Whether the project is community led with the community instigating and owning the project, or developer led with the community co-investing, there are only three sources of finance available for a community, notably:
- debt finance (for example, a bank loan)
The community may already have money from other sources. This would be classed as equity and can be used to invest in the project. This might be a direct cash investment, or if the community owns a piece of land, they might take out a loan against the value of the land to invest in the project. That would tie up their equity as it has been invested elsewhere. This would not prevent the community from using the land, but it would prevent them from using the land to raise finance for other projects.
Equity may also be a share offer that a group uses to raise funds such as through crowdfunding. If a share offer is made through crowdfunding and the individuals who support the project expect a return of their investment, the return is limited to that which is sufficient to raise and retain the capital the community group is looking for. Thus, the community organisation is not in the business to make profits for investors, but to put these profits toward the objectives of the organisation. For example, a community group may wish to form a Community Benefit Society (BenCom), similar to co-operatives, but by design are run for the benefit of the community rather than to only benefit the members. Further information on Community Benefit Societies are available in our Establishing a community group module.
The Highland Community Energy Society (HCES) raised £1.35 million across multiple shared offers. From this successful crowdfunding, HCES was able to secure community stakes in four hydro sites. The HCES are a BenCom, and thus, provide both a community benefit fund to the local communities and a financial return to its members. Alongside support from CARES, Energy4all was commissioned for this project to support with the administration. Energy4all has helped promote and facilitate several renewable projects that needed to raise equity and have a variety of case studies available to read on its website (for examples of wind projects, visit wind sites – Energy4All).
Public sector grants are generally provided to projects to fund a particular service or activity. There will be a number of restrictions associated with the grant and how it is used. It is important to clearly understand the terms and conditions of the grant and under what conditions the funder may want the grant to be returned. If the project requires additional debt finance, lenders will want to fully understand the terms of the grant.
There are regulations that also govern the amount of grant funding and generation subsidy a project can receive. Read our guidance regarding subsidy control.
Commonly the community will have few assets it can use as security for a loan, so banks and other lenders will provide non-recourse finance where the debt will be secured against the actual physical assets and the future cash flow stream from the renewable energy project. This is also called project finance. Therefore, in the unfortunate case where the project doesn’t do as well as anticipated and the debt cannot be repaid, the lender can step in and take ownership of the asset and try to reclaim some of its monies. It is nonrecourse debt as the lender cannot try to claim money from other projects the community may have. Different lenders include the following.
- CARES – a CARES development loan can be used where a community group is looking to invest at an early stage, pre-submission of a planning application.
- Commercial banks – there are many commercial banks available who are interested in investing in renewable projects. Generally commercial banks will be looking for larger scale investments but, this does not exclude them from smaller investments.
- The Charity Bank – the Charity Bank provides loans to social enterprises and other community organisations that benefit people and communities.
- Social Investment Scotland (SIS) – SIS is a registered charity and social enterprise that provides business loans to third-sector organisations.
- Scottish National Investment Bank (SNIB) – community renewable energy projects that have successfully gained planning permission can apply for support from SNIB, on behalf of the Scottish Government.
Where there are a number of lenders to a project and the lenders are not co-lending on identical terms the lenders will have different rankings of seniority. For example, a commercial bank may assume the position of senior lender and the Scottish National Investment Bank may assume the position of a junior lender. This is the ranking of the security that a lender has in a project. In a worst-case scenario where the project fails, this is the order in which any outstanding value within the project is repaid to investors.