Subscribe.How does a return of 7% every year sound, regardless of the performance of the economy? Compared to my shoddy 2% ISA interest, that sounds pretty good!
In this current climate of low interest rates, many people are turning to alternative investments such as peer-to-peer lending and community energy. I’m invested in Hepburn Wind in Australia, and another member of LLB is invested in Westmill Solar in the UK. Why did we decide to invest in these co-operatives and what issues should be considered?
Firstly, these organisations are community co-operatives, who collectively raise funds to construct and operate renewable energy infrastructure (typically wind, but also solar). There are four main benefits to doing this:
- Community ownership encourages development in the best interests of the community
- Community control over profits. Often, a portion of profits typically are reinvested back into the community (through local charitable, social or environmental groups) with the rest distributed to investors. This helps build local support for these projects.
- Spreading use of green energy through community empowerment
- Raises the profile of those communities. For example, Hepburn Wind received international recognition at the World Wind Energy Award in Germany for 2012.
Although I’m not a Hepburn local, coming from the city it is unlikely that my community would be able to construct wind turbines. I support the principles of the organisation and wanted to have part of my investment income used for a more sustainable cause. I’ve always supported the increase of renewable energy generation, and this was a change to put my money where my mouth is.
Let’s look at some considerations from an investment viewpoint.
Dividends and inflation
Once constructed, the generation infrastructure makes money by selling power into the electricity grid. There are two main variables: the amount of wind or sunlight driving generation, and the wholesale electricity price. Additional income might be generated from selling the carbon credits, depending on the jurisdiction where the infrastructure is located.
These projects are for profit, and dividends are typically paid to investors after co-operative expenses and community fund commitments are met. The main attraction to investors is a reasonable yield, typically at least 7% per annum. Compared with the stock market, the yield should be fairly consistent, as energy is consumed in both bull and bear markets (bearing in mind cycles of the wholesale electricity market). Dividends are normally paid annually.
When I originally invested in Hepburn, I thought that the investment would be a good protection against inflation, since retail electricity prices are a component of the consumer price index. Although there might be some truth in this, I’ve since learnt that wholesale and retail electricity prices do not necessarily move at the same rate. Recently in Australia retail prices have increased more rapidly than wholesale, due in part to increasing distribution costs, and large generators passing on carbon tax costs to consumers.
An important thing to note: unlike the stock market, these types of investments are NOT liquid. If you need the money two or three years down the line for something else, say a house deposit, you should probably consider a more liquid investment. I made sure that I understood how to exit my investment before I invested – read the prospectus. For this reason I chose to invest a smaller amount of my total assets for the very long term – 25 years.
Co-operatives are usually regulated under co-operative specific laws, for a huge range of organisation types. Thus it is likely that the organisation will fall outside financial regulations that govern listed companies on the stock exchange, regulated by organisations such as the UK’s FSA or Australia’s ASIC. Make sure you’re comfortable with this and seek advice if necessary.
Eligibility to join the co-operative may be limited by local laws. For example, as a Victorian co-operative, Hepburn Wind cannot easily accept members from interstate. Westmill Solar was not open to people outside the EU. Check you’re eligible to apply before spending time to read the prospectus. Additionally, the co-operative may have policies in place to give preference to applications from local people in the event the capital raising is over subscribed.
An important consideration is construction risk. Assuming the co-operative has planning permission at the launch of the capital raising, there may still be a number of months before generation equipment is purchased. Construction cost estimates may not always be accurate. Additionally, there will typically be a period of testing before equipment is certified to allow full export to the electricity grid.
What this means is that you may not expect to receive a dividend for a year or two after construction. Consider the proposed construction timelines as part of your investment return. Like most infrastructure, the most capital intensive phase of the project is during construction. If you manage to find a project to invest in that has already been built, you should have a much more accurate idea of the return you’d expect to receive.
An important note is that wind and solar installation costs are generally falling, which is helping to encourage more of these projects.
Every investment carries risk, but there are some other specific risks that should be considered for community energy. Here is a non-exhaustive list to consider before investment:
- Has sun/wind testing determined that the location is favourable?
- Has the installation received all relevant planning permission?
- What happens if capital raising is not met? Will other financing be arranged, and how will this impact your return?
- Will profits be withheld used for expansion (e.g. building a new array or turbine?)
- What happens at the end of the project when asset depreciation is complete?
- Will the co-operative organise adequate insurance and maintenance to ensure a high rate of equipment serviceability?
How to find opportunities
In the UK, Australia and US there are many projects in the pipeline, but capital raising periods are typically limited. To find organisations who might be about to raise capital, search for community energy organisations who are in the process of obtaining planning approval, and subscribe to their mailing list/facebook/twitter pages. Wikipedia is a good place to start for a list of mooted projects.
Community energy is a potential alternate investment, generating a profit while supporting the spread of renewable energy and (usually) reinvesting a portion of profits in the local community. If you come across one of these opportunities which you are eligible to invest in, make sure you read the prospectus thoroughly and seek financial advice if necessary. Be sure to consider the pros and cons and make sure your investment fits with your risk profile.
Disclaimer: the information contained in this blog is for general information purposes only. It is not intended to constitute financial advice. You should consider your own financial situation and speak to a professional financial advisor if necessary. The author will not be held liable for any loss or damage.