By Ryan Weeks on 24th April 2017
Abundance, one of the biggest “crowd lending” firms in the renewable energy space, is yet to lend a pound in 2017, according to AltFi Data.
Meanwhile, rival platform Downing Crowd is facing changes. 65 per cent of its bonds last year were for renewable energy projects. That number is expected to drop to less than 25 per cent this year.
So what’s happened?
Abundance joint managing director Bruce Davis tells us that his firm experienced a flurry of deal-flow and investment late last year. The firm is working to launch three new projects within the next three months, and expects solar to pick up again in the Autumn.
Julia Groves, who heads up Downing Crowd, points out that Downing currently has a solar bond live on the platform, and that it’s most of the way funded. Two tranches of the £2.7m deal have already closed, and investors are already earning interest. There is roughly £140k left to close out in the third tranche.
But both bosses also concede that repeated cuts to feed-in tariffs (or FITs) have significantly changed the landscape for renewable energy investment.
FITs are a UK government scheme designed to encourage the uptake of new renewable and low-carbon energy technologies. The basic premise is that large energy companies guarantee a price per unit of energy generated over a period of 20 years. That price is inflation-linked, guaranteeing developers a steady source of income, so long as the sun shines and/or the wind blows.
The problem was that the cost of implementing renewable energy infrastructure could exceed the revenues it generates. Add FITs into the mix, however, and the business case for renewables suddenly made sense.
Or at least it used to. The government has been cutting FITs for years, with a view to ultimately phasing out the scheme. The government announced significant cuts to the scheme in late 2015, which Groves says “effectively killed the pipeline for Trillion Fund” – an alternative finance platform which was wholly focused on renewable energy investment. The remains of Trillion were put up for sale in March. Groves, formerly CEO of the firm, who was poached by Downing LLP in January last year, says that its failure taught her the dangers of focusing on a single vertical. Downing is a more diversified operator. It currently has bonds for a pub and a data centre listed as “coming soon”.
FITs were only ever meant to be a short-term fix – a stopgap until the cost of developing in renewables fell. Davis says that FITs are currently so low that it doesn’t make economic sense to use them.
The question, then, is one of timing: are we ready for the phasing out of FITs?
A second important factor here is the Enterprise Investment Scheme (EIS), which used to cover renewable energy investment. Former chancellor George Osborne put an end to this in March 2014. EIS offers 30 per cent in income tax relief on investments.
Groves says that alternative lending simply could not compete with EIS returns. But its removal may have created an opportunity for alternative finance firms, in that the Innovative Finance ISA is now the only tax-break in town for investors with an interest in renewables. The IFISA frees investors from income tax for up to £20,000 of investment, and covers both peer-to-peer lending and debt-based crowdfunding products.
But the bigger impact of the IFISA – which was extended to encapsulate bonds in November 2016 – could be on deal-flow. Groves thinks that the IFISA could drive down borrowing costs in the renewable energy sector, because investors will accept a slightly lower return on investments thanks to the tax-break.
“Now that investors can use their ISA to invest in Crowd energy bonds, we can offer the scale of funding, at competitive enough rates, to back a resurgence in UK renewable energy projects, and in doing so give everyone a stake in a sustainable energy future,” said Groves.
“While it takes some months or even years to build up the Green IFISA market, platforms like Abundance and Downing are having to find new ways of generating returns for members.”
Davis thinks that power purchase deals could represent a route forwards. In fact, two seminars (Green Alliance and IPPR North) in Westminster last week raised this very topic.
“Feed in tariffs provided certainty for investors over the pricing of green energy production which allowed long term, patient and ultimately lower cost capital to fund the big roll out of renewables in the UK over the last 5 years,” said Davis.
“As we move into the next phase of the energy transition, shifting from simple production to more complex service and supply business models, the industry would benefit from establishing standards for long term Power Purchase Agreements (PPA's) which allow businesses to fix their energy costs, while investors get longer term visibility on revenues to repay their investment.”
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.