The other day I spent the morning with a bank. It was one of the most interesting meetings I’ve ever been in. I was talking to the Co-operative Renewable Energy Finance Team, about the highs and lows of funding renewables projects.
I now know all about credit scores, bond ratings, due diligence and debt service cover ratios. I’m quite proud of that. But more importantly, we talked about why renewables projects – and community renewables projects in particular – are a challenge for lenders. Here’s what I learned:
First, politics matters. What politicians say, or don’t say, about their commitment to tackling climate change or their support for low-carbon investment, affects the lending environment. If it looks like government support is going soft, it makes it riskier, and so more expensive, to invest.
Second, renewables investments need a stable policy framework. Energy markets are heavily regulated, and changes to those regulations affect the financial viability of projects. It takes a while for mechanisms like the Renewables Obligation to be understood, and incorporated into financial projections. Again, costs rise with uncertainty – and reduce if there is stability and certainty. No wonder, then, that investors are edgy about the transformation of energy markets that government is proposing through the forthcoming Energy Bill.
Third, the alternative to investing in renewables is investing in something else. The renewables team at the Co-op might want to spend all the Bank’s precious capital – but so do all the other teams. They need to make the case for returns from renewables. The Co-operative Bank has a clear ethical policy, and given that they campaign against tar sands, they’re minded to back renewables whenever possible. But they can only go so far, if the sums don’t add up.
Fourth, with small-scale schemes, particularly those run by community groups, banks shoulder more of the risk than they would for commercial schemes. This is because there’s normally a finite amount of money that the group has raised. For example, imagine a community has raised £1 million through a share issue for a hydro development, and ask the bank for a £1 million loan. The deal is signed and work begins. Costs rise because the engineering is trickier than they thought it would be or that exchange/interest rates move ahead of financial close. The community has no more cash to offer. So the Bank is forced to step in, or the project cannot go ahead, and the money spent so far is wasted. With a commercial scheme, the company more than likely have reserves to draw on.
Fifth, communities don’t have the same access to technical or legal support that a commercial developer has. That’s not surprising – but it means that there’s more work for the lender to do, to make sure the project stacks up. Proper, easily-accessible advice for community groups would help greatly to bring down costs and uncertainties.
It was clear from my chat to the team that funding community-scale renewables is much harder than backing commercial schemes – but also much more rewarding, as the team get to know each community well, and share in their success.
But it was also clear that we shouldn’t expect bankers, even the Co-operative Bank with its strong ethical policy, to stump up cash for projects which, however well-meaning, are just too risky to invest in.
Which, to my mind, bounces the ball back into the government’s court. Community schemes don’t need public subsidy. But they do need careful regulation, predictable incentives and sound advice.
Uncertainty is expensive. The more that government can do to provide a simple, straightforward market model for community power, the more likely it is to be bankable.