Last updated: March 2014
Financing the renewables revolution
Paul Monaghan, Sustainability Adviser at Co-operative Energy and Director of Up the Ethics, shows how crowdfunding and pension funds could profoundly affect renewable energy investment.
Two tectonic plates have shifted and brought with them two major unintended consequences: combined, they could prove to be the saviours of renewable energy financing, which has fallen globally in each of the last two years – from a record $317.9 billion in 2011 to $254 billion in 2013.
Pension funds turn to renewables
First, pension funds are at last starting to realise what a great opportunity renewable energy is. They are finally taking some of the money that has been burning a hole in their pockets and investing it sustainably; although this is in large part down to the fact they have been short of bog-standard investment opportunities, what with property markets crashing, equity prices see-sawing and bonds producing negligible returns in recent years.
Last year, Lancashire County Pension Fund invested £12 million in Westmill Solar Co-operative, whilst the pension funds of Flintshire County Council and the Environment Agency invested in the Low Carbon Workplace Partnership. In total, it’s been estimated that some £7.5 billion of UK-managed assets are now invested in sustainability-themed investments.
But it is Danish pension funds that have really caught the eye. Last summer, PFA Pension announced investments that made it the country’s market leader in onshore wind (and this is a country with a lot of onshore wind). In parallel, PensionDanmark announced plans for $200 million in US offshore wind investment (which comes on top of its existing substantial Scandinavian investments) and the purchase of a 49% stake in five Scottish windfarms. They are now even looking to investment opportunities in the developing world.
In many ways, renewable projects are a perfect fit for pension funds given the high-quality, stable income they generate, which often matches the long-term commitments of funds.
The emergence of crowdfunding
The second major trend is the emergence of crowdfunding, which is just beginning to mobilise sizeable sums of money out of the pockets of the Great British public and into community energy schemes; a development only made possible by the advent of the internet and its ability to match investors to projects quickly and easily. Crowdfunding in Europe grew by 65% in 2012, reaching €735 million.
Take the example of the 500 kW Great Dunkilns turbine in the Forest of Dean, where the £1.4 million of debt finance was raised via individuals and the local community. This was made possible by Abundance (see page 25) and their internet platform which enables people to invest in renewable energy projects across the UK from as little as £5.
In October, Abundance raised £400,000 for a solar project in Nottingham in less than a month, and it is aiming for £1bn over the next ten years. Co-operative Energy enables investors to close the circle further by buying renewable energy output from these projects and supplying it to retail customers, who in turn have the opportunity to earn further dividends by becoming a member of Midcounties Co-operative (the parent of Co-operative Energy).
Lack of finance for renewables
The entrance of pensions and crowdfunding to renewables finance is desperately needed as banks are now much less willing to provide project finance (blaming new capital requirement regulations) and the big utilities are still lukewarm (at best) to the sector. It’s telling that whilst the UK’s Big Six energy businesses account for 98% of domestic energy supply and 70% of energy generation capacity, they account for just 47% of the renewable energy generation we have in this country.
It is independent generators that are stepping into the hole, and growing rapidly. There are now 500,000 feed-in tariff developments in the UK and over 2,000 commercial-scale 50 kW-plus independent business development projects.
To envisage how transformational these developments can be, we need look no further than Germany and Denmark. Already, nearly 25% of Germany’s electricity is from renewables, and one reason for this is that 40-50% of its renewable energy capacity is owned by individuals, community groups and private developers. In Denmark, 30% of power consumption was from renewables in 2013 (at some points more than 100% of demand was covered, with the excess being exported), with a major contributing factor being the requirement for wind developers to offer at least 25% of a project to local investors.
In both countries, individuals have put their hands in their pockets in a big way (which in turn ensures that green policies enjoy electoral support amongst key groups). The Climate Policy Initiative has calculated that private households in Germany invested €14 billion in 2010 alone.
Setting aside the UK Government’s ridiculous opposition in Europe to an updated renewables target post 2020, the recently launched Community Energy Strategy and pending Social Enterprise Tax Relief proposals may move things along substantially this year. It looks like we could get a right to invest in local renewables projects (like in Denmark), but will investment tax relief be as generous as for venture capital? If it were to be, we really could be looking at ‘Power to the People’.