Community energy is cheap
I was just reading the email from Regen SW about the meeting with Andrea Leadsom, Minister of State for Energy at DECC.
It makes me realise again how poorly understood both the fundamentals and the benefits of community energy are. I personally find it quite incredible that the Minister of State is still asking for more evidence to demonstrate how community energy helps address fuel poverty.
So it made me realise that it is time for some more articles about the costs and benefits it can offer.
The basic point is that community energy is cheaper than regular energy. Why? Well, very simple. The cost of equity in community projects is typically capped at 6 or 7%, compared to a commercial expected return of equity of typically between 10 – 15%.
So everything else being equal (access to debt at the same terms, possibilities to re-finance the same for community as for regular, etc), the fundamental costs of financing a community energy project are lower than for a regular project.
However, the community energy sector is not as mature as the regular renewable energy sector, so there are a number of additional hurdles to overcome.
In practice, the cost of capital for community energy projects is still higher than necessary because of:
- The requirement for community share offers leading to longer fund raising periods and additional uncertainty
- Lower leverage factors for community energy than for regular projects
- Underwriting requirements leading to additional transaction costs
- Often the requirement for expensive construction, bridge, mezzanine finance
The sector needs a couple of years to get to the same level of maturity as the regular sector. At Mongoose we will do everything we can to help the sector get to this position as soon as possible. However, the following measures could help:
An initial period with community FIT and possibly SITR. This could then be followed by access to financial instruments at commercial rates such as:
- Underwriting facilities for share offers
- Community-owned bonds
- Flexible mezzanine instruments
- Affordable senior debt for community instruments
As soon as we have gone through this phase, community energy projects will be truly cheaper than regular projects.
26 February 2016