Financial Inventive to Promote Local Ownership and Investment in Low Carbon TechnologiesIdentify Pressures, Inform Policy and Develop Solutions

Dr. Celine McInerney, Joseph Curtin

EPA Research Programme 2014-2020Project Number 2014-SE-MS-1“Financial Incentives for a Resource Efficient Irish Economy”

Introductory Remarks

Research Questions

• What policy interventions / investment structures have been successful in attracting capital and creating buy-in for citizens and local communities in resource efficient / low carbon / renewable projects?

• Drawing on findings of extensive literature review and several case studies / interviews we examine the different investment structures that have been used for community investment:

1. What are considerations in terms of risk and return?2. At what stage should community investors buy in?3. What has worked internationally?4. What structures facilitate would local ownership of

low carbon technologies in Ireland?

Investment Risk Context: Windfarm Development Process

Build reservesRepay EIISLoan repayment

Economics of a Windfarm (SEAI)

• Typical wind farms investment costs are in the region of €1.6 - €2million /MW

• Cost of 10MW wind farm is approximately €16 million• Debt finance of 75% of total cost available at financial close• => Equity requirement is 25% x € 16 million = €4 million• With 200 community investors that is €20,000 each• Ranking for repayment

• Debt • Mezzanine• Equity

• Pre-financial close development costs are assumed to be 8.6% of the engineer procure contract (EPC) prices per Mott McDonald (2010, p83), or €1.38 million (€6,880 each with 200 people)

• All this real cash spent pre-financial close is at risk before you know if project is viable

http://www.seai.ie/Renewables/Wind_Energy/Wind_Farms/Wind_Farm_Development/Financing_wind_farms/#offer

Investment Considerations

1. How do we define community – is investment open to everyone or do immediate community get preferred return? Denmark 4.5km radius

2. Fixed versus variable return3. Level of risk – could community investors lose money? 4. Exposure to development risk pre-financial close?5. Ranking and minority shareholder protections for community investors?

Drag along, tag along, pre-emption6. Title of asset with community investors?7. Voting and control? Proportional voting control or one man one vote?8. Taxation – income or capital gain, partnership structure? GmbH & Co. KG

structure key enabler in Germany9. Regulated investment? Crowd funding generally regulated10. Liquid secondary market for investments?11. Time, financial, legal, technical and operational skills in community?

Structures for community ownership

• A number of structures for community participation are emerging including:

1. Community Benefit-type Schemes§ Leases§ Community benefit / near-neighbour schemes§ Subsidised electricity

2. Debt / Mezzanine§ Crowdfunding using debt instruments§ Mezzanine – fixed return§ EIIS – fixed timeframe and can have relatively fixed return

3. Equity• Enhanced tariffs for projects with community ownership• Joint Venture – project is jointly owned• Split Ownership – community owns 1 of 4 turbines, share grid access• Revenue Sharing – community invests 5% of capital, get fixed return but do not own

asset• 100% Community Owned

Typology of Investment StructuresStructure Form of Return Timing of Return Risks Security Developer

ConsiderationsCommunity

ConsiderationsLease

agreementFixed circa 2%

of RevenueAnnual None Rank ahead of

bank debt for repayment

Retain control Only landowners can benefit

Community Benefit

£1,000 / MW pa guaranteed

Annual None Don’t need any Ease of administration

Fixed return but nospecific benefits for

near neighboursCrowdfunding

/ Debt –based

funding

Can be fixed coupon on debt

Varies – usuallyfixed and usually

clear exit

Project risk Usually rank ahead of equity but after senior

debt

Retain control Small min. investment – can be as low as £5

Liquid secondary market

Joint Venture Variable Variable – but usually senior debt

restrictive covenants on disbursement

Exposed to development

risk pre-financial close

Party to loanagreement

Usually have title over asset

Challenges of dealing with minority

investor

Avail of developer expertise

Drag and tag along and preemption provisions

Risk of cash call

Split Ownership

Variable Variable – but usually senior debt

restrictive covenants on disbursement

Poolsrevenue from all turbines so reduces turbines

specific risk

Only have title to part of asset

owned

Can pose challenges – title to substation for grid connection, important for EIIS

reliefIf developer wants to sell / refinance could be messy

Avail of developer expertise

Risk of cost inflationDoes not qualify for tax

relief

Shared Revenue

CommunityGroup provide 5% of project

cost in return for share of profits (revenues less

costs)

Variable – Small annual

disbursements capital returned at end of project life

Senior debt impose restrictive

covenants on disbursement

Project risk…but

eliminatesdevelopment

risk

Community do not own a

physical asset

Challenges of dealing with

‘minority’ investor

Avail of developer expertise

100% Community-owned Co-op

Dividend if available

Annual dividend if available but may be years before capital is repaid

Project riskPotentialcash calls

Rank behind bank debt and

preference equity

NM TaxationSkills & ExpertiseIs team bankable?

Concluding Remarks

Concluding Remarks

• Need to acknowledge development risks • Investor exit – how would community investors get their money back?• Tax treatment can significantly increase investor return

• Section 23-type schemes for low carbon investments? State aid?• A number of approaches required - suggestions:1) Community benefit / near-neighbour schemes lowest risk option – gift tax

issues to be resolved2) Enhanced tariffs for projects with community ownership - Based on

Ontario model3) Modified EIIS- accepting smaller amounts and administered by Post

Office, Credit Unions, employers4) Green SSIA administered through banks – similar to Dutch Green Funds

scheme3) Co-ownership models but at or close to financial close - free carry for

local community until financial close?• Clearer planning process – this was key enabler in Germany• Role for agencies to provide support

Back-up Slides

The BES / EIIS scheme in Ireland

• BES introduced in 1984. The Employment and Investment Incentive Scheme (EIIS) replaced the Business Expansion Scheme (BES) in the Finance Act 2011. The primary objective of both schemes is to encourage investment, creation and R+D and provide an alternative capital source to the SME sector

• BES was intended to operate for a three-year period; however, it has been renewed on a regular basis – currently extends to 2020

• Qualifying trades include companies carrying out traditional manufacturing activities (including renewable energy generation), companies that are involved in internationally traded services, approved tourism projects and certain recycling activities (Revenue, 2013)

• Scheme modifications in 2011 made it easier for companies carrying on green activities with a view to producing energy from renewable sources to qualify

• Annual and lifetime investment limits of €5m and €15m respectively• For EII relief to apply the investment must be for a 4 year period

The BES / EIIS scheme in Ireland

• For top rate taxpayers the relief is at 30/40 of the investment in the year the investment is made (against all income) 30/40th relief immediately

• The balance of the relief which is 10/40 of the investment is granted in the fourth tax year of the investment provided there is an increase in the number of employees; the number of qualifying employees in the tax year before the investment was made compared to the number of employees in the tax year 3 years after the investment was made AND

• The amount of wages paid to employees must have increased by the wages of at least 1 employee

Other Conditions• The company must not have operated in any market

Or • It must be trading for less than 7 years

Or• The investment under the EII scheme is required to fund a new product or

enter a new geographical market and the EII investment must be greater than 50% of its average annual turnover in the previous 5 years

Data and Sample

“The lack of availability of data on the schemes has impacted on the thoroughness of this review. This is mainly due to the fact that the first round of investments are not due to mature until the end of 2014 and therefore there are no figures available on the number of investors who received the additional 11%. It is therefore critical that any amendments to the schemes will need to include the requirement to collect more quantitative data and statistics in order to allow for a more thorough review of the schemes in the future”

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cost of

the BES /

EIIS

Scheme

39.6 50.1 38.2 50.9 42 135.7 62.3 58.3 41 31.5

Number

of

Investors

2,046 2,599 1,642 1,994 1,913 3,200 1,642 1,467 927 984

(DepartmentofFinance,2014,p.19)

(DepartmentofFinance,2014,p.61)

Review of Irish Financial Incentive Schemes• BES / EIIS tax incentive scheme – has this tax incentive been used by resource efficient

companies?

(Department of Finance, 2014, p. 19)

Summary of Scheme from our database analysis – preliminary findings:• 2,681 BES/ EIIS investments between 2007 and 2014• Total invested €491m• Estimated cost to government @30% = €147m (may be low as pre-2011 relief at 41%)• €68.3m in low carbon, resource efficient, renewable and related companies• €50.5m in wind farms (circa 10% of total)

Irish Financial Incentives

Wind € 50,593,702Wave € 500,000Biomass € 7,509,716Energy Conservation € 2,754,331Energy Provider € 754,000Environmental Consultants € 400,000Forestry € 342,833Geothermal € 130,000Hybrid € 308,500Hydro € 1,500,000Manufacture of Electricity € 78,500Other Renewable Energy € 2,136,007Solar € 1,340,740Total € 68,348,329Count € 185

Investment Size Number of Companies %

More than €1,000,000 19 10%

€100,000 - €999,999 105 58%

Less than €100,000 61 32%

BES / EIIS tax incentive scheme 2017- 2014

EIIS wind farms investments 2007-2014

WindTotal € 50,593,702 Count 115Average € 439,945 Median € 295,004 High € 2,490,000 Low € 8,500

• 115 wind farms investments• 49 different companies• Trend of companies raising multiple funding rounds