|Author: Sara Howard|
Contributor: Martin May
Community energy projects are funded by a combination of debt and equity. The more capital investment you can raise, the less you need to borrow. In this article, we look at strategies for successful capital raising.
Main topics covered in this article include:
To develop, design, build and operate your community energy project, you need money. This can come from three different sources.
Potential investors fall into three categories:
Institutional investors include superannuation funds and managed funds. These funds usually have professional managers, acting on behalf of their investors, who achieve the benefits of diversity and reduced costs by spreading them equally amongst a larger pool of investors. Institutional investors tend to focus on larger scale projects, mainly because the investment process involves as much due diligence for a small project as a large project.
Private or individual investors tend to make their investment decisions independently and can focus on smaller scale projects. Their decision making process may be more subjective.
Ethical investors include both institutions and individuals. They focus on the benefits to society as well as investment returns.
Anybody can invest in your project, but each group will have a different objective and scale of investment. Most community projects fall into the smaller investment category, so tend not to appeal to larger institutional investors. Another factor is your organisational structure — co-operatives (co-ops), for example, tend to be more attractive to individual investors.
This democratic business structure – one vote per member, regardless of equity – tends to attract investors who are motivated by more than just money. There’s a growing movement of people who have an altruistic investment criteria, and co-ops fit nicely into that. Co-ops can break down barriers, and remove suspicion that your project is a front for developers. A lot of investors will come in because they’re attracted by your ideals, and this provides an added psychological benefit to the community.
Large-scale institutional investors are generally unwilling to invest in co-ops. They don’t really understand how they work, even though there are a number of them in Australia, including dairy co-ops and irrigation co-ops. In New Zealand, the Fonterra Co-operative Group (http:/www.fonterra.com/) contributes 25% to the nation's export revenue.
For-profit co-ops can issue shares or bonds, which pay annual dividends to members. Not-for-profit co-ops can only issues bonds, and provide a return through interest on these bonds (or member loans).
You can achieve the same democratic benefits as a co-op using a standard company structure, if you write it into your shareholder constitution.
But the cost of raising capital is much higher. There are the costs of registering with ASIC, the legal costs of preparing a Product Disclosure Agreement, and many restrictions on the capital raising process.
Plus, you still may not appeal to larger institutional investors who tend not to look at projects worth less than $25 million. Even if they have a sustainable mandate, they often won’t invest for 'non-commercial reasons'.
Embark is looking to develop a legal template for community solar projects using a corporate structure. The legal entity for Sydney Community Solar will be an unlisted public company limited by shares. The constitution of the company will reflect a "one shareholder, one vote", regardless of the size of the holding of each shareholder. This aligns more with the democratic nature of co-operative structure. However, the corporate structure will hopefully be able to access a broader pool of legal and accounting service providers, as compared to co-operatives. In theory, this should result in reduced costs for community solar projects.
By creating examples of Public Disclosure Documents, it is hoped that the cost of subsequent community projects will fall as they can draw upon precedent drafting.
See the Funding the early stages of projects article for more information about sources of investment.
Those who invest early on in a project, effectively funding the feasibility stages, incur a much higher risk. They have to wait longer for a return – typically at least five years before any electricity is produced.
So it’s important to structure your equity agreements to reward early investors, such as a ‘Founding Membership’ structure for co-ops.
One option is to issue a Co-op Capital Unit (CCU), a convertible preference share, as a reward to early investors. It could be a coupon payment, like an interest payment that’s not fixed. Or you could offer shares at a discount to early investors. For example, offer 30 cents in the dollar at a very early stage, then 60 cents in the dollar when it’s starting to look feasible, then go out to all members at the full rate.
Initially, look to ‘angel investors’ and other patient individual investors or charitable institutions, before taking the offer document to co-op members. You can make bonds or shares available at different stages of the project. Planning for future bond offerings at different rates allows you to spread the risk, as bonds will come to term at different times. In the case of Hepburn Wind, initial feasibility investment came through a partnership with a local developer, Future Energy.
Co-op members then bought shares at $1, with a minimum investment of $1,000. Local residents could buy into the scheme with a minimum investment of just $100, which encouraged community involvement. They were able to generate a high equity to debt ratio, with over 65% of their funding coming through community investment.
A similar model in the UK, the Westmill Wind Farm Co-op, was the first onshore wind farm built in the south-east of England. It's 100% community owned. A capital grant from the South East England Development Agency supported the early development costs. The co-op’s share offer raised £4.6 million from 2,300 members, and specifically targeted groups and individuals in the local community.
You need to prepare the following documents before you can start approaching investors, including providers of debt:
OSEA Community Power Financing Guidebook
Sustainable Energy Development Authority of NSW's (SEDA) NSW Wind Energy Handbook 2002
Hepburn Community Wind Park Co-operative case study
Guide to Developing a Community Renewable Energy project in North America
Funding the early stages of projects
Developing the financial model for the project
Building the business case
Raising Debt - what banks look for
Developing the offer document, prospectus or PDS
Marketing to raise capital
Grants and government funding options