Business plan. March 2014

Transcription

1 Business plan March 2014

2 SECTION 1: INTRODUCTION Legal form Community Energy Warwickshire Limited (CEW) was incorporated in December 2010 as an Industrial & Provident Society for the benefit of the community (Community Benefit Society). Its legal objects are to carry on any business for the benefit of the community by: promoting renewable energy generation and developing, installing and operating renewable energy sources promoting sustainable use of energy and reductions in carbon emissions through the provision of advice on energy efficiency and the supply of energy-efficient products and services promoting public awareness of environmental and related issues and supporting educational initiatives related to renewable energy, energy efficiency and sustainability As a Community Benefit Society, CEW is able to carry on its activities in much the same way as a limited company, in that its members enjoy limited liability; it has legal personality and can enter into contracts and sue or be sued in its own name; and it can own property, employ staff and borrow money. In other respects, however, CEW s legal form entails some features which are significantly different from those of a limited company, in particular: it is permitted to offer shares for sale to the public outside the regulatory conditions normally applicable to financial promotions it is owned and democratically controlled by its members on the basis of one member, one vote irrespective of the number of shares held its shares are unlisted and cannot normally be transferred its members can apply to withdraw their capital, but the directors have absolute discretion to disallow requests for withdrawal Meeting our community benefit obligation In order to meet our community benefit obligation, we intend to establish a charitable trust to which we aim to transfer one-third of surplus before tax each year. The resulting community pot will offer groups and individuals in Warwickshire financial support in the form of grants, bursaries and donations for activities such as: insulation or other energy efficiency improvements to homes and community buildings training in ways to improve energy efficiency through technical improvements to building fabric or energy-saving advice to building users running events, workshops or surgeries where people can get advice on ways to improve energy efficiency initiatives to provide education on issues in energy and carbon reduction one-to-one support to help vulnerable people to live in warm and energy-efficient homes 1

3 Our progress so far Renewable energy In the share offer document issued in October 2011, we stated our aim of generating at least 100,000 kilowatt hours (kwh) of electricity a year from renewable sources by The purpose of the 2011 share offer was to raise finance for Phase 1 of the Solar-powered Hospitals project. Phase 1 comprises solar photovoltaic (PV) systems with a total peak capacity of 60 kilowatts (kwp) at two local NHS hospitals: a 10kWp system was commissioned at Stratford-upon-Avon Hospital in December 2011, followed by a 50kWp system at Warwick Hospital in February As at 28 February 2014, the combined electrical output of the two systems since commissioning was almost 115,000kWh, representing around 58 tonnes of avoided carbon emissions. Total income from Feedin Tariff (FiT) payments and sales of electricity over the same period has amounted to some 45,000. In addition to its financial and environmental benefits, Phase 1 of the Solar-powered Hospitals project has enabled us to: build an ongoing collaboration with South Warwickshire NHS Foundation Trust, the body responsible for the hospitals develop an innovative contractual framework for community PV projects which is now freely available as a template for use by other community energy groups gained experience of installer selection and appointment by competitive tender establish a sound understanding of the Feed-in Tariff scheme and associated regulatory processes Based on operating experience at Stratford and Warwick, the expected annual electrical output of Phase 1 is some 57,000kWh, more than half-way towards the achievement of our target of at least 100,000kWh by We expect to be able to meet this target through Phase 2 of the Solarpowered Hospitals project: if successful, this will at least double our installed solar PV generating capacity by the end of 2014 and increase our total output to at least 115,000kWh in a full year. Phase 2 will consist of PV systems at two further sites owned by the Trust, namely a 50kWp system at Leamington Spa Hospital and a system of either 23kWp or 10kWp on a new office building adjacent to the Warwick Hospital site. If completed in full, we estimate that in its first full year of operation Phase 2 will generate some 63,000kWh of electricity, avoid around 32 tonnes of emitted carbon and produce income of some 11,500 from FiT payments and sales of electricity. Energy efficiency In the October 2011 share offer document, we set ourselves the target of helping to reduce Warwickshire s electricity demand by at least 100,000kWh a year by 2015 through energy efficiency measures. We envisaged that this target would be achieved in part through income-earning activities such as the provision of energy-saving advice; collective purchasing of energy reduction and renewable energy schemes such as solid wall insulation and solar PV installations; and collaboration with local businesses to promote green energy products and services. We had some initial success in negotiating deals and discounts on behalf of members and have also worked actively with partners to promote energy awareness. As part of our collaboration with South Warwickshire NHS Foundation Trust, we have undertaken a range of activities to support the Trust s 2

4 sustainability and carbon management programme. These have included energy awareness training for Trust staff run in partnership with Act on Energy, the local energy efficiency advice service for Warwickshire and Worcestershire, and displays at events organised by the Trust, for example to mark the annual NHS Sustainability Day. More broadly, we have worked with Act on Energy to organise community energy fairs at various locations in south Warwickshire to promote energy efficiency and showcase local businesses offering energy-saving goods and services. These activities have been undertaken on a voluntary basis and help to meet our commitment to raising public awareness of issues relating to renewable energy, energy efficiency and sustainability. However, the establishment of income-generating activities relating to energy efficiency has proved more difficult than we anticipated. Although it is not possible to ascribe a single definitive reason for this, we believe that public confusion arising from Government policy initiatives - notably the delayed launch of the Green Deal and the watering-down of the Energy Companies Obligation (ECO) - must be implicated to some extent. These events have created a difficult operating environment for community energy groups seeking to base their businesses on energy-saving goods and services. Against this background, we have concluded that, for the time being, we should not pursue the development of income-generating business activities based on energy efficiency and behaviour change. We remain committed to these objectives, but in the short term we will pursue them through partnership working and social and charitable expenditure, rather than by seeking to develop them as separate business streams. Future development Since the completion of Phase 1 of the Solar-powered Hospitals project, CEW has investigated a number of further opportunities for renewable energy generation. We have explored proposals for generating electricity from water and wind power and producing heat from locally-sourced biomass and from food waste using anaerobic digestion technology. This work is described in more detail in Section 3 below. We are currently in discussion with parish and town councils in Warwickshire and beyond about potential projects: these discussions have initially been focused on solar PV, but we are also actively seeking opportunities for other renewable and sustainable technologies such as small wind, microhydro and renewable heat. As the number, size and timing of future projects are not certain, we have developed three scenarios to reflect CEW s possible development beyond Phase 2 of the Solar-powered Hospitals project. These are: Scenario 1: CEW as single-project vehicle Scenario 1 assumes that CEW undertakes no more projects after Phase 2 and reverts to being a single-project vehicle akin to those set up to operate community shops and pubs. Scenario 2: PV pipeline Scenario 2 assumes that CEW undertakes further solar PV projects after Phase 2: under this scenario, CEW could revert to the single-project model described in Scenario 1; raise money for 3

5 new projects through a succession of time-limited share offers; or move to open share offer if a steady succession of projects seemed likely. Scenario 3: Mixed technology pipeline Scenario 3 assumes that CEW seeks to develop new projects based on solar PV and other technologies. Under this scenario, CEW would move to open offer and would also need to secure other sources of risk finance for the pre-approval stages of new projects, and possibly beyond. These scenarios are further discussed in Section 3 (Proposed activities). 4

6 SECTION 2: WHO WE ARE Membership As at 28 February 2014, CEW had 88 members, the majority of whom live or work in Warwickshire. Directors The current directors of CEW are: Chris Begg (founder-director; to retire by rotation at 2014 AGM) A retired chartered engineer, Chris is a trustee of Hill Close Gardens in Warwick. As its project manager, he has overseen the creation of a new visitor centre using ground-source heat, wind and solar, reflecting his commitment to low-carbon energy. Barbara Cooper, Secretary (founder-director; re-elected 2013) Professionally qualified as a chartered secretary, Barbara worked for over 20 years in the electricity industry and has wide experience of corporate transactions. She is an author and management consultant and a founder member of Transition Stratford. Paul Huband (elected 2012) Paul s early work on the effects of agricultural practices on wildlife has led to a long-term interest in low-input food production and small-scale food processing. Paul continues to investigate new ideas for producing food and utilising organic wastes. Roger Matthews (founder-director; re-elected 2013) Previously a senior manager in the Audit Commission, Roger is a consultant in strategic and operational planning. He is a trustee of Act on Energy and treasurer of Transition Stratford. James Pavitt (founder-director; re-elected 2012) Formerly chief executive of the National Association of Farmers Markets, James is the chair of Transition Stratford and co-ordinator of its thriving community garden project. Peter Pettifor (elected 2013) A qualified plumber and landlord with many years experience of property maintenance and improvement, Peter wants to be involved in putting technical solutions to climate change into practical use. Keith Sinfield, Chair (founder director; re-elected 2012) A retired chartered mechanical engineer, Keith is a passionate believer in the need to reduce energy demand and has more than halved his home energy use in recent years. David Wood, Treasurer (founder-director; re-elected 2013) After an early career in conservation, David works as an accountant and has experience of audit, business development consultancy and corporate finance. He is a governor at his daughter s school. 5

7 Ian Wood (elected 2012) Ian has over 30 years experience in telecoms, including electronic engineering and international regulations and standards. Since 2009 he has been pursuing his passion for energy conservation and renewable energy, working primarily with heating systems. All of the directors serve in a voluntary capacity and are unpaid. Running the business CEW operates under the Community Finance rules developed by Co-operatives UK. It is registered with the Financial Conduct Authority, to which it makes an annual return and sends its annual report and accounts. The board of directors meets monthly, with additional ad hoc meetings as necessary. There are no formal sub-committees of the board, but informal sub-groups are set up from time to time to deal with specific activities such as the investigation of prospective projects. These sub-groups report their recommendations to the Board, which makes any final decision. The directors report to members at the Annual General Meeting, which is held in the early summer each year. Members present at the AGM receive the annual report and accounts for the preceding financial year, elect and re-elect directors and consider any other business before the meeting. The directors also make a presentation to the AGM on activities and performance in the preceding year and answer any questions put by members. From time to time, CEW members are invited to workshops to discuss issues of interest and importance. For example, nearly one-third of members attended a workshop in summer 2012 to discuss opportunities for follow-on projects following completion of Phase 1 of the Solar-powered Hospitals project. Corporate capacity and succession At present, CEW is run entirely by volunteers drawn from the organisation s members, who between them represent a wide range of professional expertise, work experience and community links and which enable it to respond flexibly to different circumstances. We are mindful of the need to ensure a succession of volunteers willing to take responsibility for the future running of the organisation. Community share offers will be important in this connection, in that they must not only raise the capital needed for future projects, but must also draw in new members with the energy, enthusiasm and skills to carry the organisation forward. 6

8 SECTION 3: PROPOSED ACTIVITIES Opportunities for CEW Area covered Our current activities are largely focused within the neighbouring local authority districts of Warwick (population approximately 134,000) and Stratford-on-Avon (population approximately 116,000). Our partnership with South Warwickshire NHS Foundation Trust, which serves people across both districts, gives us visibility to a high proportion of the local population. We are seeking to extend the geographical reach of our activities within Warwickshire and beyond. Under the auspices of the Warwickshire and West Midlands Association of Local Councils (WALC), we are in discussion with a number of town and parish councils about how we can work with them to address their energy priorities. Local resources Relative to other parts of the UK, Warwickshire and its immediate surroundings lack natural resources which could be used to generate renewable energy. Rivers are relatively slow-running and there are few local sites which offer the right combination of head and flow to support efficient hydro generation. Wind speeds are generally below the national average, and wind power is not an option in many parts of the county because of amenity constraints and restrictions imposed by air traffic control networks. There is some scope for anaerobic digestion (AD) and for the development and use of biomass, particularly from local sustainably-managed woodland. Against this background, solar PV represents a pragmatic choice for local community investment in renewable energy. The technology is well-established worldwide, projects involve few or no planning issues and installation is quick and straightforward, leading to early generation of revenue. Further, the modular nature of PV makes it suitable for most buildings, irrespective of size or particular design features. However, generation is limited to the hours of daylight and is higher in summer than winter, meaning that energy production is lowest at the times of greatest demand. For these reasons, we are actively investigating viable alternatives to solar PV within the constraints imposed by geography and the relative lack of exploitable renewable resources. In each case, the development costs of projects will be much higher than those for PV and may potentially be lost, for example if planning permission is withheld. Micro-hydro We have had the benefit of earlier work carried out by other organisations into the feasibility of micro-hydro at two sites on the River Leam in Leamington Spa. Our investigations confirmed the technical viability of this proposal and also made good progress in identifying potential local purchasers of electricity generated by the scheme. Following notification by the Environment Agency that its consent would not be forthcoming, we are not able to pursue this scheme. However, we are actively seeking other locations where it may be possible to put the experience we have gained through our investigations into practical use. 7

9 Small wind We are working with community groups in the south of the county to develop proposals for a study into the acceptability of siting small wind turbines in community and industrial settings on urban fringes. If there is sufficient evidence of local support for this idea, we will consider an application to the Rural Communities Energy Fund (see below) for grant finance to carry out a full feasibility study which, if successful, could provide a model for development in other communities. Biomass In partnership with a national sustainability charity, we have carried out detailed work to develop a sustainable energy strategy for its headquarters site near Coventry: proposals included the replacement of time-expired LPG-fuelled heating equipment with a new biomass-fired district heating system; a solar PV array; a small wind turbine; and efficiency improvements to lighting and other energy uses. Although it has not been possible to take this project forward, we are hopeful that other opportunities will arise to apply some of the positive lessons, for example about the potential for biomass projects using waste wood from local sustainably-managed woodland. Anaerobic digestion In early 2012, we secured a grant from the Government s Local Energy Assessment Fund (LEAF) to carry out a feasibility study into the potential for generating energy through the process of anaerobic digestion (AD) using food waste from the hospitality industry in Stratford-upon-Avon. Although the study confirmed the technical feasibility of the concept, it also demonstrated that there are contractual asymmetries which make access to secure, long-term supplies of feedstock very challenging for community-based projects. The study suggested other possible ways of securing supplies of food waste and although we have not yet been able to develop these, AD remains a promising technology for longer-term development. Public policy environment The Feed-in Tariff scheme The impetus for the formation of CEW and many other community energy groups came from the introduction of the Feed-in Tariff (FiT) scheme in April Intended to encourage the take-up of renewable energy, the FiT scheme made it possible for the first time for communities to establish their own energy projects and retain the profits for local benefit. The FiT scheme works by providing a guaranteed payment per kwh for electricity generated by renewable technologies such as solar PV, wind and hydro. The level of payment applicable to a particular project depends on its capacity and the technology it uses. Once a project has been registered for FiT, the payment per kwh is guaranteed for the duration of the project s FiT contract, subject only to adjustment for inflation. During the first 18 months of the FiT scheme, the Government undertook two fast-track reviews in response to unexpectedly high take-up of tariff payments for solar PV projects. As a result, the level and availability of FiT support for PV was severely curtailed, creating major uncertainties for community energy groups and leading to the delay or outright cancellation of many PV schemes then at an advanced planning stage. CEW took the decision to proceed with Phase 1 of the Solarpowered Hospitals project despite the expectation that the 50kWp system at Warwick Hospital would qualify for FiT at a much lower rate than originally envisaged. In the event, however, the courts determined that the Government s proposed timetable for the imposition of tariff cuts was 8

10 unlawful, with the result that CEW has benefited from FiT payments for Warwick at the original level. The Government has subsequently introduced a number of further changes to FiT arrangements for solar PV projects. These include a reduction in the length of FiT contracts for new projects from 25 to 20 years and a new mechanism, known as quarterly degression, for the progressive reduction of starting rates of FiT. Under the degression mechanism, FiT rates are revised every quarter by reference to the amount of new solar PV capacity registered for FiT in the preceding quarter. The baseline degression rate is 3.5% per quarter: however, if new solar PV capacity in any quarter exceeds a pre-determined threshold, FiT rates for new PV systems in the following quarter will be reduced by one or more 3.5% degression steps, subject to a maximum reduction of 28% in a single quarter. Conversely, if new PV capacity in any quarter is lower than the pre-determined threshold, degression may be skipped in the following quarter. Degression can be skipped for a maximum of two successive quarters, meaning that FiT rates for new PV projects will fall by at least 3.5% every nine months. Although the changes to the FiT scheme have reduced absolute levels of tariff support for PV and made it inevitable that there will be further progressive reductions in starting rates for new projects, the quarterly degression mechanism is predictable within defined parameters and so enables future FiT income to be modelled with greater certainty than previously. Taken together with reductions in the capital costs of solar panels and other equipment, this gives confidence that new PV systems will produce acceptable returns on investment. Alongside the degression mechanism, the Government has introduced measures specifically designed to assist community energy organisations, including exemption for community PV projects on non-domestic buildings from the requirement to achieve an Energy Performance Certificate (EPC) of at least Level D in order to qualify for FiT at the most favourable rate. Community energy organisations are also able to pre-register proposed PV installations of up to 50kWp for FiT up to 12 months ahead of completion, thus locking in to a guaranteed rate of FiT and providing certainty of future FiT income irrespective of any subsequent degression. While Level D exemption and community tariff guarantees are useful tools which can be used to mitigate some of the risks involved in community-based PV projects, they are not cost-free as EPCs need to be obtained before applications can be submitted to Ofgem: CEW s experience is that EPC costs average 600 per project, which will usually be lost if the project does not go ahead. Renewable Heat Incentive The Renewable Heat Incentive (RHI) is a tariff support scheme intended to encourage investment in systems for the production of heat for space and water heating from renewable sources such as solar thermal, biomass, certain heat pump applications and deep geothermal. RHI tariff payments for qualifying non-domestic systems became available in November Although the RHI is similar in its intentions to the FiT scheme, RHI-remunerated projects are a more challenging prospect for community energy groups, primarily because there is no physical equivalent to the electricity grid whereby surplus heat can be exported. Heat-generating systems therefore need to be sized accurately to meet the heat energy requirements of specific sites and backed by legal contracts which guarantee that heat produced will be purchased by the site owner. 9

11 Despite these challenges, pioneer community heat schemes are beginning to emerge - most notably Sharenergy s Woolhope Woodheat project in Herefordshire. As noted above, CEW carried out detailed work in on a potential biomass-fired district heating system using waste wood from local sustainably-managed woodland and is now actively seeking opportunities to apply the lessons learnt from this experience. Government community energy strategy As demonstrated by the early history of the FiT scheme, the Government has until recently taken little account of community energy in the implementation of its energy policies. There is now some evidence of a more positive attitude, as reflected in the document Community Energy Strategy: People Powering Change published by DECC in January The document estimates that, by 2020, projects owned wholly or partly by communities could represent nearly 15% of all solar PV and onshore wind capacity. Amongst other policy initiatives intended to support community energy projects, the document announced a new 10 million Urban Communities Energy Fund. This will complement the existing 15 million Rural Communities Energy Fund launched in June 2013 to provide grants and loan support for the development costs of larger-scale community projects. CEW investment in renewable and sustainable energy Solar-powered Hospitals - Phase 2 Capacity As explained in the Introduction, we expect that our existing generating capacity will at least double by the end of 2014 through Phase 2 of the Solar-powered Hospitals project. This will consist of PV systems at two sites owned by South Warwickshire NHS Foundation Trust, namely a 50kWp system at Leamington Spa Hospital and a system of at least 10kWp on a new office building at a site adjacent to, but electrically separate from, Warwick Hospital. The legal and commercial frameworks for these systems will be similar in all respects to those for our existing PV systems. We have successfully applied to Ofgem for a community tariff guarantee which has enabled us to pre-register the proposed 50kWp system at Leamington Spa Hospital. The effect of the guarantee is to ensure that the starting rate of FiT generation payments for the system will be fixed at 13.03p/kWh, the rate in effect up to 30 June 2013, provided that the system is commissioned and registered for FiT before 30 June The proposed PV system at the Warwick site will ensure that the Trust is able to meet a planning condition imposed by Warwick District Council which requires that 10% of the forecast annual energy demand of the new office building will be produced on or near to the site from renewable sources. Our aim is to commission and register the system for FiT before the end of September 2014: subject to the availability of finance, our preference is to install a 23kWp system - the maximum effective capacity that can be accommodated on the new building - but failing this we have flexibility to reduce the capacity to 10kWp and still meet the planning condition. In the worst case, our financial modelling confirms that a 10kWp system will be affordable from ordinary trading income by the end of 2014 even if fresh share capital is not available for this purpose. Project costs Following a competitive tendering process, we have appointed Stratford Energy Solutions Ltd to design, supply and install the proposed 50kWp system at Leamington Spa Hospital. The proposed PV system on the new office building at Warwick will be installed by Eco2Solar, the firm responsible for 10

12 our existing systems at Stratford and Warwick Hospitals. Our total fundraising target for Phase 2 is 110,000, based on contract prices plus contingency. As explained above, the proposed 50kWp system at Leamington Spa Hospital will benefit from a guaranteed FiT rate, provided that installation is complete before 30 June We estimate that, to ensure that we can install the full capacity by 30 June, we need to raise at least 50,000 by 1 June If this target is met, installation of the 50kWp system at Leamington Spa Hospital will proceed and the share offer will continue, and may be extended if the directors so decide. Depending on the final amount raised and the date at which this share offer closes, the directors may decide to proceed with the full 23kWp of capacity at Warwick, to install a 10kWp system and/or to vary the date at which installation will proceed. Project revenue Assuming that we are able to install the full capacity proposed at both Leamington Spa and Warwick to our preferred timetable, we estimate that in its first full year of operation Phase 2 of the Solarpowered Hospitals project will produce total income of some 11,500, of which around two-thirds will be derived from the Feed-in Tariff (FiT). Environmental and community benefits Assuming that the full capacity proposed under Phase 2 is installed, estimated output in the first full year of operation will be some 63,000kWh of electricity, avoiding around 32 tonnes of carbon. In order to meet our community benefit obligation, we intend to establish a charitable trust to which we aim to transfer one-third of surplus before tax each year. The resulting community pot will offer groups and individuals in Warwickshire financial support in the form of grants, bursaries and donations for activities such as: insulation or other energy efficiency improvements to homes and community buildings training in ways to improve energy efficiency through technical improvements to building fabric or energy-saving advice to building users running events, workshops and surgeries where people can get advice on ways to improve energy efficiency initiatives to provide education on issues in energy and carbon reduction one-to-one support to help vulnerable people to live in warm and energy-efficient homes We estimate that, assuming completion of the full capacity proposed, Phase 2 will contribute around 1,500 to the community pot in its first full year of operation and a total of around 56,000 over the 20-year duration of its FiT contracts. Beyond Phase 2 As outlined above, CEW s future development will depend largely on the extent to which it is able to identify viable opportunities for generating renewable energy and working with local communities on energy issues. Central to our approach is to establish partnerships with owners and users of community buildings such as village halls, leisure centres and schools to take forward energy projects. 11

13 As the number, size and timing of future projects are uncertain, we have developed three scenarios to reflect CEW s possible development beyond Phase 2 of the Solar-powered Hospitals project. These are: Scenario 1: CEW as single-project vehicle Scenario 1 assumes that CEW undertakes no more projects after Phase 2, either because we fail in our efforts to bring new projects to fruition or for other reasons: these reasons could include, for example, inability to attract fresh share capital and/or inability to secure succession to the board of directors to take the organisation forward. Under this scenario, CEW would revert to being a single-project vehicle akin to those set up to operate community shops and pubs: accordingly, the directors would allow share capital to be withdrawn up to a pre-determined annual limit; would not seek to replace withdrawn share capital; and would structure CEW s reserves so as to repay all share capital within the fixed period determined by the FiT contracts for the PV installations comprising the Solar-powered Hospitals project. Scenario 2: PV pipeline Scenario 2 assumes that CEW undertakes further projects after Phase 2, but that these are confined to solar PV technology and that capacity increases at a steady rate of around 100kWp every two to three years. Depending on how quickly follow-on projects materialise, and on other factors such as board succession, it might be appropriate to make an open (ie not time-limited) offer of its shares in order to attract a steady stream of new investment and provide liquidity for existing members wishing to withdraw share capital. Alternatively, CEW could continue to raise capital for follow-on projects through a succession of time-limited offers or could retain the option of reverting to the single-project model described in Scenario 1. Scenario 3: Mixed technology pipeline Scenario 3 assumes that CEW continues active exploration of both PV projects and other technologies such as small wind, micro-hydro and renewable heat, incurring pre-approval costs for energy audits, preliminary feasibility studies etc, some of which have to be written off because projects then fail to materialise. Under this scenario, CEW would move to open offer and would also need to secure other sources of finance for the pre-approval stages of new projects and possibly beyond. The directors do not believe that immediate decisions need to be taken on CEW s future direction. Our current focus is on identifying and developing new projects and partnerships. In the light of our progress with this, we will review the position in consultation with members and involve them fully in strategic decisions about CEW s future. 12

14 SECTION 4: FINANCE Financial resources As at 28 February 2014, CEW had share capital of 113,200 subscribed by 88 members, of which 27,800 was subscribed by directors. This money has been used to establish Phase 1 of the Solarpowered Hospitals project and to meet start-up costs. Our main sources of income from Phase 1 are derived from FiT payments and sales of electricity. Total income from these sources since the commencement of trading in December 2011 is some 45,000, which is being used to: finance running costs and provide cash flow liquidity, for example to cover VAT payments on Phase 2 support the future development of the business by financing EPC assessments, energy audits and preliminary feasibility studies provide against future Corporation Tax liabilities ensure that assets can be replaced as necessary pay returns to members, in the form of a modest rate of interest on their investments build reserves to meet applications from members for repayment of share capital make social and charitable donations in line with our community benefit obligation Sources of capital Our intention is that Phase 2 of Solar-powered Hospitals will be wholly financed from the proceeds of the community share offer to be launched in March 2014, which will seek to raise 110,000. Commercial production of electricity will begin immediately on completion of each of the two systems included within Phase 2 and we expect the full capacity of 73kWp to be in operation by the end of September VAT at the rate of 20% will be payable on the installation of the systems and short-term cash flow issues are most likely to arise from the phasing of VAT recovery. In the event that a small cash shortfall cannot be avoided, arrangements are in place for short-term bridging finance at low or no interest. For the foreseeable future, we expect that follow-on solar PV will also be financed from new share capital, although smaller PV projects requiring lower investment could potentially be funded from retained surplus. For future projects using technologies which involve significant pre-approval expenditure and/or higher levels of investment risk, we will consider on a project-by-project basis whether it would be appropriate to seek grants or loan financing under schemes such as the Rural Communities Enterprise Fund and the Urban Communities Enterprise Fund. Investor motivation As much of the capital required for future projects will need to be raised through community share offers, CEW needs to be able to identify and target potential individual investors. 13

15 Some information on the take-up of community share offers is provided by the report Community Investor Research produced in 2010 by Wessex Community Assets on behalf of Community Shares. This identified four types of investor: local community investors living near a project and motivated by social benefits; community of interest investors interested in technical aspects of a project and motivated by social benefits but not living locally; social investors looking for a mix of financial and social benefits; and ethical investors seeking financial rewards but also looking for social benefits. We have gained more specific intelligence about investor attitudes by carrying out a survey of our own members in early Key findings were that: 25% of respondents regarded their investment in CEW as a donation to support local sustainable energy projects and were not looking for any financial return 75% of respondents had invested in CEW shares because they wanted to support such projects but also hoped for a modest financial return no respondents regarded their share purchases purely or mainly as financial investments nearly 60% of respondents would definitely or were quite likely to consider investing in future CEW share offers over 55% of respondents would definitely or were quite likely to encourage family and friends to consider investing in future CEW share offers Based on these findings, we believe that the prospect of interest at the same rate as Phase 1 (ie. 3% gross pa) should be sufficient to attract the share capital required to fund Phase 2 of the Solarpowered Hospitals scheme, particularly in the light of current low interest rates on savings and commercial investments. However, we will keep this under review in the light of operating performance and external economic conditions and will also consider on a project-by-project basis whether a higher rate of interest is needed to attract and retain the capital required for future projects which represent a higher level of investment risk. Withdrawable share capital CEW s share capital is withdrawable, meaning that members may apply at any time to withdraw their money, which may not then be replaced outside a share offer period. Until relatively recently, withdrawable share capital has been used mainly for single projects, such as community shops and pubs: supporters of such projects typically invest for a fixed period - often years - during which they receive interest on their investments. At the end of the period, all financial contributions which have not already been withdrawn are repaid and the venture is wound up. By contrast, our ambition is to establish CEW as a sustainable ongoing business, with a continuous pipeline of new projects. As explained in Section 3, our ability to succeed in this ambition will depend to a large extent on whether we can build partnerships with the owners and users of community buildings in order to take projects forward. Assuming that we do succeed, we envisage that new projects will be financed wholly or mainly from the proceeds of fresh share offers. However, the retention of existing share capital will be important to CEW s financial stability as the business develops: the directors will therefore use their discretionary powers to prevent withdrawal of share capital by ensuring that all shares, irrespective of their date of issue, are subject to an initial three-year retention period, other than in exceptional circumstances such as the death or bankruptcy of a member. 14

16 Thereafter, we intend to create and maintain a level of reserves that will enable us to fulfil requests for the withdrawal of up to 10% of the total share capital a year once shares have emerged from their initial retention period. However, our aim is to foster a sense of ownership on the part of members and thereby encourage them to leave their share capital undisturbed within the business for as long as possible. We will do this by investing in projects with demonstrable community and environmental benefits and creating open and inclusive organisational arrangements which encourage members to get involved in CEW and help to determine its future direction. We will also seek to ensure that eligible investors are able to benefit from income tax relief under the Enterprise Investment Scheme (EIS). At the same time, we recognise that we may not succeed in our efforts to bring new projects to fruition beyond Phase 2 of the Solar-powered Hospitals project. In that event (which corresponds to Scenario 1 as described in Section 3 above) the directors will still have the option of determining that CEW will operate as a single-project vehicle with fixed-term investments. Under these circumstances, the directors would allow share capital to be withdrawn up to a pre-determined annual limit, would not seek to replace withdrawn share capital and would structure CEW s reserves so as to repay all share capital within a fixed period. Application of surplus Paragraph 65 of CEW s Rules states that any surplus generated by its activities is to be applied as follows, in such manner and in such proportion as the directors may decide: paying interest on members share capital at such rate as may be determined by the board from time to time, but not exceeding the minimum rate necessary in the opinion of the board to attract and retain the capital required to carry out the objects continuing and developing CEW s activities making payments for social and charitable purposes Interest on share capital As noted above, the directors consider that for projects based wholly or substantially on solar PV technology, interest at the rate of 3% gross pa should be sufficient to attract and retain share capital, particularly in the light of current low interest rates on savings and commercial investments. This will be kept under review in the light of operating performance and external economic conditions. We will also consider on a project-by-project basis whether a higher rate of interest is needed to attract and retain the capital required for future projects. Continuing and developing CEW s activities As a volunteer-led organisation, CEW has very low overheads. However, there is a need to create reserves to meet future requests for the repayment of share capital, finance the replacement of time-expired plant and equipment and fund business development activities. The size and incidence of development costs will depend on how successful we are in identifying new projects and on the types of technology used by such projects. For example, for follow-on solar PV projects we might expect to incur an average of 600 per project on obtaining EPCs to support future applications to Ofgem for community tariff guarantees. For other technologies, such as 15

17 renewable heat, we may need to spend up to 5,000 per project on external consultancy work such as energy audits and preliminary feasibility studies. Social and charitable expenditure In order to meet our community benefit obligation, we intend to establish a charitable trust to which we will donate approximately one-third of surplus before tax each year to support a range of activities as described in Section 3 above. Investment appraisal Based on the above, the directors have determined that prospective PV projects should achieve a forecast Internal Rate of Return (IRR) of at least 10% in order to enable CEW to meet its community benefit obligation, fulfil its commitments to investors and operate and develop its activities. A lower IRR may be accepted on a case-by-case basis, for example if a specific project would itself confer a direct community benefit, such as helping to reduce costs so that a community building could be kept open or offer a greater range of services to local people. Financial projections The tables below set out forecast income and expenditure and a forecast balance sheet for CEW as a whole. Key assumptions underlying the projections are: CEW s future development is closest to that described in Scenario 3, ie a continuing pipeline of projects using solar PV and other renewable and sustainable technologies we will self-finance at least some of the development costs of these and 5,000 a year is set aside for this purpose: to allow for the longer lead-times associated with non-pv technologies, however, no allowance is made in the projections for either injections of fresh share or loan capital or future income from projects after Phase 2 the proposed 50kWp system at Leamington Spa Hospital will be completed by 30 June 2014 and the full 23kWp of capacity will be installed at Warwick before 30 September 2014, thus maximising future FiT income income estimates are based on operational experience at the existing Stratford and Warwick PV systems together with manufacturers output data for specific plant items to be used in Phase 2 of the Solar-powered Hospitals project depreciation is calculated to write off the cost of assets, less estimated residual value, on a straight-line basis over their useful economic life: solar panels will be depreciated over 20 years and inverters over 10 years all inverters will be replaced once at CEW s expense during the FiT contracts applicable to Phases 1 and 2 of the Solar-powered Hospitals project profits will be taxable in line with Ofgem s FiT table published on 31 December 2013, inflation on income from FiT payments has been included at the rate of 2.7% pa; for items of expenditure, inflation has been included at the rate of 3% pa overhead cost projections are based on actual operating experience in the period share interest projections are based on CEW s current share capital, plus the target proceeds of the share offer to pay for Phase 2, and reflect our expectation that Phase 1 investors will receive interest from 2014 and Phase 2 investors from 2016 members share capital is withdrawn at the rate of 10% of total share capital per year from 16

18 October 2014 (when Phase 1 shares emerge from their initial three-year retention period) Table 1: Forecast income and expenditure Income Solar-powered Hospitals Phase 1 23,458 24,092 24,743 25,411 26,097 26,801 Phase 2-5,741 11,862 12, ,585 12,966 Other income Donations Interest Total income 23,595 29,958 36,730 37,753 38,807 39,892 Expenditure SPH Phase 1 depreciation 5,108 5,082 5,036 5,036 5,036 5,036 SPH Phase 2 depreciation 3,065 6,130 6,130 6,130 6,130 Panel insurance Project development costs 1,907 2,000 5,000 5,000 5,000 5,000 Overheads Phone and internet Printing, stationery and postage Events/member engagement Co-ops UK subscription FCA fees Accounts examination/audit ,000 3,090 3,183 3,278 Public liability insurance Meeting rooms Total expenditure 8,910 12,907 21,990 22,200 22,387 22,576 Surplus of income over expenditure 14,685 17,051 14,740 15,553 16,420 17,316 Charitable donations 2,000 5,684 4,913 5,184 5,473 5,772 Share interest - 3,396 3,396 6,356 6,051 5,776 Appropriations of profit 2,000 9,080 8,309 11,540 11,524 11,548 Retained surplus before tax 12,685 7,971 6,431 4,013 4,896 5,768 Tax charge ,731 2,269 1,839 2,074 2,308 Retained surplus after tax 9,771 5,240 4,162 2,174 2,822 3,460 17

19 Table 2: Forecast balance sheet Fixed assets SPH Phase 1 104,159 99,123 94,087 89,051 84,015 78,979 73,943 SPH Phase ,435 99,305 93,175 87,045 80,915 Equipment Current assets Work in progress - 1, Trade debtors - SWFT ,000 1,000 1,100 1,100 1,100 Trade debtors - FiT 2,694 2,555 3,833 3,986 4,145 4,311 4,483 Prepayments Cash at bank 22,364 39,273 56,878 63,602 68,329 75,051 72,556 Current liabilities Corporation tax VAT Accruals ,500 1,500 1,500 1,500 Net current assets 25,818 43,606 61,219 67,491 72,477 79,365 77,042 Deferred tax provision - 2,933-5,842-8,568-10,832-12,666-14,735-17,038 Total assets less liabilities 127, , , , , , ,862 Capital and reserves Share capital b/f 113, , , , , , ,523 Shares subscribed/withdrawn 110,000-11,320-10,188-9,169-19,252 Surplus b/f - 1,628 13,962 23,733 28,973 33,135 35,309 38,131 Retained surplus for the year 15,590 9,771 5,240 4,162 2,174 2,822 3,460 Members' funds 127, , , , , , ,862 18

20 SECTION 5: RISKS AND UNCERTAINTIES The directors have carried out an assessment of the risks and uncertainties affecting Phase 2 of the Solar-powered Hospitals project. We set out below our assessment of the principal risks we have identified and how we are managing them. Risk Feed-in Tariff The Government may change the Feed-in Tariff arrangements for solar PV, for example by reducing FiT levels or removing indexation for inflation Community share offer This share offer may fail to raise enough capital to enable the Leamington 50kWp system to be completed before 30 June 2014 Our response under the community tariff guarantee arrangements, the 50kWp system at Leamington Spa has been pre-registered for FiT at 13.03p/kWh, subject to completion before 30 June 2014 although the 23kWp system at Warwick cannot be pre-registered for FiT, the quarterly degression mechanism introduced in 2012 enables future FiT income to be modelled with greater certainty than previously, giving confidence that the system will produce an acceptable return on investment we do not believe that the Government will risk li ga on by making retrospec ve changes where projects are already registered for FiT our strategy is to proceed as quickly as possible with Phase 2 of the Solar-powered Hospitals project in order to lock-in to FiT at the highest available rates, in the knowledge that these will then be guaranteed, subject to infla on, for 20 years we are confident that sufficient finance will be available to enable the 50kWp system to be completed before 30 June 2014 the directors can extend the share offer period if necessary the introduction of the quarterly degression mechanism has made it possible to model future FiT rates for new solar PV projects with greater certainty than previously on this basis, if for any reason completion of the 50kWp system is delayed beyond 30 June, it will still produce an acceptable return on investment even at a lower FiT rate 19