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Why investing directly in renewables projects is a worthwhile venture

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It’s a new tax year, and the opportunity to apply for 2012/13 ISAs has been and gone. But worry not; for Rebecca O’Connor, editor of Trillion Fund, is on hand to explain about the benefits of direct investment in renewable energy projects.

In investment, ‘early adopters’ are those who like to be the first to test the latest exciting idea – and the first to the early returns. This group of profit-seekers have had their interests piqued lately by opportunities to invest directly in renewable energy projects.

Hazel Capital, a fund manager offering direct investment opportunities in large solar parks around the UK, recently extended its offer to investors wanting to take a minimum £50,000 stake (so not exactly mainstream) in a solar park in North Norfolk, until April 12. It has a total target of £13.5m. The target return on offer for investors is an IRR – internal rate of return – of 8.2% (net of fees and taxes).

Meanwhile Abundance Generation, a platform set up for the express purpose of offering retail investors ‘debentures’ – essentially loans to projects in exchange for a return – is in the middle of a £385,000 raise for a solar farm in Kent.

Its investors can look forward to 6.3-6.7% a year for 24 years and can invest from as little as £5 – so more accessible, but potentially less profitable, than Hazel Capital’s raise.

So far, such deals are proving popular. The Norfolk project is the 12th raise for a solar park from Hazel Capital and the Hoo project is the third from Abundance. Most raises (see trillionfund.com/directory for a list of current opportunities) have offered investors an IRR of something between 6-8% – a great deal more than they could get on a cash ISA.

Internal rate of return needs some explaining to the uninitiated, as it is not as straight forward as an interest rate. The IRR is the expected amount that can be returned to investors expressed as an annual rate, but based on the total income the project is expected to generate over its life. So if you sold your investment early, you would not necessarily receive this amount.

The IRR for renewables projects can be predicted with quite a lot of accuracy because the subsidies they attract are guaranteed and because the amount of wind or sun present in an area is fairly constant.

Abundance Generation's latest project is a 999-panel, 250kw solar development in Kent.

A different kind of investment

The opportunity to buy an equity share or a bond in a wind farm or solar park is a different kind of opportunity to anything that has gone before, for a number of reasons.

First, the investments are direct. There is no fund and no manager pooling a large number of investments and allocating the pot across a range of companies and sectors. The money goes straight to the project once the offer period closes.

Second, they are long-term. Very long-term, in fact, at between 20 and 25 years because this is the length of time that the subsidy the project attracts is guaranteed for. Although this doesn’t mean ‘guaranteed’ returns – capital and returns are at risk with any kind of investing – it does give some predictability, which, if you are going to invest in something for a quarter of your life, you will need.

Such a long time frame might seem off-putting, but investing for the long-term is not new. Generally speaking, the longer you invest for, the higher your returns are likely to be.

Generally speaking, the longer you invest for, the higher your returns are likely to be

You could try to sell your investment before the end of the term, but one of the big disadvantages of direct investment in renewable energy projects is the illiquidity. Because of the immaturity of the asset class, if you buy this kind of scheme there is no secondary market (yet) in which to sell your investment. You’d have to find a buyer yourself.

Third: the returns look high relative to the apparently low risk levels. This again is mostly down to the subsidy (the feed-in tariff or FiT) that such projects are attracting. Developers are able to pay back investors more than they would be able to afford if the project was not in receipt of either the FiT – which was introduced by the government to encourage the installation of renewable energy projects rather than their fossil fuel-burning alternatives – or the renewable obligation certificate (ROC).

ROCs are digital certificates that are received by renewables projects. The number of ROCS a project receives depends on how much electricity it generates. ROCs can be traded – which means they can be bought by non-renewable electricity suppliers. They therefore represent an additional income stream for projects, besides the income they make from the actual electricity generated.

A fourth advantage to direct project investments: they are completely transparent. The idea is that you can see where your money is going, you can drive up to it, have your photo taken in front of it, and know that it is being used for a purpose that most of us agree is good because it is sustainable.

The principle is not dissimilar to buying shares in a single company that you know and like via a stockbroker. The differences are that these renewable energy projects are much smaller than the big household name companies that usually attract small sums from thousands of individual shareholders – and you do not need to use a stockbroker.

If you are buying an equity stake in an energy project, the principle is the same as a traditional stock investment – the value can go up and down in line with the company share price.

The purchase of a bond or debenture in a project, such as those available via Abundance, would result in a more stable return in the form of the IRR.

The benefit of a direct investment over investing in a green or renewable fund is there is no dilution. You know exactly what you are investing in and if the project does well and generates a lot of electricity, the performance of the investment is not held back by a poorer performing company in the fund.

The flipside of this of course is no diversification. In terms of risk, investing in a single project in this way is not unlike buying some shares in a single company like Tesco or ITV. So quite risky if you are not investing in other asset classes too.

If there is a hiccup in the electricity generation, the negative impact on the value of your investment will not be cushioned by a better performing stock, as it would in a fund. However because the electricity a wind or solar park will generate is quite predictable, based on the typical amount of wind or sun in an area, the performance of an investment in a project is likely to be less volatile than company shares.

Because the electricity a wind or solar park will generate is quite predictable, the performance of an investment in a project is likely to be less volatile than company shares

Analysing the risk

So how risky are they overall?  Well, all investments carry the risk of complete failure by their nature. You may not get all (or in the worst case, any) of your capital back. But it is useful to divide renewable energy projects into pre and post construction.

More established developers with projects that have been running for a few years and have already proven revenue streams are ‘post-construction’. They usually need finance to expand or re-finance existing loans and should be less risky than a ‘pre-construction’ investment in a new project, where more things could go wrong with the installation or parts. But the returns tend to reflect the risk and post-construction investments in established projects will come with a lower return.

For what it’s worth, the parts – solar panels and turbines – are usually insured for their working life. Renewables parts are quite popular with insurers because they are so reliable. So a technical failure (which is very unlikely) would not necessarily affect returns.

Because this kind of investment is relatively new, there will be investors who prefer to adopt a wait and see approach and get feedback from some of those early pioneers before leaping in.

Should you buy shares or bonds in projects just because you believe in renewable energy? People have been buying shares for reasons of the heart rather than the head for many years and the approach is usually frowned upon by advisers because it can lead to poor decision-making and a lack of diversification. Yet it remains a popular way of gaining exposure to the stock market because it allows the investor complete control over what they are investing in and it is easy to understand.

In theory, if you diversify all of your investments yourself then you don’t need to stick to funds. In practice however, a lot of investors might not diversify and find themselves exposed.

But for the early adopters, community venturers and return chasers, a direct investment in something that is worthwhile, potentially profitable and relatively secure, is likely to tick most boxes.

Rebecca O’Connor is editor of Trillion Fund, a renewable energy investment platform.

Further reading:

Harnessing the power of a community

Community renewables: creating sustainable wealth with values

Bringing clean technology home: community led cleantech

Abundance calls on investors to pledge to third renewables project

The Guide to Limitless Clean Energy 2012

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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