In the 2014 Autumn Statement, the chancellor announced that investors in companies which benefit substantially from subsidies for the generation of renewable energy (like the Feed-in-Tariff) are excluded from receiving further tax reliefs like EIS, SEIS and VCT relief after 6 April 2015. The reason given for this decision was that investors in these businesses were effectively receiving a generous “double subsidy” from the government in the form of both renewable subsidies and tax relief, and that this was no longer required to support the growth of the renewable energy sector.
However, an important exception was made for community renewable energy generation projects where investors can still receive EIS tax reliefs*.
“Bencoms, Co-ops and CICs are coming under increasingly tight regulation to ensure that they do genuinely act in the best interests of the community and are not simply used as commercial vehicles with a community badge.”
Dan Hird, head of corporate finance, Triodos Bank
There has been some debate as to the definition of “community renewable energy”, and whether this meant community originated, community led, community owned or community managed projects. Rather helpfully, the new EIS tax rules provide their own clarity and stipulate that in order to secure tax relief the issuing entity must be either a Community Benefit Society (Bencom), a Co-operative Society (Co-op) or a Community Interest Company (CIC).
Bencoms, Co-ops and CICs are coming under increasingly tight regulation to ensure that they do genuinely act in the best interests of the community and are not simply used as commercial vehicles with a community badge. For example, a Bencom must demonstrate to its regulator (the Financial Conduct Authority) that it is set up to benefit the community, whether that community are members or not. The legislation requires that a Bencom must have a persuasive reason for seeking registration as a Bencom and not as a company. In practice this means including a standard constitutional provision requiring that;
- benefits will not be returned to its own members
- its business will primarily be conducted for the benefit of the community, and
- it adopts the co-operative principle of one member, one vote, regardless of contribution.
This all makes sense, but the Bencom registration requirements can make raising significant amounts of finance difficult. A typical 5MW ground mounted solar scheme which could provide enough renewable energy to power around 1,200 homes** could cost up to £6 million including pre-development costs, which is quite a challenge for a community led business.
There is also the important question of expertise. Completion of a renewable energy project of any size is complex and typically requires technical, contracting, financing, legal and project management skills as well as community engagement, capital raising and governance expertise. A typical community group will find it difficult to locate all of these skills amongst the local population – many of whom will still have to prioritise their full time job.
It seems clear that the answer to these challenges lies in the creation of effective partnerships between the community group and carefully selected third parties with the required resources, expertise and motivations. Our current project, Chelwood Community Energy Limited, (for more details see – www.chelwood.org) which is currently raising £2.75 million of share capital is a great example of this partnership-type approach. Working with Triodos, the local community has managed to build a consortium of partners whose combined expertise will help them deliver a 5MW ground mount solar project.
“A good example of what can be achieved is shown by Denmark… where over 70% of all wind turbines involve some form of local or community ownership.”
Dan Hird, head of corporate finance, Triodos Bank
Importantly, the Chelwood project shows how it is possible to meet FCA and HMRC requirements by balancing the creation of significant community benefit with an attractive (but not excessive) index linked return to investors. Successful completion of the Chelwood project will be a great achievement for the local community who stand to benefit from a £1.2 million community benefit fund over the 25 year life of the scheme and who make up the majority of the board of directors of the company.
It is not yet clear whether community renewable energy will achieve significant scale in the UK, but it is clear that the tax incentives need to remain in place in order to ensure it is attractive for investors.
A good example of what can be achieved is shown by Denmark, which is over 40% self sufficient in energy from its own renewable sources and where over 70% of all wind turbines involve some form of local or community ownership.
words: Dan Hird, head of corporate finance, Triodos Bank – firstname.lastname@example.org
Investment decisions must only be made on the basis of the Chelwood Community Energy Ltd share offer document and not on any information provided in this article. Investing in Chelwood Community Energy Ltd shares is not the same as depositing money in a bank account as your capital is at risk and you may not get back the full amount that you invested. An investment in Chelwood Community Energy Ltd shares is not covered by the Financial Services Compensation Scheme.
*EIS Relief for community renewable energy generation will be replaced by the broadly equivalent Social Investment Tax Relief (SITR) when the EU State Aid limits around SITR are increased in the near future
**Estimated figure based on the Department for Energy and Climate Change calculations of annual UK average domestic household consumption.
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