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Barriers to microgeneration part 2: finance

Posted by on 31 May 2010 at 9:37 pm

Initial capital outlay is a major barrier to installing microgeneration systems, whatever someone's motivation. Renewable energy installations can cost from £4,000 to £25,000. Access to sums of capital of this size is not realistic for most UK homeowners.

So how do we get around this? Especially now grant funding through phase 1 of the Low Carbon Buildings Programme (LCBP) has just ended.

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

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

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

Top-up grants
Many local authorities across the UK offer top-up grants for residents installing microgeneration. These can be as much as £1,000 and can be counted towards a local authority’s carbon reduction targets. Good Energy believes that sums below £1,000 will help incentivise residents but are small enough that they do not challenge the stability of installation companies.

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

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

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

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

Local credit unions
Credit unions are financial co-operatives owned and controlled by their members. They offer savings and low interest loans to local borrowers. They are primarily a social enterprise and are not solely focused on commercial return.

Microgeneration projects can offer secure investment opportunities for credit unions and credit unions can offer suitable access to finance for homeowners wanting to install microgeneration.

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

As local authorities are often linked with credit unions, they could communicate the opportunities to homeowners.

Tax efficient investments
Access to debt financing for small commercial scale renewable energy projects can be challenging to obtain, as can access to equity investment. There is a need to stimulate the creation of more tax efficient investment opportunities, such as a Venture Capital Trusts (VCT) that will deliver more equity investment into viable renewable energy projects.

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

If you have a question about anything in the above blog, please ask it in the comments section below.

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