The facts of life, as the saying goes, are that we live, we die, and we pay taxes. To refine that slightly for 2013, we might say that savings rates are simply too low while energy prices are too high. Perhaps a common solution lies somewhere in-between. Through renewable energy schemes, companies could cut their energy bills by half and investors could generate returns of 6.5% per year.
An interactive panel broadcast featuring Nick Hanna, author of the Green Investment Handbook, and Gerry McGowan, executive chairman at CBD Energy, has looked at how renewable energy schemes work. An abridged version can be seen below.
Renewable energy schemes in general terms: What’s available to investors?
(NH) Basically, the situation is that the government is obliged to invest in low-carbon forms of energy as part of the Kyoto Protocol. When we’re getting wind farms and solar farms being built by developers, they’re paid a feed-in tariff by the government and there are various other tariffs that are paid to them to build the wind farms and the solar farms and what’s happening is that’s now opening up to retail investors to invest in those and it’s a new field…
What’s driving the interest? Is it the ethics or is it the interest returns?
(NH) The interest is driving the interest because you can get very good returns, and clearly in an economic climate where you can’t get anything more than 2% on your bank account or savings account and inflation is running at 2% – your money’s going nowhere. [Ed: That’s not entirely true: see here for more details.] So, to be able to get anything between 5 and 7% for instance on one of these schemes is a very good deal – so that’s what’s attracting people. There is a bit, of course, of the ethical background in there as well.
How do they typically work?
(GM) People invest for a three-year period; at the end of the three-year period they get their money back. They get an interest rate of 6.5% per year paid quarterly through that period. We regard it as a fairly safe investment, because what goes on people’s roofs has a long revenue stream coming off the back of it. So we think it’s a good alternative to having money in a bank account.
Describe the mechanics of a scheme like this
(NH) Many of these schemes are obviously based around wind or solar, and the government has a feed-in tariff that it has to pay for 20 years. The recipients of the solar panels get free electricity. If you can afford to put your own solar panels on your own roof, I would say “put them on your roof” because you’re going to benefit personally from the feed-in tariff and reduced electricity. If you don’t have the capital to do that, there are opportunities for people to “rent” their roofs, either domestic roofs or commercial roofs, and they get a reduced price on their electricity and benefit generally in that way.
How does this scheme compare to others?
(NH) There are all sorts of ways you can invest with a green ethic, if you like. You can invest directly into companies that are producing wind turbines or solar panels or hydropower or electric cars, so you’re buying shares, much as you would buy shares in any other company on the stock exchange. Or you can buy into a fund, and there are quite a lot of well-established funds out there where you are paying a fund manager to select those stocks and you’re getting a return based on that. Now what we’re seeing is this new direct method, where consumers / retail investors are able to benefit directly by investing themselves so there’s no middle man, and there are no management fees. And you’re getting a much higher return for that reason.
What are the risks of energy schemes, and this one in particular?
(NH) I think they’re quite low generally, because you have got a government guarantee to pay the feed-in tariff for another (probably) 20-25 years. Most of the risk is in the planning stage, particularly with large infrastructures such as windfarms. There are attempts to de-risk; you can de-risk your investments in those. Even though you’ve not got a fund-manager, because a lot of green companies are quite small/new companies, so you’ve automatically got a built-in risk there already, and this isn’t the same thing. You haven’t got that risk of the company going down the tubes, for instance, on the stock market. It’s a completely different set of criteria, really.
(GM) We try to mitigate risk by giving investors security over the cash, the assets, the cashflow those assets generate, and then we give them a corporate guarantee from the company itself. And we’ve interposed a trustee to look after the investor’s interest, and they’re an FSA [sic] regulated company. So we’ve tried to make it as secure an investment as we possibly can.
Viewer Questions: If I invest today, what happens next?
(GM) His money is used to construct solar panels on a (typically industrial) roof, and the owner of that premises will buy the power for 20 years. He gets the power at about 30-50% discount at what he’s currently paying his provider. We collect the cash from that owner, and we pay the investor 6.5% per year, paid quarterly. The capital is returned after 3 years.
Viewer Questions: Can anybody invest in this type of investment? What sort of investor is this appropriate for?
(NH) It’s a medium-risk profile of an investor. If it’s all your money, you’re better off putting it somewhere safe – you’re a low-risk type person. Anybody who feels that they are able to… you should have a solid base in your savings that’s set aside. Then if you’ve got some extra money, then you could go down this route. Or if you feel you can risk it generally. And another thing I would say is that if you’ve got less than the set amount (required to invest), there are crowdsourcing platforms you can go to and invest from £5 in solar or hydro-power schemes, so there are other ways of doing it as well.
Viewer Questions: Is that return guaranteed? If businesses don’t take up the offer of solar panels, how would the returns be generated and would my investment be protected?
(GM) First of all, we guarantee the 6.5% return. Secondly, we don’t install unless the owner of the building has already committed to the off-take of the power. We’re confident we’ll reach our targets, and if we don’t, then we’ll top it up.
Is it a good scheme for small businesses to get involved with?
(NH) If they’ve got a big enough roof, particularly if they’re using a lot of electricity, they should definitely be looking at it.
(GM) It’s no risk for a small business. All they’re giving over is their roof. We install for nothing; we sell them the power at 30-50% discount to what they currently providing; so there’s really no risk for those customers.
The whole scheme relies upon the Government’s commitment to renewable. Is there any risk of a U-turn?
(NH) I think it’s very low. Politicians of either party can play ball with these ideas in parliament, but the Department of Energy and Climate Change has reiterated their commitment to these and contractually it would be extremely difficult for them to get out of it. I don’t think it’s going to happen.
If somebody were thinking about an ethical investment, what advice would you give to them?
(NH) Look around. Shop around. There are a lot of these schemes around at the minute. They’re becoming very popular. You can go to a platform like Trillion Fund where it’ll give you a range of alternatives to look at – or crowdsourced funds as well. So have a good look around. Talk to your financial advisor to make sure that you’re happy with the risk involved, and take it from there.
(GM) If people go to the website (EnergyBonds.co.uk), they’ll get a lot of information. There’s a little video on there that explains it pretty simply for them, so there’s a lot of information on the website.