Author: Sara Howard
Contributors: Simon Holmes à Court, John Edgoose
Have you considered how much it will cost to get your community energy project off the ground? Have you thought about where the funds will come from? In this article we look at ways to finance the early stages of development.
It may be several years before your community energy project orders its key project assets. But it will be even longer before you start to receive revenue. And during that time you'll have many costs to meet — resource identification and monitoring, planning, permits and assessments, studies, marketing, stakeholder engagement, legal and other consulting fees. These costs can easily run into hundreds of thousands of dollars, and you may not get this money back if your project is abandoned.
So where will you find the funding and resources to get your project up and running?
How much do you need?
To work out how much you need to finance your project, you need to:
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estimate your costs. You need to understand the likely scale of the project capital cost. For example, wind farms cost about $3 to 4 million per MW while large solar photovoltaic projects cost about $7 million per MW. To calculate smaller solar projects use the Sunulator tool.
- estimate your revenue. This will depend on the amount of available renewable energy resource, which is determined by factors such as average wind speed and level of solar radiation.
- narrow down potential locations for your project. Having considered the factors above, you should be clear about which sites will work best.
Once you've worked through these stages, it's important to develop a cash-flow projection to help you manage the financial aspects of your project. This will show you what you need, and when you'll need it. For more information, see the Developing the financial model for the project article.
Remember, a small two-turbine community wind farm has to go through many of the same processes as a 100-turbine wind farm, so development costs alone can be between $500,000 and $1 million. This includes project management, resource assessment, permits and approvals, environmental and planning studies, stakeholder engagement and legal fees.
Example: Hepburn Wind Park Co-operative, Victoria
- Feasibility costs: $100,000
- Project development costs: $300,000
- Two wind turbines: $14 million
- Management costs: thousands of hours were volunteered
There are also costs associated with raising capital. If you decide to structure your development as a company, these costs can be quite significant, as ASIC regulated processes are complex. You may want to engage professional services to help you raise capital, which you'll also need to budget for.
Hepburn Wind chose the co-operative structure as it was a simpler (and cheaper) way to raise capital. Because co-operatives are not regulated by the Corporations Act, they don't incur the significant legal costs involved in producing a full Product Disclosure Statement (PDS) which can easily exceed $100,000.
Funding the pre-feasibility phase
Funding any risky activity is difficult and potentially expensive and you may find it hard to secure the funding you need from banks or financial institutions.
Forget the banks
You can rule out banks for early-stage funding. The days when you could take a business plan to your bank manager and ask for a loan are long gone. Banks may consider lending against tangible assets, such as wind turbines, but generally see development costs as too risky.
Obstacles to institutional investment
You may think there are lots of ethical super-annuation funds out there, keen to invest. Sadly not - at present, large institutional investors aren't interested in small-scale projects for a number of reasons. These include:
- project size: any investment requires a process of 'due diligence' and ongoing management. This costs money, so most institutional investors won't look at projects worth less than $25 million
- novelty factor: particularly if there aren't any examples of the same model in Australia they can compare it to
- inexperienced management: particularly if your group has never built this type of project before
- liquidity: if you're an unlisted entity, investors have no guarantee that they can sell their shares when they need to
- not being on the 'approved list': unfortunately, in these days of outsourcing, most major institutions rely on outside firms to prepare an 'approved list' of pre-vetted investments, and won't consider opportunities not on the list
- uncertainty in the Australian renewable energy market: in the past, investors have suffered uncertainty as government policy changes have resulted in multiple boom and bust cycles
- uncertainty about the ownership structure: while the co-operative structure appeals to community investors, many institutions are wary of this new set-up.
Over time, as more examples emerge of the co-operative model working, institutional investors are more likely to invest. The Middelgrunden wind farm in Copenhagen is a good example, owned 50% by the local community, and 50% by the local electricity network.
So where does that leave you? For pre-feasibility and feasibility funding, look to:
- early stage investors
- social investors
- landowners
- government funding
- developers
- sustainable funding organisations.
Early-stage investors
There are a range of investor types in the community. Some may be more suited to early-stage development funding.
In most communities there are entrepreneurs who have built local enterprises and are well connected. These entrepreneurs know how to grow businesses and manage risk, and may also have access to capital.
An angel investor is someone with access to significant capital and experience in investing in start-ups. Many 'angels' are serial investors who enjoy getting new ideas off the ground. Usually, once the venture is up and running, with conventional capital in place, they look to invest in their next project. They are used to risk, and good at managing their exposure to it.
Local entrepreneurs and angel investors are ideal early-stage investors as they:
- are prepared to wait for a return on their investment
- understand risk and how to manage it
- are often keen to play an active role in advising a venture through its formation stages.
However, most early-stage investors look for exceptional returns from their investments, and are often keen to leave an investment (with a handsome profit) as soon as possible. Local entrepreneurs may be more patient, owing to their connection to the community.
You might consider raising capital in two phases. You can use seed capital from risk tolerant investors, then approach the community when the project is sufficiently developed to have minimal risk. The return on the seed capital can be structured at a higher rate. But make sure the whole thing is completely transparent so no one in the community feels alienated. For example, publicise the early-stage capital raising in your local newspaper. It's important to get your community on board at every stage.
One way Hepburn Wind approached the 'risk' issue was to ensure the project costs were covered by the developer and government grants for as long as possible. This meant that in the event of project failure, investors would get almost all their money back. In fact, up until the first payments to the developer were made in June 2009, members would have received more than their investment back, had the project been abandoned.
Social investors
At Embark, we developed a network of investors who look for more than a commercial return from their investments. Australia is seeing a new class of investor emerge. That is, people looking for opportunities in the middle ground between philanthropy and arms-length commercial investments.
Landowners
As part of your initial site negotiations, the landowner may be prepared to become an early investor in the scheme. There's anecdotal evidence that many landowners are attracted to the idea of partial ownership of the turbines on their land, including the dividends attached, on top of the income from leasing the land.
Government funding
There are a number of federal, state and local funding initiatives that may apply to your community energy project. All government projects are subject to change and new programs may become available at any time. For more information on types of government funding available, see the Grants and government funding options article.
It's important to search for grants that apply to the various community benefits your project will bring. Rather than applying only for renewable energy grants, search for grants in the areas of:
- Renewable energy
- Education
- Capacity-building
- Regional resilience
- Employment
Hepburn Wind's Renewable Energy Support Fund grant of $975,000 (administered by Sustainability Victoria) was vitally important to the project's success. Not only did the grant reduce the risk for Future Energy and the community, it also shored up the economics of the project to make it attractive to outside investors.
Local government funding usually happens through a broader state or federal scheme. The Local Government Sustainability Accord funding program aims to support strategic projects and develop regional capacity.
For example, in 2007 Maribyrnong Council in Victoria funded a pre-feasibility study for an urban wind farm near the West Gate Bridge.
To apply for government funding, you may need to prepare a fully documented business case. Government bodies look for a similar level of due diligence as a bank. Engage with government agencies early on, as it could take up to 12 months to get a funding decision. For more information on preparing a business case, see the Building the business case article.
Developers
Some wind farm developers may have the financial capability to support the risky development phase. Small community projects are certainly at a disadvantage in this regard. While they may have access to community capital once the project's success is assured, at-risk capital can be hard to obtain.
Community wind farm proponents may be able to find a developer to conduct and fund all or part of the early stages in return for a success fee or similar compensation. In the case of Hepburn Wind, Future Energy provided at risk capital to cover part of the development costs in exchange for a success fee (paid in cash and equity).
Sustainability seed fund organisations
At present, these types of organisations are not well established in Australia. In the UK, Energy4All created a community wind farm development fund, Energy Prospects. This fund will provide capital for community projects, helping them through the costly planning process stages.
Energy Prospects recognises that the major barrier to community wind ownership is the substantial cost of seeking planning permission, and the high risks involved. A pooled approach means revenue from established successful projects can be used to cover costs for projects still in the early development stages.
Initially, Embark helped eligible projects source two types of funding:
- seed funding to support the scoping and feasibility process
- investment funding to bridge any shortfalls and ensure the project is capable of attracting funding from other investors.
Are you ready to secure early funding?
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Do you have a formal business case document? Refer to Building the business case
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Have you developed a financial model to prove your case? Refer to Developing the financial model for the project
- Have you agreed on a formal organisational structure? Refer to Review of legal structures
- Do you have an offer document for early investors? Refer to Developing the offer document
More information
Click here to check out some of the funding calculators and guides.