Finance – Loans and Investment

Any community project would be required to satisfy the following requirements in order to attract a loan or investment, especially from a bank.

A commercial funder will lend money to earn interest and fees and has a responsibility to get the money back. It must cover its overheads and pay investors for the use of their money. It will always be risk averse.

Community projects will be regarded in much the same way as any other development. The project will be expected to make sufficient profit, after the payment of all costs – capital and ongoing running costs, which could include wages.

The community group which wants to borrow must have

  • A board of directors with varying backgrounds and the relevant skills and experience/track record
  • Clear responsibilities and decision making within the organisation
  • A mix of funding sources

The loan would be “non-recourse” project finance – a loan to a company that does nothing other than construct, own and operate a project with no recourse to anything other than the future cashflow and assets of that business.

The owners equity will be at risk, but the lender has no claim on outside assets.

Unlike a domestic mortgage the amount lent normally exceeds the resell value of the component parts of the project.

How does a lender value a project?

The strength and value of a project lies in its future projected cashflow – cashflow = energy yield x sale price – operating costs. Consequently, if the project does not work it has very little value.

Therefore a lot of value is contained within the contractual obligations, warranties and insurances comprising the project – far more so than in the physical assets. Lenders base their estimates of value on conservative projections (e.g. a lender will use 90% or 95% energy yield probability estimates for their valuation whilst an equity investor may take 75% or even 50% depending upon their appetite for risk)


Value can have a very different meaning from a project owner’s perspective

 The lenders job will be to identify the risk, assess its level and to then manage that risk such that the party most able to manage that risk carries it.

There will be a sensible balance between the risk and the reward. The lender will not expect to act as a shadow director and will only lend if they are certain it is a fully operational project.

Both parties’, the lender and the borrower’s, interests will be the same – that the project is successful and provides a good return after the loan is paid. Those interests will be

  • construction contracts
  • land issues
  • insurance
  • long term power purchase arrangements
  • managing exchange rate & interest rate risks

The only area in which this alignment does not exist is in negotiating terms and conditions with the lender (the facility agreement) and in establishing the lender’s rights (the security documents).


Step In Agreements

 If the borrower defaults on an agreement which then endangers the future of the project, the lender may step in and remedy the fault – for instance with turbine supply/operation and maintenance, land lease and power purchase agreements



 Never assume that this is straightforwardA All rights to the land and those required to construct, operate and maintain a project, must be secured. This will include

  • site of renewable energy equipment & any substation needed
  • road access and cable / ‘phone connection
  • wayleaves for adjoining land

The lender will also want to assure themselves that the design and feasibility of the project is robust, that all necessary permissions have been granted, that all parties have the appropriate experience, technical & financial capability and that the contracts dovetail, both technically & legally and that there are clear responsibilities.


Ownership structure

 The borrower should be a discrete single purpose company so that it’s other activities do not potential endanger the project and of an appropriate legal structure.



 If the borrower is also looking to apply for grants, then funders are likely to have their own approaches and requirements, drawdown times, may require invoices to be paid before claiming against them. There may also be a certain amount of inexperience and nervousness on the side of the funder which can affect performance.


Operating costs

Those essential to the operation of the project will take precedence over the loan repayments: discretionary costs will be subordinate to the loan repayments. The borrower should then consider where any payments to the the community will sit in this hierarchy.


What makes a project attractive to a lender?

That there is an established technology, simple contract structure, experienced contractors – clear purpose, responsibilities and decision making.

The borrower has the ability to spot blind spots and seek appropriate support, knows its worth, but chooses its battles.

That relationship matters much more than size and that the smaller the project, the “plainer” the vanilla needs to be or cost of lending and due diligence becomes disproportionate to the cost of the project


When to engage with a lender

  • to test your economic assumptions and assess funding requirements – at any stage
  • to test the bankability of a proposed project structure, or the use of particular suppliers – at any stage
  • you will probably need significant progress with land options, planning consent & grid connection before most suppliers will devote substantial time to a project
  • a lender would prefer to comment on the whole financial picture or the whole proposed structure rather than receive too many specific questions in isolation
  • a lender would prefer to be involved prior to final signing of contracts to ensure its considerations are covered

Sources of Loans for Community Energy Projects


CO2Sense specialise in financing renewable energy projects. The fund is a £5m revolving fund with all capital repayments being returned and used for further investment. Surpluses are used to grow the fund. The fund was established by the Department for Business, Innovation and Skills who continue to oversee activity.

Tridos Bank

Triodos Bank helps individuals, institutions and businesses connect with inspiring entrepreneurs and groundbreaking organisations, and put their money to work in powerful, positive ways. Together, our collective impact can be a major factor in bringing about change for the better.

Big Issue Invest

Provides finance for social enterprises in the form of loans, participation loans (where repayment is linked to the future performance of the enterprise) and equity. It works closely with social enterprises to tailor the finance to fit with their growth needs and repayment capability. It offers finance between £50,000 and £500,000. BII can also arrange financing in partnership with other social finance institutions for amounts over £500,000. They do not provide grants.

Charity Bank

Charity Bank is the UK’s only regulated bank that is also a registered charity. Using 100% of depositors’ savings, they support voluntary organisations, social enterprises and charities to address society’s needs and maximise their social impact.

The Co-operative Bank

The Co-operative Bank has a track record in funding a wide range of renewable energy projects, including hydro.

The renewable Energy and Asset Finance Team provided £61,000 to help fund the installation of a hydroelectric Archimedean screw at Rorr Weir on the River Gyt at New Mills, Derbyshire. The funding was provided to Torrs Hydro New Mills Ltd (THNM) a company specifically set up to own the scheme at New Mills and install the hydro plant.

Power generated from the Archimedean screw will ultimately be sold, through an electricity supplier, to the Co-operative Group. The electricity will be fed directly into a nearby Co-operative food store.


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