Community energy investment incentives

Transcription

1 Consultation response September 2014 Community energy investment incentives (A singular response to Question 5 to the Social investment tax relief and Question 27 of the Tax-advantaged venture capital consultations) About Co-operatives UK Co-operatives UK is the national trade body that campaigns for co-operation and works to promote, develop, and unite co-operatives. We have a unique role as a trade association for co-operative and mutual businesses. We work to promote co-operatives across all sectors of the economy from retail and finance where co-ops are most recognised to key growth areas such as renewable energy, agriculture and education. Together the co-operative economy is worth some 37 billion, is owned by 15.1 million adult members in the UK, and has grown by 13.5 percent since Co-operatives UK has been a champion of the community energy sector for many years. We currently represent 80 individual community co-operatives involved in renewable energy generation, as well as a number of key sectoral development bodies. We are ourselves members of Community Energy England. Introduction This is a joint sectoral response to the following question posed in both the Social investment tax relief and Tax-advantaged venture capital schemes consultations: What impact, if any, would the absence of SITR for investment in companies receiving energy subsidies together with removal of tax relief under EIS and VCT, have on community energy schemes? In this response we describe the significant damage a total loss of investment tax relief would have on the UK s nascent community energy sector. We have set this within the context of the unique risks and rewards inherent in investment in community energy co-operatives 1 (see part 3). Our conclusions are predicated on quantifiable evidence of the key role EIS has played to date in supporting communities to invest in renewable energy co-operatives (see part 4). We go on to describe how the interplay of investment surplus and rates of interest impact upon a co-operative s community benefit, and how a loss of investment tax relief will diminish or destroy the social and environmental benefits that are intended to be at the heart of this model (see part 5). 1 Co-operatives UK defines a Community Energy Co-operative as a renewable energy enterprise owned through a community co-operative structure, most commonly incorporated using either the co-operative or community benefit society legal forms

2 2 We recognise that every tax relief must be thoroughly justified, and that a continuous cycle of lobbying and carve outs does not make for sound policy making. It is only right that HM Treasury reviews this matter with a view to a more fixed position, so long as this supports investment in community energy co-operatives. A strong case can be made for retaining the community energy carve out for EIS (see part 8). However we also believe that if appropriately altered SITR could serve as the designated tax relief for investment in community energy co-operatives. However, it is crucial that HM Treasury understands that the issues to be worked through in making SITR a useful tax relief for community energy are numerous and complex (see part 9). Retaining a community energy carve out for EIS is justifiable, and given the time it could take to recalibrate SITR, may prove to be the best course of action in this policy cycle. But instead of coming down hard one way or another our intention is to highlight the need for a stable and well calibrated investment tax relief, and to warn of the grave danger to the sector posed by an absence of any such relief. Please note that Co-operatives UK is sectoral representative body. A list of organisations that have signed up in support of this response can be found at the end of this document. 1 Why community energy co-operatives matter 1.1 Most people in this country now accept the case for renewables in principle, but in practice the UK energy transition is increasingly threatened because communities in key localities are not being brought in as partners in the process. Community energy co-operatives allow local people to own and benefit from renewable energy generation, and they are an essential component of a successful energy transition in a complex market democracy. Individual members of community energy co-operatives have a personal financial stake in our energy transition; but, crucially, through the mutuality of the co-operative model, significant long term economic and social benefits also accrue to communities. 1.2 Community ownership of renewable generation is also radically redressing imbalances of power in the UK energy system, allowing people to move from being passive consumers to active generators of their electricity. This is a crucial economic innovation that can make the UK energy market more diverse and competitive. 2 Government policy 2.1 The 2010 Coalition Agreement included commitments to encourage community owned renewable energy schemes, 2 and following detailed consultation and research DECC published its Community Energy Strategy in January Through this strategy government aims to support a step 2 The Coalition (2010) Our programme for government

3 3 change in the scale of community energy generation aiming for up to 3 gigawatts of electricity through co-operative and community organisations by It is clearly acknowledged within the Community Energy Strategy that in order to grow as the government intends it to the sector will need a predictable stable finance model, which in turn requires predictable stable regimes for tax and investment incentives. 4 3 The risks and rewards of investing in a community energy co-operative 3.1 The risks and rewards for communities investing in co-operatively owned renewable energy generation are very different from those for individuals investing in commercial projects. Developmental uncertainty, funding gaps, and the unique nature of co-operative share capital, magnify real and perceived risk for communities developing such projects whilst limiting the scope for individual returns on investment. 3.2 Communities undertaking renewable energy ventures face unique localised developmental risks in bringing forward their projects which larger private developers do not. Key factors include: Uncertainty in the planning process Uncertainty about a community s investment appetite and capacity Steep learning curves for community volunteers Difficulty in accessing affordable patient debt finance 3.3 Communities cannot escape these difficulties or mitigate uncertainties risks and losses by running multiple projects in varied locations as commercial developers can. Each community energy co-operative represents a start up from scratch, with all the uncertainty and risk that inevitably comes from any new venture. 3.4 Early developmental risk also stems from the fact that, as with all innovations, great efforts in explanation and assurance are required to overcome unfamiliarity and scepticism. So community energy co-operatives are also disadvantaged in early stage negotiations with key project stakeholders such as landowners, financiers and commercial partners, because these often have difficulty understanding how the mutual social enterprise model of renewable energy generation works. 3.5 The special nature of co-operative share capital adds to the perceived risk for investors by limiting opportunities for liquidity. Co-operatives issue a unique 3 DECC (2014) Community Energy Strategy 4 Ibid

4 4 form of share called Withdrawable Share Capital, which is very different from conventional equity. These shares are non-transferable, reducing liquidity, and retain fixed nominal value. Because community investors are unable to sell their shares in a secondary market their cash tends to be tied up for the long term. 3.6 Community energy co-operatives also need to overcome funding gaps that commercial developers do not, which further increases perceived risk for community investors. Because of their one-off nature and relatively small scale community energy co-operatives lack the collateral to attract appropriate non-recourse project finance. Not only does this lack of finance make the investment appear more risky to begin with, it also prevents the refinancing of projects seen in the commercial sector. This lack of refinancing prevents any early exit for community investors, which can itself be perceived as a factor of risk. HM treasury must also take account of the fact that in attracting investors, community energy co-operatives are sometimes competing with straightforwardly commercial investment offers, in which the public are invited to invest in the less risky refinancing of existing commercial renewable generation sites. 3.7 All of the above makes development of the venture altogether more uncertain for communities compared with commercial projects. It is crucial to understand that renewable energy subsidies, such as Feed-in-Tariffs (FiTs), in no way offset these development risks; they simply make renewable energy generation a viable business venture once deployed (see paragraphs 8.2 and 8.3). 3.8 The rewards for communities are also very different than those for investors in private energy generation. The unique nature of co-operative share capital means investors cannot gain from speculative fluctuations. Furthermore returns on investment are legally limited to be only fair and modest, and there is a defined intention in both co-operative societies and community benefit societies that the investment will have a community benefit. 3.9 Community energy co-operatives allocate significant portions of the profits earned from generation in further community energy endeavours; such as community energy saving projects, education, and in developing more renewable generation capacity. Consequently the interest paid on members share capital (the return on investment) is modest Furthermore the funding gap and lack of early refinancing discussed in paragraph 3.8 limits any uplift in returns on community investment that might be gained from an investment tax relief. Commercial projects may seek to refinance after 3 years, providing a quick realisation of investment. Their primary investors enjoy the concentrated benefits of any tax relief over 3

5 5 years, whilst for communities investing in a co-operative the benefits of any tax relief are diluted by being spread over a year timeframe. 4 The role of EIS in community energy growth to date 4.1 EIS and SEIS have played a crucial role in levering in community investment to fund renewable energy deployment. The key factors here are as follows: They reward those investors who take on some of the extra development risk inherent in community energy projects They allow community energy co-operatives to attract investment at a rate affordable enough to provide significant reinvestment of profit for community benefit They provide extra assurance to key stakeholders such as landowners and financiers that community investment is viable 4.2 According to the Community Shares Unit, which has been involved in over 40 community energy share issues to date, between 2009 and percent of share issues made use of EIS. This represents 20,950,362 of community investment in renewable energy projects that benefitted from EIS. 5 This demonstrates how important a material impact the presence of EIS has actually had on the financial modelling of community energy co-operatives to date. 4.3 Beyond this we have sought to understand how the ability to claim EIS has actually influenced people s investment decisions. We have surveyed the sector to quantify this and 1056 individual investor-members of at least 57 independent community energy co-operatives have completed an online questionnaire. Of these 883 have benefited from EIS relief. 4.4 Asked what they would have done if EIS had not been available 37 percent of respondents (who did benefit from EIS) told us they would have invested less. When asked what lower amount they might have invested, the responses averaged out at a 45 percent reduction. A further 38 percent of investors told us that without EIS they would not have invested at all The table below shows the average investment amounts and the total investment represented by each of the three respondent groups mentioned in paragraph 4.4. The data suggests that in real monetary terms the absence of EIS would have resulted in a 59 percent loss in community investment. 7 5 Community Shares Unit 6 Co-operatives UK (2014) Impact of Enterprise Investment Scheme on investor decision making survey results 7 The total loss of the investments made by those who would not have invested at all, plus 45% loss of the investments made by those who would have invested less

6 6 Investors Average investment Total investment not invested at all % 4,303 34% 1,454,496 37% invested less % 6,101 48% 1,995,228 50% invested the same amount % 2,385 19% 519,995 13% 4.6 The results of the survey also show that EIS had the least impact on the smallest investments. Of those who said they would have invested the same amount even without EIS, 61 percent invested under 2,000. Of those who invested under percent indicated that EIS had no impact. However, the results show the role of EIS on decision making growing rapidly as the investments increase in size. So by contrast 74 percent of those who invested between 1,000 and 1,499 said that without EIS they would either have invested less or not invested at all. Perhaps an important distinction can be made here between very small investments that are almost donations, and amounts over 500 that quickly become serious investments for those without much cash to spare. 4.7 At the other end of the scale, 50 percent of those who invested over 10,000 said that without EIS they would have invested less, and 40 percent said they would not have invested at all. Whilst these larger investors ( 10,000 or more) may only account for 13 percent of the total respondents, they account for 59 percent of the total investment covered by the survey. It is therefore very clear that removing eligibility for EIS tax relief will have a disproportionate impact on the ability of the community energy sector to raise capital from the wealthier community members, whose participation is required to enable the investment from less wealthier parts of the community to be effective. Without wealthier investors playing their part the projects would not be viable, and as a consequence the wider community would lose a rare opportunity to invest in, own, and democratically control, enterprise. 4.8 Taken together this demonstrates the severe impact an absence of EIS would have had on investment rates. As social enterprises engaged in renewable energy generation, the margins of viability in the business models of community energy co-operatives are already tight. A suggested 59 percent loss in community investment would make it highly unlikely that these business models would have remained viable at all. 5 Investor behaviour in a future without reliefs 5.1 In the same survey of community investors we asked what impact a future without any investment tax relief might have on future decisions to invest. The responses were as follows:

7 7 22% say it would make no difference 40% say would invest less 38% say would be less likely to invest at all 6 Analysis of results through the lens of a community s business model 6.1 As already stated in paragraph 4.6 a loss of 59 percent monetary investment would have serious implications for the viability of any business model. What must be further understood is the relationship between investment tax relief, rates of interest paid on society share capital, and reinvestment in community benefit. If there is no tax relief, interest rate paid on members share capital must increase considerably to have any hope of attracting community investors in numbers close to those seen under the EIS regime. 6.2 These higher interest rates must be paid out of profits from power generation. Since community energy projects do not yet benefit from the economies of scale and bargaining power of larger commercial schemes, raising interest rates on investments is likely to reduce financial surpluses to de minimis levels, destroying the very basis of the community energy business model, which has at its heart reinvestment of surpluses into other energy projects such as further generation capacity, reducing fuel poverty and making homes and community buildings more energy efficient. This erodes fantastic social and environmental returns which are in themselves addressing significant market failures. 6.3 Below we present some case studies exemplifying what we have so far discussed: Morecambe Bay Community Renewables are looking to develop larger solar and wind generation projects, and inform us that without EIS they expect it will be necessary to offer more than 6 percent interest at the very least. This co-operative has sought to reinvest 20 percent of their annual surplus for community benefit, but these higher rates of interest will make this impossible. In the words of Director Gill Fenna: This is particularly hard as one of the main reasons for setting up MORE Renewables was to help fund action on sustainability, energy efficiency and fuel poverty in our local area. 8 Killington Sustainable Energy Trust is currently just through the exploratory phase and looking at a share issue. They inform us that the prospect being unable to offer EIS puts the whole project in jeopardy, with local money likely to be wasted: Within a couple of months we shall be launching a co-operative share issue to raise the funds. The 8 Morecambe Bay Community Renewables

8 8 intention of the government to remove the EIS and SEIS tax incentives will probably kill our enterprise stone dead, although we have already spent thousands of pounds on a feasibility study, sound and biological surveys, planning permission and licences as well as the costly design studies. 9 RX Energy (Rye) exemplifies how communities can combine profits from generation with new community share offers to fund hugely innovative energy saving projects. A large part of our locality is off the natural gas grid and is thus excessively reliant on electricity and oil for space heating and cooling - fridges, freezers, hot water heating and heat pumps. We have a very high inventory of storage heaters as a result of the historically limited choice of fuel sources for heating. At the same time we have a very high solar flux for the UK, as well as a 60 MW wind turbine installation within 4km of Rye. We have several large storage heater installations - blocks of flats in private and housing association ownership - which are ideal testbeds for much improved demand management to reduce overall energy usage. A communitybased organisation is in an ideal position to undertake such installations because of the community coordination requirements for a successful implementation. We have no hope of financing these without EIS/SEIS support because of the experimental nature of the projects with significant uncertainties as to their technical outcome It is also important to consider that if lots more communities are to be brought in as partners in our energy transition some will need to share ownership of renewable generation with commercial developers. Indeed increasing shared ownership is a core pillar of DECC s Community Energy Strategy. However, if investment incentives are withdrawn this will severely reduce hard to win confidence amongst commercial partners that community investment is viable. This is already happening and Communities for Renewables reports that progress on a shared ownership initiative, to enable local communities to buy in to commercial projects, has already been shelved because of the uncertainty caused by this consultation A future without tax relief on community energy investment means that we will not achieve anything like the volume in community energy deployment seen to date. And where there is deployment the extent to which this addresses market failure will be greatly diminished. This will mean that official targets for a step change in community energy will not be met. And more worryingly still 9 Killington Sustainable Energy Trust 10 RX Energy (Rye) 11 Communities for Renewables

9 9 this loss of community engagement may in turn hinder the UK renewable energy transition as whole. 7 Future reliefs 7.1 We have provided quantifiable evidence that the removal of SEIS/EIS combined with an absence of SITR would have a severe impact on the viability of community energy schemes. Given that a step change in community energy by 2020 is stated government policy, and that bringing in communities as partners in our energy transition is essential for success, the question remains: what future relief should community energy investment qualify for? In part 8 we discuss the case for EIS and in part 9 we discuss the case for SITR. 8 The case for EIS 8.1 Since 2012 we have successfully made a case for community energy carve outs, allowing continued combinations of EIS with FiTs and other subsidies This is because there is a compelling argument for community energy investment being risky enough to warrant EIS relief. 8.2 As explained in part 3 investing in community energy projects can be more risky and less financially rewarding than investing in private renewable energy generation. This is down to the complex and innovative nature of community energy projects, limited external project finance, and the lack of exit via a secondary market for holders of co-operative share capital. These risk factors are unrelated to the nature of renewable technology, are not mitigated by renewable subsidies, and have not altered since The table below breaks down the three main respondent groups in our investor survey (detailed part 4) by the main renewable energy technologies they invested in. In shows that the variance between technologies is very low. 14 This really does suggest that the EIS impact is not discernibly related to technology, but rather to the risks and rewards unique to investment in a community co-operative (see part 3). Wind Solar Hydro I would have invested the same (25%) 24.96% 26.37% 23.19% I would have invested less (37%) 39.79% 32.80% 40.58% I would not have invested at all (38%) 36.25% 40.84% 36.23% 12 HMRC (2012) Enterprise Investment Scheme and Venture Capital Trusts: Better Focus ; page 2 Proposed revisions 13 Finance Bill (2014) Notice of amendments 14 Co-operatives UK (2014) Impact of Enterprise Investment Scheme on investor decision making survey results

10 Contrary to what is implied in the venture capital consultation document the risk factors still apply. Commitments to community benefit and limited return that are inherent in the co-operative model remain. Furthermore we are unaware of any other income guarantees community energy co-operatives now receive that might have changed this equation. 8.4 It is important to note that in their official report to DECC the Community Energy Finance Roundtable, representing expertise in this particular aspect of community energy, recommended retaining the EIS/SIES exemption for community energy co-operatives EIS is addressing market failure by plugging a funding gap for risky innovative ventures with otherwise limited investment returns. 9 The case for SITR, and the considerable changes to the relief required 9.1 We are convinced that all community energy projects able to prove a wider social purpose should be eligible for SITR. In their very nature community energy co-operatives are a high impact form of social enterprise. They are businesses trading for a combination of closely connected social purposes. They are generating profits from environmentally sustainable sources, and then using these profits to deliver a host of social benefits and address serious market failures: Making homes and community buildings more energy efficient Catalysing behavioural change related to energy and sustainability at a community level Building social capital and community cohesion Making a successful energy transition in a complex market democracy more likely 9.2 As stated in part 3 the community energy business model requires returns on investment to be limited in order for greater benefit to accrue to the community. The risks and rewards inherent in investing in this social innovation mean that there is most definitely a funding gap that in its essence SITR should be filling. 9.3 But crucially, as currently designed SITR would not serve the community energy sector. Even with hypothetical alterations, such as removal of energy generation from the excluded activities list, a great number of community energy co-operatives would be unable to benefit because of the legal form they use and they ways in which they determine rates of return. It is critically important that SITR be made fit for purpose in order to support community 15 Community Energy Finance Roundtable (2014) Final Report and Recommendations to the Secretary of State for Energy and Climate Change and the Minister for Civil Society

11 11 energy investment. Each of the following changes to the tax relief would be absolutely essential if it is to serve as a well calibrated relief: It must be made compatible with all renewable energy subsidies. It is vitally important to understand that renewable energy subsidies in no way mitigate the uncertainties inherent in community energy projects, or offset the lower returns due to the social nature of the investment. This change will also address the current imbalance in which the dedicated social incentive is actually less flexible on community renewables than the one designed for High Net Worth Investors and profit maximising enterprises. It must be expanded to EIS size (see the response from the Community Shares Unit to the SITR consultation). Investment in co-operative societies able to prove a social purpose, such as community energy co-operatives, should also be eligible for the relief. 9.4 It is important to note that in their official report to DECC the Community Energy Finance Roundtable, representing expertise in this particular aspect of community energy, recommended retaining making alterations to SITR so that it can serve community energy co-operatives. However the report placed greater emphasis on debt financing opportunities presented by the relief Concluding remarks 10.1 For community energy co-operatives to thrive and multiply, and so bring more people in as partners in the UK energy transition, they need a stable predictable and well calibrated tax relief that supports large scale community investment. To date EIS has proven instrumental in supporting community investment. This is because these reliefs help mitigate the greater uncertainties and risks, and lower rewards, inherent in investment in a community energy co-operative. EIS allows co-operatives to attract investors large and small whilst at the same time ensuring that rates of return remain low enough to deliver the community benefits that are at the heart of their reason for being Our survey of community investors suggested that in real monetary terms the absence of EIS would have resulted in a 59 percent loss in community investment. This would have severely reduced the deployment of viable community energy co-operatives. Asked how an absence of any tax relief would impact on future decisions to invest, 78 percent of people told us that they would either invest less or not invest at all. 16 Ibid

12 A future without tax relief on community energy investment means that we will not achieve anything like the volume in community energy deployment seen to date. And where there is deployment the extent to which this addresses market failure through social impact will be greatly diminished Considering the risks and rewards inherent in investment in a community energy co-operative there is a very strong case for retaining EIS eligibility. At the same time, given the great social returns at the heat of the model, SITR should certainly be serving the sector, but in order to do so will require significant alterations in scale and eligibility. Retaining a community energy carve out for EIS is justifiable, and given the work required to make SITR useful for the sector, may prove the best course of action in the current policy cycle We ask HM Treasury to carefully consider the serious impact the absence of a well calibrated investment tax relief would have on our community energy sector. The following organisations have signed up in support of this response: 10:10 Amber & Derwent Valley Community Energy Ashden (Awards for Sustainable Energy) Campaign to Protect Rural England Centre for Sustainable Energy Chase Community Solar Communities for Renewables Community Energy Birmingham Community Energy Warwickshire The Community Hydro Forum Co-operative Energy Energy4All Energy Saving Trust Exeter Community Energy Friends of the Earth Scotland Grand Union Community Energy Hockerton Housing Project Hook Norton Low Carbon Killington & District Sustainable Energy Trust Low Carbon Chilterns Co-op

13 13 Low Carbon Hub Low Carbon Lichfield Low Carbon South Oxford The Micro hydro Association Morecombe Bay Community Renewables My Green Investment CIC National Union of Students Neen Sollars Community Co-operative Pennine Community Power Limited Plymouth Energy Community Renewables Power for Good Co-operative Pure Leapfrog Regen SW REPOWERBalcombe RX Energy (Rye) Social Economy Alliance Solesco Energy Co-op South Brent Community Energy Southern Staffordshire Community Energy Whalley Community Hydro James Wright, Policy Officer Co-operatives UK Holyoake House Hanover Street Manchester M60 0AS