting a high subsidy increases bills for everyone, whereas if there was a proportion of community investment in larger schemes then there would be no impact on bills. (See How much more does rooftop solar cost).

From the point of view of the developer, this is a very onerous requirement as there will be costs involved in setting this up. They have to advertise the scheme, have meetings with interested groups, then go through negotiations and draft legal contracts. Even worse, this will take time and anything which delays installation adds to costs. For this to work, community groups need to be able to move quickly, so they are going to need a lot of support to help them through the process.

On the other hand, if planning departments were to look more favourably on projects with community involvement, that would be a big plus for the developers. At the moment they don't.

In any case, all this is a complete waste of time unless people in the local community are prepared to invest - and that is certainly not a foregone conclusion.

I have discussed the pros and cons of community energy before. (What's so great about community energy). For me, the most important thing is that the renewable energy subsidies don't go to foreign investors. When UK people benefit from UK subsidies and spend their profits in the UK it helps to grow the UK economy and costs less in the end. (See The cost to the tax payer of Green Deal Subsidies is less than you think). Wider community benefit is also very nice to have but not essential.

1 comment:

  1. Nice piece. Tensions between HMRC/the Treasury and DECC/environmental interests aren't new. VAT on home-improvements but not on new homes undermines efforts to improve the energy efficiency of existing homes, but the energy and environmental implications of this distorting tax are outweighed - in HMRC/the Treasury's eyes - by the revenue it brings in. Sadly, the Treasury/HMRC (and others who control purses) have louder voices.