In a four-part series we've been researching the barriers to generating independent renewable energy, and here we suggest some potential solutions to the problems.

Week 2 - Finance

People are motivated to install microgeneration systems for environmental, self-sufficiency and - with the arrival of the Feed-in Tariff - economic reasons, but a major barrier for many is the initial capital outlay. Microgeneration installations can cost between £4,000 and £25,000. Access to sums of capital of this size is not realistic for the majority of UK homeowners.

So how do we get around this?

Grant funding
Grant funding through phase 1 of the Low Carbon Buildings Programme (LCBP) used to provide a valuable means for accessing capital for microgenerators. However, our experience was that many microgeneration installation companies found the grant system difficult to work with. Grants tend to create a ‘synthetic’ and unstable market and, while a business can grow when it offers a product that can be heavily subsidised, once that subsidy is removed it jeopardises the security and further growth of these companies. The LCBP grants are now being phased out.

It is not only at the sub 50kW microgeneration level where access to capital is a challenge. Projects that require an investment of up to £20 million, such as 10 -20MW wind farms powering 10-15,000 homes, are finding it hard to attract the investment they need.

Financing is a critical obstacle but there are existing lending models that can be adapted and offered to installers of microgeneration. Here are some of our suggestions:

Government Interest-Free loans
Under the terms of the Feed-in Tariff, the accredited generator can nominate who is to receive the Feed-in Tariff payments. The government could provide interest-free loans to microgenerators much as it does to UK students to fund their education. The lending body (similar to the Student Loans Company) could be nominated as the recipient of the Feed-in Tariff payment which would deliver security to the lender as the payments would be made regularly by the energy supplier that was delivering the Feed-in Tariff service.

There would be an option to assign the loan to the property or to the homeowner, depending on the intentions of the homeowner and how long they anticipated they would live in the house. This might alter the risk profile of the loan application but could be adapted accordingly.

Top-up grants
Many local authorities across the UK offer top-up grants for residents installing microgeneration. These can be as much as £1000 and can be counted towards a local authority’s carbon reduction targets. While it was stated above that grants do not help to stabilise a young market, Good Energy believes that sums below £1000 will help incentivise residents but are small enough that they do not challenge the stability of installation companies.

We think Local Authorities should be encouraged to offer top-up grants and their availability should be communicated clearly to the region’s residents.

Commercial loans
At both microgeneration scale and small commercial scale up to 20MW, the nationalised high street banks should be instructed to offer debt finance. The Royal Bank of Scotland and Lloyds TSB have accessed funds through the European Investment Bank (EIB) and been instructed to make investment funds available for large-scale renewables but this does not provide for entrepreneurial landowners or independent developers.

An amount of EIB funds should be ring fenced for generators of 5MW or less which are eligible for the Feed-in Tariff. These loans can operate on similar principles to the government interest-free loans: the lending body could be nominated as the recipient of the Feed-in Tariff payment which would deliver security to the lender as the payments would be made regularly by the energy supplier that was delivering the Feed-in Tariff service.

These loans can be offered at a commercial rate, generating secure income for the banks.

Local Credit Unions
Credit unions are financial co-operatives owned and controlled by their members. They offer savings and low interest loans to local borrowers. They are primarily a social enterprise and are not solely focused on commercial return. Microgeneration projects can offer secure investment opportunities for credit unions and credit unions can offer suitable access to finance for homeowners wanting to install microgeneration.

Involving credit unions with microgenerators should be relatively simple to encourage. Principally, the challenge is to improve communication and educate homeowners interested in microgeneration about the existence of credit unions and make credit unions aware of the safe investment opportunities presented by microgeneration projects.

As Local Authorities are often linked with credit unions, they could communicate the opportunities to homeowners.
  
Tax Efficient Investments
Access to debt financing for small commercial scale renewable energy projects can be challenging to obtain, as can access to equity investment. There is a need to stimulate the creation of more tax efficient investment opportunities, such as a Venture Capital Trust (VCT) that will deliver more equity investment into viable renewable energy projects.

To encourage the introduction of new VCTs that focus strongly on renewable energy investments, we recommend that HM Revenue and Customs review the terms for companies qualifying, and adapt the criteria to make investment in Renewable Energy Developments increasingly attractive.

Next week we will look at planning renewable energy projects…