A community-led investment is where the community owns the entire project, usually building between one and three turbines. A developer-led investment is where a community is offered an investment opportunity in a wind farm that a developer is applying to build. This might be shares in a proportion of the project, with an estimated return on the investment. Alternatively, it might be a share of the whole project, including a proportion of debt required to finance the project. Or it might be a proportion of the income stream in return for a proportion of the final cost.
For the Neilston Community Windfarm (see the case studies section), the local development trust, Neilson Development Trust, partnered with a developer, Carbon Free Development and raised investment which allowed a 28.3% ownership in the project. The terms of the investment that was offered to the community were the same as the terms offered to the developer. Similarly, in 2022, the community around developer Muirhall Energy’s Crossdykes wind farm in Dumfries and Galloway purchased 5% of the shares in the 46MW project. Both projects received support from CARES and the predecessor to the Scottish National Investment Bank, the Energy Investment Fund.
For a community group to invest in a project, they will be required to set up an appropriate shared ownership structure, a Community Vehicle. It is important to understand exactly what the offer is, as it influences the legal framework under which the community group would incorporate itself and the opportunities for raising finance. There are an increasing number of opportunities for communities to take an ownership stake in a project, where they are partnered with one or more of the stakeholders involved in the project. As a result there is an increasing diversity of Community Vehicles that enable this partnership.
Where there are a number of stakeholders investing in the project, the size of the stake each will have will relate to the level of investment they will be required to make, and the level of control they will have over the development of the project. The offer to the community group may or may not allow voting rights in the project.
It is up to the investors to determine whether they are happy to invest in a project in which they may or may not have voting rights. For this reason, professional advice, either from within the community group or external sources is important. It is important to have as much information available as possible before making any investment decision and to be clear on the implications of the investment.
The implications of being able to borrow money from commercial banks if the developer does not offer ownership of some of the assets are illustrated in the following four scenarios.
Scenario 1: Developer raises money with non-recourse bank loan and other sources
In this case the developer may raise 70% or more of the project costs with a bank loan secured on the project assets being developed and the future cash flows of the project.
If the developer only grants access to income streams then a commercial bank is very unlikely to lend to the community group unless the commercial bank is the same as the developer’s own bank, in which case it may.
Scenario 2: Developer raises money with recourse bank loan
Recourse finance are loans secured against some additional assets which are used as collateral. For example, if a developer owns a number of other renewable projects outright and does not have any outstanding finance against these projects, these could be used as additional collateral against which the developer can borrow money to finance other renewable energy projects.
If the developer only grants access to income streams then a commercial bank is very unlikely to lend to the community group, even if the same bank the developer is using is approached as the bank is lending on a recourse nature to the developer.
Scenario 3: Developer uses existing money to finance the project
The developer may have a strong cash flow position and not even need to approach a bank. If the developer only grants access to income streams, then a commercial bank is even more unlikely to lend to the community group as no other lender is involved.
Scenario: Developer loans community finance
The developer can lend to the community group using the same resources as in the section “How community projects are financed”.
Venture capitalist finance
Venture capitalist finance is another potential source of finance to a developer. In this case, the project developer is looking to raise finance from a venture capitalist investor. There are a number of venture capitalist companies that can raise finance for a renewable project. For example, there are Venture Capital Trusts (VCTs) that offer income tax relief.
It should be apparent that this is a complex area that again requires input from a professional financial advisor.
Like bank loans, venture capital finance also tends to be long-term, but often not as long as a bank loan. After a number of years (generally no more than five) venture capitalist finance will look for a return on their investment and the developer will be expected to find an alternative source of finance to repay the original loan. At this stage the project will have a proven track record of annual energy production.
As with the section ‘How community projects are financed’, if the developer only grants access to income streams then a commercial bank is highly unlikely to lend to the community group as no other lender is involved.
Different legal structures for your group
To access any of these sources of finance it is a requirement that an incorporated structure is set up. This provides the Community Vehicle with the legal status required to enter into contracts, issue shares, receive grants and secure loans, as well as limited liability.
The following structures may be suitable for your organisation.
- Registered society (previously known as Industrial and Provident Society (IPS)), which can be
- Community Benefit Societies (BenComs).
- Scottish Charitable Incorporated Organisations (SCIO).
- Private Companies Limited by shares (CLSs).
- Private Companies Limited by guarantee (CLGs)
- Charitable Status.
For more information, read our Establishing a community group module.
If a community has identified a potential site for a renewable project to be developed, they have a number of options to consider for the development of the project.
- Community led development – the project development section of the toolkit provides further guidance on developing a site and raising finance.
- Community led development with third party support – organisations such as Energy4All exists to support communities in the financing and build of their consented projects, allowing the community to retain control over the development of the project
- Community led development with commercial developer support – having identified the project, a commercial developer is approached to develop the project further.
There are benefits to all these options. Community led developments, and those with third party support, ensure that the control of the project is maintained locally through the construction phase and beyond. By engaging a commercial developer, the project is likely to be developed more quickly and could require less input from the community. It is possible that the commercial developer will expect to retain control of the project.
For any project development, collating the information required within a business case is a useful first step. If taking a project further with support from a third party or a commercial developer, they will be interested in understanding the land ownership arrangements at the site and any similar projects that are in operation locally. Our Securing a site module can provide further information on how to complete this. Before approaching the developer, if possible, an exclusivity agreement should be entered into with the landowner.
When taking a project to a potential lender or seeking support from a third party it is good practice to compile a business case which demonstrates and explains the benefits of completing the project. Investment in a community led renewable project needs to include a robust business case.
There is a lot of guidance available on the components of a business case. The following key components could form the structure of the business case.
The project description
This should discuss the current position of the project development, the future position and potential alternatives considered. Who are the key stakeholders involved in the project and what agreements are in place between the stakeholders.
The benefit of the project
This is where the details of the potential outcomes are highlighted. This would also include the community development plan. Other information that could be provided could be details on safety, financial impact, risk management, environmental concerns and other regulatory requirements.
The minimum information that you need to calculate the financial viability of the project includes:
- indicative project capacity (MW)
- estimated capacity factor for the development
- the developers may have a ball-park capacity factor figure they are using (for wind somewhere between 35-45% and hydro between 45-55%)
- estimated capital costs
- maximum size of equity investment being made available to the community eg 35-40% of total equity investment
- minimum size of equity investment being made available to the community, eg 1% of total equity investment
- how the development of the project is likely to be structured: indicative debt/ equity gearing ratios
- timetable for development.
If you are investing in a project being developed by a commercial developer as a minimum they should provide you with this information to allow some early financial modelling.
These financial figures are an important part of the business case, but they are not the only considerations lenders or investors will make. The complete package of information provided in the business case will be considered.
The proposed project
This section should cover the quantitative technical details. This should detail the technology that is being proposed and its anticipated performance and costs. What is the proposed legal structure that the group is proposing to incorporate.
Our CARES Investment Ready Tool is a good starting point for collating all the required technical, legal and financial information required. This should then be summarised within the business plan.
This section should outline the timetable for developing the project, including all the project tasks, who is responsible for completing them and what the key milestone dates are. If there is professional advice required, time should be allowed for procuring this support. The timetable for investing in a shared ownership project will be short. You may be required to make investment decisions in a matter of weeks, so it is important to be as prepared as possible for when the opportunity arises. The CARES Project Development Plan can be tailored for project.
Project finance evaluation
The value of the project is determined using a financial model.
There are two separate stages to evaluating the financial returns on a potential investment in a renewable project. The first is to determine the financial performance of the project as a whole. The second is to evaluate the financial return of the investment offering to the community group.
One way to determine the financial performance of the project is to ask the developer for the financial model they have developed for the project. This will give full access to the assumptions that the developer has made in assessing the project. This is likely to contain some commercially sensitive information and the developer would expect you to treat it as such. However, due to this, some of the information may not be possible to obtain such as third-party information, supplier bid, annual fees paid to landowner etc.