In a previous article, I explained how project finance can be suitable for wind farm developments. This business model seems to be ideal for a power plant project, since the regular and highly predictable cash-flow of the operational facility is a strong guarantee that any loans will be repaid in time. For this reason, banks are more and more willing to lend money for such projects and equity investors could see this business as a lucrative opportunity.
Trying to focus the attention on the fictional company Zero Emission Project Ltd, this company seems to be a tiny dwarf between giants: banks and equity investors. In fact, ZEP Ltd has very little money to invest in Zero Emission Wind Farm Ltd, so the majority of the shares of the business could go to external venture capitalists and ZEP would be pushed to the corner.
Since this is something ZEP wants to avoid, we have probably to modify some parts of the diagram, in particular regarding owners and investors of the business.
One first step to increase the number of shareholders (and thus, even out the big differences between investors) is to give the landowners the option to be part of the SPV Zero Emission Wind Farm Ltd, as depicted in Figure 1.
Figure 1 - Landowners and the project finance model
They would obviously contribute to the assets of the business by providing the land on which the turbines would be erected and they would eventually earn a part of the profits made by the company. This way landowners could power their own farming business from the electricity of the wind farm (if this option is actually feasible) and this would also be a step towards a wider participation of local people in the wind farm project.
This solution though leaves almost unchanged the original problem, which is the heavy dependency on external equity investors. Since the access to Venture Capital is usually difficult to obtain a more accessible option could be turning to business angels. Business angels (or angel investors) are usually influential individuals whose target is to support the very early stages of a business, though typically the expected return on investment is 10 times the initial investment made, given the high risk of the capital invested in start-up companies.
Even if this is an option to take into account (since a wind farm wouldn't be a high risk company in a long term, given the predictable nature of its cash-flow), I would like to consider another option that would really even out the inequality of investments: involving the local community in the project.
This option is illustrated in Figure 2: Zero Emission Project Ltd will form a co-operative company (Zero Emission Wind Farm co-op Ltd) together with individuals of the local community and, optionally, the landowners. What does this mean in practice?
Figure 2 - A co-operative model for Zero Emission Project
A community wind farm is at least partially owned by the landowners and the local community. Usually, a public share offer is held and anyone can decide to buy some shares, from £250 to the legal maximum of £20,000. The members of the co-op will totally or partially own the wind farm and the profit will be shared proportionally depending on the amount of shares owned. The co-op is democratically managed, since each member counts as one vote (also known as one member - one vote rule).
There are already many co-operative wind farms operational or under development in the UK, so this is not a new experiment. Energy4All is a company owned by some of these co-ops which provides consulting and support services for the co-operatives themselves. This is a great source of information on community wind farms and their target is to replicate the successes made with the existing co-operatives across the UK. One of the latest wind farm developed and managed by Energy4All is the Westmill wind farm in Oxfordshire, started in August 2007 and commissioned in March 2008. The interesting story about the development of this wind farm is available on the Community Shares web site.
A possible ownership pie-chart for Zero Emission Wind Farm is illustrated in Figure 3. Zero Emission Project Ltd owns 51% of the company, and the rest is shared between the community (39%) and the landowner (10%).
Figure 3 - A possible ownership scenario for Zero Emission Wind Farm
This is just a possible scenario, whose feasibility depends very much by the actual circumstances. For example, can Zero Emission Project Ltd own 51% of the wind farm even though it can invest very little money in it, say £5,000-£10,000? Would the landowner be willing to invest other money apart from the land? Also, the co-op could even own just half of the wind farm (say 2-3 turbines) with the rest belonging to Zero Emission Project Ltd, via the Special Purpose Vehicle Zero Emission Farm Ltd, giving shape to a much more complicated arrangement (Figure 4).
Figure 3 - Another possible ownership scenario
Another thing worth noting is that banks usually are available to lend not more then 70% of the initial investment costs, which means that the remaining 30% has to be funded by equity. In one of my previous articles I calculated that the initial investment for a 10 MW wind farm formed by 5 wind turbines is approximately £10M. If banks agree to lend £7M, £3M needs to be funded by someone else. The Westmill wind farm was financed through a £4.6M fundraising campaign backed by 2,374 community members, with an average investment of £1,900. We need to remember that Westmill is 100% owned by the co-op's members, but at least this proves that a £3M community fundraising is possible.
70% of the investment costs should be funded by banks through a project finance approach. The Co-operative bank for example has already a good experience in project finance for wind farms (Westmill wind farm was partially funded by a Co-operative bank's loan). The bottom line is that banks need to be very confident about the management of the project. In other words, they need to trust the people, groups, institutions and private companies that are going to develop and manage the wind farm.
Since Zero Emission Project Ltd is a new name, with no previous success stories or particular expertise on wind farming, this might result as an issue. This clearly means that if we want this project to be a success, we need to find credible and experienced partners to support it. This will be the topic of one of my next articles.
