The Difference Incubator's (TDI) small-scale community solarfarm model uses a proprietary limited company Special Purpose Vehicle (SPV) legal structure to enable up to 50 community members to co-invest in a project (though no more than 20 per year). This model is especially suited to a solarfarm that is installed on the premises of a medium-to-large electricity user.
The best example of this model being utilised is REpower One - a 100kW solarfarm created in partnership between REpower Shoalhaven Inc (RSI) (community energy group) and Shoalhaven Heads Bowling Club (host site).
What it is
Community investors can provide capital either by way of being a lender or shareholder to the SPV. The model is based on the SPV owning and operating the solarfarm for a period of 7-10 years, with a power purchase or rental agreement in place with the host. Following this period of time, or sooner if negotiated, the host becomes the owner of the solarfarm. The agreements include a methodology for the buy-out value.
As the owner-operator of the solarfarm, either the SPV or parent community organisation is responsible for metering electricity and regularly invoicing the host for their consumption.
What it isn't
The SPV is not an entirely independent community entity. While the SPV is entirely owned by community members who are shareholders, it is governed by the board of the parent community organisation through a special shareholding that gives them voting power but no dividend rights.
What is this model most fit for purpose for
The TDi model is well suited to an existing community organisation looking to develop a number of community solarfarm projects. REpower Shoalhaven are looking to do this.
The limit on the number of investors (see Constraints section below), and their financial capacity to invest, will affect the total financial value of possible projects. This factor, combined with the current political uncertainty surrounding the Renewable Energy Target, makes the model most fit for solarfarms of up to 100kW in size.
The main strengths and benefits of this model are:
- Availability of the existing templates
- Demonstrated track-record with REpower One
Essential requirements for viability
The essential requirements for this model to be viable currently are:
- A solarfarm host who is able to purchase (or pay for via a rental agreement) all of the electricity at the time it is produced (as well as insurance of the solarfarm). This is often described as the solarfarm being 'behind the meter' or 'under the load'. It means that the host uses a significant amount of electricity in the day time, every day of the year (i.e. including weekends and holiday periods). This is key because the value of electricity saved (retail price) is much higher than the price for selling electricity sold through the electricity grid or network (wholesale price)
- High certainty in being able to sell the renewable energy certificates (REC) generated by the solarfarm either up-front (for renewable energy generation of less than 100kW in size) or throughout the period of the project (7-12 years) for projects larger than 100kW. This is because the RECs account for approximately one-third of the project's up-front capital or ongoing income respectively.
- Either of the following to satisfy the governance, compliance and operating requirements (invoicing the host, financial distributions to investors) of the governing community organisation and SPV:
- Professionals with relevant skills willing to be Directors and/or assist voluntarily, or
- Financial viability purchasing fee-for-service support from REpower Shoalhaven
As the owner-operator of the solarfarm, the SPV (and so investors) carry the risk of something going wrong with the performance of the solarfarm. Any sub-optimal performance of the solarfarm will directly affect, and reduce, the income of the SPV from selling electricity and/or renewable energy certificates (for projects larger than 100kW in size).
The SPV can have up to 50 investors in total, however no more than 20 in any 12 month period. As noted above, this can constrain the total financial value of possible projects (depending upon the financial capacity of the investors of course).
It may be possible to secure bridging finance for a project to be able to make available two rounds of investment (i.e. two blocks of up to 20 investors). The second tranche of community investors could pay out the bridging loan.
Lastly, there is the risk of host experiencing financial difficulty and being unable to pay for the electricity, rental and/or buy-out of the solarfarm.
**Currently this model is constrained in Victoria due to retail license legislative barriers.
How to utilise this model
Developing a community solarfarm project takes effort, time and cash. There is a considerable body of work to do before a project is ready for community investment.
A core leadership group is key. They need to be both willing and able of negotiations with prospective solarfarm hosts, assessing the suitability and viability of prospective sites, as well as engaging with the community and other key stakeholders to build sufficient support.
The templates have been designed as a general legal starting point, however legal and financial advice is likely to be required to fully understand and utilise the model.
As noted, there is potential to engage fee-for-service support from REpower Shoalhaven.
What not to do
As noted above, the current political policy uncertainty in respect of the Renewable Energy Target makes solarfarms larger than 100kW unviable for the moment. This is because around one-third of the income of a solarfarm larger than 100kW arises from the sale of renewable energy certificates (RECs) year-by-year into the future. The riskiness of this income today makes it nearly impossible, if not unethical, to seek community investment and provide reasonable financial returns.
The one exception to this is if it is possible to negotiate an arrangement which includes a long-term purchaser for the RECs, such as by an organisation aiming to be carbon-neutral or sustainable.
Key lessons from other groups using this model
REpower Shoalhaven were closely involved with the development of the TDi model, which was in fact developed specifically with the purpose of enabling their REpower One project. They have developed knowledge, systems and templates which are key to the successful use of this model:
- Advice to clarify taxation treatment of different aspects of the model
- Investment offer documentation
- Automated processes for quarterly billing of the host, accounting and annual reporting
As the governing organisation, REpower have structured their project to have one annual meeting and financial distribution for the community investors.
Getting assistance and finding out more
REpower Shoalhaven are your first port of call for advice on this model. The REpower Shoalhaven/TDi model includes templates for:
- Power Purchase Agreement for the sale of solar power to the host (which requires the parent community organisation to hold a retail electricity licence or exemption
- Solar System Rental and Power Purchase Agreements
- Management Agreement between the community organisation and the SPV
- Community investor documents:
- Loan Agreement plus Letter of Comfort (which is between the community investors and the parent community organisation since in the loan-based arrangement they have no decision-making authority with the SPV)
- Shareholder Agreement where use in the shareholder-based structure
- Fact sheet and guide to registering the SPV through Cleardocs
Figure 7. Key elements of the TDI Model
The various templates listed above are available for free from TDI with the requirement of signing a simple Memorandum of Understanding before accessing the documents. For details email email@example.com.