Private investors are being given the opportunity to participate in two very different renewable energy projects, offering potential annual returns of between 6 and 31 per cent. But advisers say the long-term nature of direct investment, and the difficulty in selling up, make energy funds a more practical option for gaining exposure to the sector.
Future Capital Partners (FCP) is seeking investors willing to commit a minimum of £40,000 to back a new bioethanol plant being built in the north-east of England. Bioethanol is a renewable transport fuel (RTF) refined from wheat, which must be blended with petrol to reduce carbon emissions under UK and EU law. EU directives will require an estimated 23bn litres of ethanol-based RTFs to be added to petrol annually by 2020, compared with the 2bn litres being blended at present.
Ethanol produced by the new plant, near Grimsby, will be sold via two routes: 100 per cent of the minimum production capacity has been sold to a global investment bank (currently subject to a non-disclosure agreement) at market price under a pre-signed “take or pay” contract, with any excess offered to the bank, or the open market.
Animal feed and liquefied carbon dioxide – by-products of the process – will also be sold to generate additional revenues.
With fuel companies subject to a 30p a litre penalty for failing to meet their petrol blending targets, FCP argues that ethanol demand can only increase at a time when supply remains limited. Only three bio-refineries have been commissioned in the UK – including this one – and new plants take four years to come on stream. “There is a big supply gap coming, where mandated demand exceeds supply,” says Dave Knibbs, chief executive of Vireol, the plant operating company. “Other people entering market is always a risk but it takes years to find a suitable land site near surplus food stock and for planning contracts to be put in place.”
FCP is giving investors two ways to back the venture: directly into plant operator Vireol or through a limited liability partnership, Future Fuels LLP, which will get a share of the equity in Vireol, rental income from the plant and access to UK tax allowances. These allowances can effectively offset the initial cost of the investment before revenues start to be earned, affording UK investors a degree of capital protection.
Assuming oil prices of $85 a barrel and wheat at £120 a tonne, with an exit in year seven, FCP projects a post-tax internal rate of return of 31 per cent a year. “It could be regarded as an annuity supplement, held by a pension scheme or an individual investor,” says FCP’s marketing director Piers Denne.
However, only investors certified as “sophisticated” by financial advisers can take part in the fundraising – and analysts warn that commodity prices, and returns, may be volatile. “Bioethanol producers typically have no control over their input cost or their price, so any investment should be made in the context of having a view that the difference between costs and the output price will allow the company to earn good margins,” says Ed Guinness, co-manager of the Guinness Alternative Energy Fund.
Jim Totty, managing director and portfolio manager for Sustainable Technology Investors, also warns that bioethanol “has historically suffered from a range of commercial problems such as commodity price fluctuations, feedstock supply chain issues and the lack of long-term political support.”
At the other end of the scale, Abundance Generation is inviting investors to invest as little as £5 into its first community wind turbine project in the Forest of Dean. It is raising funds for a single 500kW turbine to be installed at Great Dunkilns Farm this year, which will produce electricity for 300 homes in St Briavels parish.
This project is a partnership between environmental consultancy The Resilience Centre, set up by Andrew and Sue Clarke, and Anthony Cooke, who runs a food business from the farm.
Investors from the local community and beyond will be able to buy debentures – official IOUs issued by the project committing it to pay a share of profit from the power generated, and repay the capital value of debentures at the end of the project’s lifetime, usually about 25 years. These debentures will be transferable during that period, and Abundance will provide a bulletin board to match sellers with buyers.
Returns will be linked to the performance of the wind turbine. “We estimate the effective rate of return to be in the range of 6.5-8.5 per cent over the life of the project,” says Karl Harder, director of Abundance Generation.
For those with a shorter time horizon, though, the risk is selling at a loss, or being unable to sell at all, suggests Guinness. “There are small companies raising capital for individual projects, but these will be private with no liquidity and limited transparency,” he says. “However, these projects do offer good investment returns, particularly with the judicial use of leverage.”
Others argue that diversifying across a range of projects, via a managed fund or venture capital trust, is a safer way to capture the growth potential.
“In most cases, private investors should gain exposure to the renewable and sustainable sector through managed funds,” says Totty. He says an experienced manager will have “a strong understanding of both risks and returns” and a better knowledge of pricing.
“Instead of investing in a specific product a managed fund can cover a wider range of investment opportunities,” adds Adrian Lowcock, senior investment adviser at broker Bestinvest. “A fund will not only invest in more established projects such as wind turbines but also access some of the more exciting growth areas which will enhance total returns.”
Green tech alternatives to invest in