Environmental Audit Committee - Minutes of EvidenceHC191

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 20 November 2013

Members present:

Joan Walley (Chair)

Peter Aldous

Neil Carmichael

Martin Caton

Mark Lazarowicz

Caroline Lucas

Mark Spencer

Dr Matthew Offord

Simon Wright

________________

Examination of Witnesses

Witnesses: Robert Rabinowitz, Chief Executive, Pure Leapfrog, James Vaccaro, International Head of Corporate Development, Triodos Bank, and Mike Smyth, Chair, Energy 4All, and Wey Valley energy co-operatives, gave evidence.

Q186 Chair: I would like to start by welcoming each of you to our session this afternoon on Green Finance. When we commenced our inquiry with the launch in the City of London we were very impressed by those who contributed to the debate, highlighting the whole issue of community energy projects; so much so that we thought we would like to have an opportunity to hear directly from those of you with some expertise in this. There is no better way for us to start off this session this afternoon by inviting each of you to very briefly introduce yourselves and to say how you see the direction of travel, in terms of how it is and, more importantly, how it could be, and how what is happening in the UK compares with other countries. For example, Germany comes to mind where there is a great deal of local ownership of community energy schemes. If I could start with you, Mr Rabinowitz, that might be helpful.

Robert Rabinowitz: Yes, thank you very much. Thank you very much for the invitation to give some evidence. I run a charity called Pure Leapfrog. We focus on support of community energy projects. We do it in two ways. We have a network of lawyers, accountants and other professionals who provide professional services to community energy organisations that they would not otherwise be able to afford.

For example, we were approached at the end of December 2011 by a community group that wanted to do PV solar panels on social housing. They said they had everything organised except for the contract. They were not incorporated. They did not have a share prospectus. They did not have a financial model. They did not have a contract with the installer. They had all the relationships in place, but they did not have all the technical, professional stuff. Our network comes in and helps put all that stuff in place that they would not otherwise be able to afford.

The second thing we do is provide relatively low-interest loans to community energy groups to help them to afford the capital costs of installing community energy projects. We are very close to exhausting our first £1 million of finance, which we have received from Big Society Capital. We have approved or issued loans to just around 20 projects, focused on deprived areas of the UK.

That is a little bit about us. Where I see things happening right now is I think it is important not to divorce community energy from the broader ferment and turmoil of what is going on in energy. If you look at continental power markets, certainly in Germany, there is a lot of turmoil going on that is to do with renewables and decarbonisation. You will have seen that RWE recently halved their dividend, blaming it on what is happening with renewables. In this country we are not at that level of development, but I think community energy has the potential, in due course, to be quite disruptive to existing models of energy.

Q187 Chair: What do you think the difference is between here and Germany?

Robert Rabinowitz: I have given this a bit of thought. I think there is a massive cultural difference between here and Germany. They are more comfortable with the state role in financing and so there has been strong state finance through KfW in financing community energy. Traditionally, they have invested with a longer timeframe in mind, so they have been able to put more affordable finance in for community energy, and they have built a financing system that is designed to support and promote community energy. I am not an expert on Germany.

Q188 Chair: How would you define the real hurdles towards achieving what you hope to achieve from your own charity?

Robert Rabinowitz: There are lots of small hurdles and hopefully I can go through a lot today. I think the biggest hurdle is whether both the community energy sector and the Government believe that community energy could be a significant part of what we need to do over the next 20 years to decarbonise this country. I think at the moment there is a view that it is interesting, it could scale up, but it is a bit of a sideshow. I believe that it is not a bit of a sideshow. I believe it could be very central, but I am not sure whether the Government believes that yet and I am not sure whether the sector believes in itself enough.

Q189 Caroline Lucas: It is a bit unfair because you did just say that you were not an expert on Germany, but when you were talking about the difference there being primarily a cultural one, I was going to make the point that they also have some positive, practical policies; for example, having priority access to the grid for renewables and the continuation of the FIT Scheme and so forth. It seems to me if we are to look at Germany, because Germany is such a leader in this, it is important to see there are things that are translatable. It is quite hard to change the culture of a country, but certainly you could adopt some policies.

Robert Rabinowitz: Absolutely, and I think the same with community energy. There are lots of individual hurdles and there are lots of things we could copy from Germany, but I have been trying to think about it and trying to wonder why it is we have not gone down that route. I suppose "culture" almost answers too much and too little and, you are right, maybe I need to be more specific.

Q190 Neil Carmichael: Carrying on this German theme, one thing that strikes me about Germany is the company structure that it has, the Mittelstand kind of company that you get in Germany, which are quite strategic and pretty much family-controlled often and, therefore, able to take decisions without the usual processes that the British equivalent would have to go through. Do you think that makes a difference? If so, how would you see us replicating that kind of company structure?

Robert Rabinowitz: Again, I am not an expert on Germany. I think there is definitely an issue around time frames. For example, when we have been talking to banks about financing this type of project, the longer the time frame for the funding the more the risk weighting from a Basel perspective, so the less inclination they have to do it. It is about finding long-term finance. On the company structure side, we deal primarily with industrial and provident societies and those are built around a 20-year structure. I think the companies will have a longer time frame and maybe that is a company structure that is worthy of being promoted more.

Q191 Peter Aldous: We will come to detail later, but I think you said there had been quite a lot of rhetoric but not policy framework. I am conscious that last month Greg Barker said he wanted to move from the Big Six to the Big 60,000, which would indicate to me there is a will to do that. Have you noticed any change since he made that announcement?

Robert Rabinowitz: I am not close enough to the policy to notice since that announcement. From the conversations we have been having with people at DECC, it is quite clear they are thinking quite practically about solutions to particular issues. I was doing some calculations on the way here. To get community energy to where it needs to be we need several hundred of these companies, and perhaps the Big Several Hundred is not quite as good as the Big 60,000. They are quite clearly thinking and trying to address some of the particular hurdles. I am not sure there is a real belief that we could get to the Big 60,000.

Chair: You think it comes down to belief, to some extent?

Robert Rabinowitz: Yes, belief and confidence that this thing could be as big as it could be. It could be one of the Bigs, as it were.

Q192 Chair: I am conscious I need to move on to your two colleagues. Mr Smyth, why don’t you tell us a little bit about Energy 4All and the Wey Valley energy co-operatives?

Mike Smyth: I am a solicitor, retired, by background. I joined Energy 4All as its chair, which is a volunteer job in my case. Energy 4All seeks to deliver co-operatively-owned renewable energy and so far it has delivered a dozen projects around Britain; in Scotland, Northern Ireland and England. It has another dozen or so close to launch, but there is a high abort factor with energy. We would expect the majority of those to go through, so it is probably the largest single organiser of community energy by some distance in Britain. The projects sometimes come from grassroots organisations approaching Energy 4All; sometimes they come from developers seeking a community involvement in whole or in part; and sometimes they come from projects that we originate, either directly or through contacts, and then take to communities. Wey Valley Solar Schools is a fairly typical example. This is a community group in south-west Surrey. It raised £625,000 through a share issue and has installed 250 Kw of solar power on six local secondary schools. It has been a very successful project and it is that sort of project that we are seeking to replicate.

James Vaccaro: I am James Vaccaro from Triodos Bank, which is a values-based bank operating in Europe. What that means is that we only finance social, environmental, positive projects. We have developed specialisms in sustainability areas such as renewable energy, organic fuel farming, social housing, health and social care and that sort of thing. Our total funds under management is around €9 billion. About €2 billion of that is in renewable energy and it is mostly aimed at smaller schemes. Not the large utility-level schemes, but smaller schemes. We have financed around 650 around Europe. We are a Dutch bank operating in northern and western Europe: Germany, the Netherlands, Benelux, Spain, France and the UK.

In renewable energy we finance mostly the mature types of renewable energy schemes: wind, solar, hydro, and looking now at energy efficiency. In terms of communities, we see a diversity of different types of model. We are mostly financing independent operators and those can be farmers, small businesses and communities organised as co-operatives or organised in different ways. Some of our larger clients in the UK would be some of the schemes for companies like Ecotricity, and some of the smaller schemes would be community-interest companies formed by local communities in the Highlands and Islands in Scotland.

The specific questions you put in terms of comparison, I would broaden it from Germany, which I do know a little bit about, but also the Netherlands. If you take Germany, there are certain things where the features of the economy are such that there are more local banks. There are a greater number of mid-sized developers and a greater number of partnerships. There is a clear feed-in tariff system that has been around for many years and people have been used to how it is reviewed, and its decline has been less of a surprise than in other European countries. The priority for grid access is, again, something that people have been able to gain confidence in. The major factor that makes Germany different to here is that people have formed habits and, in a way, culture is formed from habits. I think people have been used to a framework that exists and is fairly stable. When it is stable it allows you to invest, go through things, build up the experience and get better at it.

What has happened, I think, in UK communities, which are still very small and fragmented, is that, in the context of quite large changes where you have had originally the NFFO scheme, then ROC, then feed-in tariff, and now the consultation for Contracts for Difference, you have a fast-changing system with specific details, like the FIT banding review and all of those things, being quite destabilising. You do not get enough people entering the process with the confidence that there is going to be something at the end of it and, if reviews are taking place every year but it takes two or three years to develop a project, that specific factor means that not enough people are forming the habits.

Q193 Chair: Given that you have described the situation in the UK where you have had change after change and a lack of stability and perhaps not that much general awareness or even capacity to be able to set up the kind of schemes that you are all committed to, how would you say that plays out with the inequality agenda as well? Would you determine that maybe there are parts of the country that would be much more ready to embrace these ideas than others? Is there an issue of social inequality here as well, would you say?

Robert Rabinowitz: In our loan portfolio, we have a lot of projects. There is an affluence connection and then there is a plain physical geography connection. We have projects on the south coast. We have projects around Bristol. We have projects in the south-west. We are starting to do some projects now in Staffordshire, relatively close to your heart. It has been a combination. I did hear one person say, "If you want to know where community energy projects are, look at where the retired solicitors and accountants live".

Chair: How do we get over that?

Robert Rabinowitz: This is something that Mike and I have been working on quite a lot. We tried to do a project, and we are still trying, that twins Mike’s area, which is a relatively affluent area, with another more deprived area that brings the skills that Mike has in. Mike has a £625,000 project that has assets that we would take security over and lend against, and we could set up projects in an area where there is not the same human capital or financial capital. It would improve the returns to Mike’s investors. It would help projects in more deprived areas. There are ways. It is still quite small-scale, but we are thinking of-

Chair: Can I just then perhaps paraphrase what you are saying? You would say that, for those looking to formulate policy on community energy projects, somehow attention should be given to the possible social inequalities insofar as there is not necessarily the expertise in some of the most deprived communities to be able to fly with this?

Robert Rabinowitz: Yes. There are a couple of things. There is the expertise. Groups are normally retired professionals or semi-retired professionals, plus they have capital where, if they invest in the project and get EIS tax relief, there is quite an attractive return. Areas where there are fewer people who are interested in EIS tax relief and do not have those skills and all that time, there is definitely an issue.

Q194 Mark Lazarowicz: I have a number of related questions. First of all, can I refer to my declaration in the Register of Interests that I am an unpaid member of the board of Edinburgh Community Energy Co-operative, so I have a non-pecuniary interest in the subject. Mr Vaccaro, you refer to Triodos’ experience in Germany and Britain. You are also involved in Spain, which has a fairly big renewables sector. I am not sure if there is a community energy part of that renewables sector. If that is so, are there any conclusions we can draw from their experience in relation to the UK as to how we could improve our record?

In terms of the UK, is it fair to say that an area where there has been a particular success in developing renewables has indeed been the Highlands and Islands of Scotland, where there has been a lot happening? In connection with that, quite a lot of the schemes there are ones, as far as I can see, where perhaps a developer decides to erect a number of wind turbines and donates one or arranges for one to be community held. That is a perfectly valid way of proceeding, but does it not much depend upon the commercial sector taking the lead? I wonder how far the community energy sector in the UK, to date, has been dependent upon that kind of spin-off from commercial developments.

There are a few questions on Spain, the Highlands and Islands of Scotland’s relevance as a cluster, perhaps, and the issue of community energy being dependent upon commercial renewable development.

James Vaccaro: Unpacking all of them, in terms of Spain, we predominantly focus on solar and it has mostly been through mid-sized development companies. There have been some smaller, more distributed schemes,

Mark Lazarowicz: There it is more commercial operations?

James Vaccaro: Spain is in a specific situation at the moment because of the announcement of retrospective action on feed-in tariff. There is still an announcement awaited at the end of the year as to how that will resolve and that has sent shock waves around Europe. In terms of the future as to how it will look in Spain, I think that will be quite a big barrier. We are looking at quite a few schemes in things like energy efficiency, which do not rely upon Government subsidies so much, and looking at both ESCO models and house models for social organisations there.

In terms of the more general point about community models, if it is only about the traditional community co-op then there is more of an inequality in that it does tend to be white, middle-class, male, professional, retired people, and for reasons of that is where expertise and capital tends to live. There are other models of involvement. For example, in the Netherlands there are the green funds. Banks have separate green funds that allow people to invest quite small amounts of money into a distributed portfolio of renewable energy projects that are certified by the Government and benefit by a tax credit, and that has generated about €15 billion of private investment into renewable energy. There is a degree of ownership or connection. In a way, there is quite a wide spectrum of different schemes and different ways of being able to involve people and other models that we picked up.

You then went on to how the Highlands and Islands have worked. There have been some schemes that have been more genuinely community-promoted, developed and managed through and we have been involved in quite a few of those. There are others where there are developer partnerships and I think Mike will have experience of those. Again, there are going to be different situations that are required for the local environment. What we are seeing is one of the developers on a scheme that we financed in Scotland took the project right the way through the process in a local area and he is now helping out as a community consultant at a project about 20 miles away.

That resource, in a slightly informal sense, is very important for being able to develop some of these patterns because you can then not buy in but allow for the transference of some of these skills and experience around different communities. That can be very helpful in giving the community the confidence that they could do it themselves, rather than only having the option of going into a partnership with the developer and maybe feeling a bit unequal in that relationship. I am afraid I can’t remember the third one.

Mark Lazarowicz: That was the third one.

Q195 Caroline Lucas: Mark’s declaration of interest reminds me that I should probably say I have a very, very small shareholding in a community solar scheme in Brighton and a wind one in Oxfordshire. My question is about the Government’s community energy strategy, which I think we are hoping to see before Christmas, and it is a fairly broad question. What would a good strategy look like with regard to finance? I guess you have begun to touch on it a little bit-for example, the example that you gave about the green funds in the Netherlands-but if you could just say a little bit more about the components of what a good, robust strategy would look like from a finance perspective, that would be helpful.

James Vaccaro: Overall, we would want to see that community is playing a central role for a pivotal part of the overall mix; that it was not just something that was bolted on to the side as a nice thing to do because we did not want to forget it. When that happens, several things follow as a corollary. You look at things like the feed-in tariff mechanism, so looking at where the bounds are and there is discussion at the table about 5 MW to 10 MW. There may be some of the more advanced co-operatives who say, "Why stop there, in fact?" At the moment there is a lot of fixation with "community" meaning just micro-schemes and looking at having to down-rate turbines in order to qualify for a feed-in tariff, when actually-once they have gone through that-the next logical stage would be using much more efficient technology at a larger scale still being appropriate within the local environment because it is being developed by local people. The overriding objective is being more ambitious about community energy becoming a meaningful slice of the pie.

I have been at Triodos Bank for 16 years. I remember talking to the DTI about things in about 1999 and the conversation from NFFO to ROC and being told, "The trouble with all these small schemes", which is what we finance, "is that they are never going to be very much of the pie, if you look at the overall amount of energy", and it was all going to be offshore. The reality is that, from a financing point of view and from a commercial landscape point of view, it is not just about the large schemes if you do not have enough wealth of experience through the smaller schemes to be able to get to the large schemes.

Through having financed 650 independent power projects through non-recourse project finance, that probably puts us in the league of financing as many different types of schemes as any other bank. That makes us more resilient for being able to take a full understanding of the risks in looking at larger projects if we had capital to fund that. It is being able to look at how the financial players within the UK are able to make that step. They need to have enough experience of dealing with lots of different structures and lots of different projects at the smaller scale to be able to move up sufficiently.

Mike Smyth: I want to mention a couple of points. First, this to some extent goes back to the earlier question of differences between Britain and Germany. One of the key things Germany has is a holistic view, whereas in Britain we tend to try to pick off individual issues but that always means there is another blockage elsewhere. It is a slightly different question, in a way. If you talk about the differences between Britain and Germany, I do not think it is in the existence of social entrepreneurs-there are just as many, if not more, in Britain-and it is certainly not the willingness to get engaged. The framework is very, very different and in Germany there has been a comprehensive thinking-through of the framework and all the obstacles and removing them all so that community groups can develop.

That is exactly what has happened and I think we can do exactly the same thing in Britain very quickly if the multitude of obstacles were assessed as a whole and were tackled and removed. Finance is one of those obstacles. It has become much more difficult in the last few months with the effective demise of the Co-operative Bank so far as lending to renewables is concerned because in the smaller area-the gap between Pure Leapfrog/Big Society Capital and Charity Bank, and when you start getting into the syndicated loan area of about £10 million plus-there is a complete void in Britain. The Co-op used to be the principal lender in that. It has gone. There is now a big market issue there. The Green Investment Bank has been a major disappointment. It is simply a non-player so far as this is concerned.

It is ironic, because the big difference in many ways that Germany has on the finance side is KfW Bank, which was formed at the same time as III. It was formed as an equivalent to III. One of them got flogged off and has become a hedge fund/private capital organisation. The other is doing this constant rebuilding of German infrastructure to this day. Those are the big gaps, as I see it, as part of the larger whole.

Robert Rabinowitz: I echo very much what James said. For me, there is a shopping list but there is a bigger picture, which is that community energy is not just, "There is a problem that these nice people have with doing small projects. We need to help them out". A proper community energy strategy would see community energy in its broader sense, which includes local authorities and community co-operatives. It is the preferred solution not just for renewable energy generation, but it is about everything we need to do with our energy strategy: decarbonising; the grid; energy efficiency; demand reduction. That is a preferred solution and that is why I was talking before about the vision and belief. That is what a good strategy would say; "This is the best way to do it. We understand it is not the only way to do it". Everything else would follow.

At the moment DECC is looking at some of the blockages for community energy groups that are developing hydro and wind projects, in particular. Those are there and should be addressed, but you need to take a broader view of the regulatory policy aspects and say, "Across the landscape, what are the things that are built into policy and regulation that do not promote community energy?" There are a lot of issues around grid, not just grid access but right to buy electricity, right to dispatch electricity; all of those things that they have in Germany.

On the financing side, if we are going to do 5 GW and we need 500 projects that are only 10 MW, what scale of finance is needed? What level of capital is needed? Where is that going to come from and how are we going to get that? What are the requirements of those funders to get that capital in there? For me, it is starting with a commitment to the big picture.

I do have a couple of shopping list items that I will mention briefly. One of them is priority for community energy to sell energy; to say, "We are generating. We want to sell electricity to our consumers". That will make a massive difference. Priority to connect to the grid. Priority to dispatch. I think there should be a right of first refusal for public sector property. If the public sector has property that could benefit from renewables and community energy can install on a pari passu basis with the commercial sector, they should have the right to do that. I think there should be a right to buy into commercial development, again on a pari passu basis. Private capital should not necessarily be disadvantaged, but we do need to build an asset base to enable the sector to grow. There are a couple of broader things, but that is probably my biggest specific thing on the shopping list.

I think we do need a mechanism to share experience and mutualise risks. Part of the problem is that small community energy groups find it very hard to play the numbers game on planning, for example, because they only have one project, whereas a commercial developer might have 20 projects. As Mike said, some of them are going to fall away and some of them will survive, but if you only have one project and you are reliant on semi-retired people and you do not have deep equity to underwrite development planning risks then it can be very challenging. I think we need a mechanism to mutualise risk among the smaller groups so that you replace the deeper pockets that a larger organisation would have. Those are probably my main shopping list items.

Q196 Caroline Lucas: Thank you. You have answered a number of the questions that I have, but I think one is still outstanding. You just mentioned 5 GW. I wondered whether your colleagues would agree with you in terms of the kind of scale we should be looking at in terms of the level of ambition that is realistic. I know that Baker Tilly said 3.5 GW, but I don’t know if you want to stick your neck out and put a figure on it.

James Vaccaro: I think it should certainly be that quantum. Again, there is a related thing in the broader green finance agenda, and that is probably looking at the mature renewable energies and you have to then look beyond at what could be accelerated and taken through. One of the things that we would be looking for in terms of the ambition phase is being able to take things through to larger projects.

We do finance things from about £1.5 million to £2 million. We do things on non-recourse project finance, which means there is no other alternative security. It is just the set of contracts and the due diligence required to put everything into place so that it is absolutely watertight. The cost involved in doing that means that it is not feasible, we feel, to do it at less than about £1.5 million and probably more like £2 million. Other banks probably feel that cuts in at about £10 million or even £20 million. It is about what level of interest you take in a sector, but if more communities were encouraged to be able to look at projects where the equity component, rather than being only equity in a scheme that is for a smaller turbine, could be leveraged with bank debt to becoming larger projects, it might take more banks into the picture.

Banks are not going to be helped by the new banking regulation and Basel III impacts. It is not generally going to be helping banks in this sector, and that is not something that UK legislation is going to be able to impact itself. What UK legislation could do is look for things like green funds where banks have been able to develop off-balance-sheet funds that they take responsibility for, and they are not things which are off balance sheet and out of sight and out of mind. They are specifically retail vehicles for individuals to invest in, from which banks can use their expertise in project finance to continue the supply of capital into the sector. I think that could be quite an important intervention in being able to support more of the smaller scale schemes.

Mike Smyth: If I could just come in on that, there are a couple of factors. First is the overall size of the market and the second is the time it might take to get there. There are various figures that get bandied around. Baker Tilly had their 3.5 GW. That was an absolute capacity and it was before solar panels had become cost-effective. I think that report is obsolete. ResPublica came up with a figure of about 5 GW-I do not quite know what timescale they put on that, I think it was 2020-which was heavily dependent on a joint venture system between communities and commercial developers. That is eminently feasible if the regulations provide for it and it would be similar to the Danish system. I know some work has been prepared for DECC as part of their strategy that was coming up with a figure of about 2.5 GW, which did not require the same degree of mandatory involvement as the Respublica report. That is by 2020 again.

The answer is it could easily be a low number of gigawatts of capacity by 2020 within the right framework, which is creating, collectively, a pretty significant new participant; turning a Big Six into at least a Big Six-and-Three-Quarters. I have gone through the calculations. I think that is eminently feasible with the right framework, the same sort of framework that they have in Germany or in Denmark or in Flanders or in the Netherlands. We could start delivering that outcome in Britain, which has lots of advantages.

Q197 Peter Aldous: For the record, I do have interests in family farms where the renewable energy scheme is being pursued. If I can just pick up on something that Mr Smyth said. I think you described the Green Investment Bank as having been a disappointment. Could you just elaborate a little bit more on that?

Mike Smyth: Yes. It has not participated at all in the community energy sector. It simply refuses to lend to it.

Peter Aldous: What reasons do they give?

Mike Smyth: It is not wholly clear. I think they have argued state aid, but it is not necessarily state aid to lend in small amounts. They have concentrated very much on the offshore sector.

Q198 Peter Aldous: I think there are four areas the Green Investment Bank is allowed to lend in. Does community energy fall in one of those areas? I can’t immediately recall.

Mike Smyth: My recollection is that they are not at the moment either permitted or, as a matter of policy, have decided not to lend in that area.

Peter Aldous: It is the fact that they are not allowed to, rather than the fact that they have been-

Mike Smyth: Yes. I do not think it is a statutory allowance.

James Vaccaro: Although, as a matter of record, they just invested, from recollection, £50 million in a public IPO for a company called Greencoat, which is a commercial aggregator of pre-existing, operating onshore wind farms. There may have been a reason for that in terms of capacity-building within the sector, but it is not very clear and certainly it is not the first time I have heard frustration that it is not in scope. I think they have been arguing it has not been given to them as scope.

Q199 Chair: I am quite keen just to look at this. We must move on in a minute to Simon Wright’s question, but can you just try to elaborate for me about the Green Investment Bank and the state aid rules? I understood that this was one of the obstacles to getting community energy projects off the ground and that there was some dispensation that would need to be submitted to Brussels for what would need to be provided. From preliminary discussions that I have had on this very subject, I am not quite sure in my own mind now and I would like some clarification from you. The answer that I am getting back is that there would be nothing inherently in the state aid rules to prevent this, in which case I can’t quite understand where that blockage might be. Picking up on Peter Aldous’ point about where perhaps the Green Investment Bank is not doing what was needed, do you have a message for this Committee about the Green Investment Bank, about state aid rules, and whether or not that is or is not the obstacle?

Robert Rabinowitz: I must confess that most of what I know about the Green Investment Bank and state aid is what I have read of they have said to this Committee. However, on the issue of state aid, the community energy world has been stymied by a number of issues related to state aid where I think, from a perspective of other countries in Europe, they would be looking at us and wondering why we see state aid where they do not think it is there.

Chair: It is specifically how we as a member state apply those state aid rules? Is it that the UK has not grasped what needs to be done to get this investment in place?

James Vaccaro: I could not comment on that specific part because it is around legal interpretation. There are certainly things where perhaps things like market failure and what constitutes market failure can be subjective. What I would say is, though, Triodos Bank is a bank that is lending into this sector at the moment and it will continue to do so. On a commercially equivalent basis-because there is a lot of co-lending, which usually is the main exemption for state aid disqualification-if the Green Investment Bank was to do something alongside us in these types of schemes, we could do more than we are currently doing.

Chair: That would be something that you would be recommending to this Committee, would it?

James Vaccaro: It would certainly be favourable. If you wanted to take it as a recommendation, then yes.

Robert Rabinowitz: From our perspective, that still leaves the sub-£1.5 million, sub-£2 million, which is where these organisations get started. We need to help them before they get there and there is definitely a market failure. You have just heard there is not any lending into that space. Co-operative Bank, which was the lender that was most willing to look at the smaller space, is absent. We are trying to fill some of that gap, but we are not yet at the scale. Our largest loan is £200,000. There are a number of areas where that could be helpful.

Peter Aldous: Madam Chairman, I do think, before we complete this inquiry, we need to go back to the Green Investment Bank and just follow up and ask for clarification on this particular issue.

Chair: I think we possibly do and also, I would think, with the DG inside Europe in terms of state aid rules as well. Thank you.

Q200 Simon Wright: In relation to the Co-op Bank, the Telegraph reported at the start of last week that it is preparing to sell off its renewable energy lending arm because of low yield. What do you believe the future is for bank financing and lending to community groups?

Robert Rabinowitz: I have been thinking about this recently. It is one of those things where there are pressures on the banks right now, which makes us feel that some banks will be trying to step away to a certain extent if we need very long-term money, which causes them problems on their capital adequacy because of Basel. I think over the longer term I can’t see this working without bank financing although you could talk about crowdfunding or you could talk about pension funds as alternative sources of capital.

Ultimately, I am hopeful that the bank situation will resolve itself and I think we are going to need banks to get involved. The way banks are set up right now, I do not see that they can do anything too much to help the sub-£2 million type project. I think there is an absence there and I do not see that absence being addressed without something like the Green Investment Bank or some other form of assistance.

There are plenty of projects. The world of solar farms has picked up dramatically in the last 12 months and there are opportunities for banks to get involved there. I do not think there is anything wrong with renewable energy per se. I think there are certain pressures that are on long-term money, but our sector at least is not benefiting from any repair of the balance sheets.

James Vaccaro: I would say there are not many banks in our part of the sector. Renewable energy, though, generally, is quite attractive to banks when there is a stable enough regulatory environment and the technology is proven. There is now a good European-based infrastructure for operation and manufacture. A lot of it is not UK-based, but it can be managed well and can be quite reliable. I think also it is good for banks to be in projects. It is all a question of risk and if you go through a banking process you are making a project more watertight and more robust. That is not to say that every project needs to go through that if there are enough people around it who can go through and accept the risk and satisfy themselves with a lighter level of due diligence. We have done projects in the past that are smaller. From a feasibility level, to go through that process at this moment in time, it is around about £1.5 million to go through a non-recourse project finance basis. A smaller project will need a different approach.

One of the other things I would like to highlight, which is an ongoing consultation at the moment through the Financial Conduct Authority, is on crowdfunding and similar activities. I have not gone through all of it in detail, but I think there is a significant risk that the Financial Conduct Authority may see crowdfunding as being something that needs to have the heat taken out of it because there is not necessarily capacity within them to regulate it as much as they perhaps would like. I think there is a real risk that, having a lot of people in DECC maybe seeing crowdfunding as being the solution to the retreat of banks, it might be an option that is under threat of coming off the table. The reality is that you need to have a diversity of different funding mechanisms, but banks can absolutely add value to projects and need to be brought into the fold.

Q201 Simon Wright: On that point of crowdfunding, do you think there is sufficient interest for people to invest in local projects who may be removed from that area; people in investing projects that might be some distance?

James Vaccaro: There is plenty of demand.

Mike Smyth: I will speak on that. The answer is yes. At Energy 4All we find that approximately half the members of the project are local and half are from what is described as a community of cause. They are national and they come from everywhere. The computerised crowdfunding platform, an organisation called Abundance, draws very little indeed from the local area. It is primarily database marketing to people who have expressed an interest and are interested in trying to achieve an outcome and get a fair return on their money. They do not tend to do that much local marketing, whereas the cooperative model tends to have more local marketing but still is heavily dependent on support coming from across the country.

Q202 Peter Aldous: I wonder if there is any more scope for joint ventures with commercial operators who may be having their own particular challenges on planning issues at the moment. Is that something you have explored?

Mike Smyth: There is something that Energy 4All does. A lot of our projects are joint ventures of one form or another, but it has very little relevance in practice to planning. The developers who are doing it are primarily doing it because they are continental developers. They do this on the continent and they do not see why they should treat people in Britain less favourably. They get some brownie points for it perhaps on an extension, but it does not count for anything in the planning system.

Q203 Simon Wright: How ready or how prepared are individuals to invest, to put their own money into local energy projects? What is the motivation and what are the risks to those making those decisions?

Robert Rabinowitz: Of the projects we finance, our loan to value is under 50%. In excess of 50% will be provided by the local community. I think it shows a willingness on the part of the community to invest. There is a number of share offers that are either happening or have just happened, which demonstrates that people are willing to put their hands in their pockets. Brighton Energy, which I think Caroline might have alluded to, to which we issued a loan, is now doing a second share issue. I think that is going pretty well. Bath & West Community Energy, every time they have raised money they have raised more than their target. In fact, I think they had to turn people away from their last project. People are willing to put money in.

I think there is a high level of trust the public needs to have on the integrity of the people running those projects because, at the moment, they are not subject to FCA disclosure rules, and I think that is what James has alluded to. If you started loading up the FCA costs on to it, I think you would have another massive hurdle that would kill it. The issue is around integrity. So far, people have been willing to invest because very few people have been burned by it. I am not expecting it is going to happen, but there is a risk there. We, as an organisation that supports these projects through our network, are looking at making sure that the prospectuses and everything are of a sufficient standard that people will put in the money.

I will say one thing. Bear in mind, the people raising money for these projects will often be putting their own money in and that of their friends and families. That is not a guarantee that their money will not be lost. We do know of one project where, a colleague tells me, something adverse happened. They did not take a lot of money off people, but something happened around planning, so they could not proceed. The people who had created those expectations in the community felt for about a year that just popping down to the shops was somewhat of an ordeal because it was neighbours who they had made excited about it. There is something about it being embedded in a community that hopefully adds an additional layer of security.

Mike Smyth: Can I just speak on the returns? About 10,000 people have participated in Energy4All co-operatives. This is not scientific, but I guess there are probably between 15,000 and 20,000 people altogether who have participated, that sort of scale; probably nearer the 15,000 end. The problem so far has been shortage of projects, rather than shortage of people.

The number of people who want to engage is very substantial indeed. Their motives are always a mixture and different people have different priorities. The fact is that it is tangible: you can see something happening with your money and you can see yourself making a difference, particularly if you are local, to your local community. You can see the wind turbine. You can see the solar panels going up. You are getting a fair return and, in retail terms, it is a good return at present. It is not right to compare the return you get from community renewable energy with bank deposit accounts but, inevitably, people do compare 0.5% with 5% or something like that. It is a mixture of the return, the tangibility and care. People want to make a difference. They want to improve their local community. They want to do something to tackle climate change and this enables them to do it.

With all of these cases, why they are rather different from investing in a commercial wind farm company is the community approach on top. The surplus of these projects is reinvested back into that local community. You get a whole hybrid of factors. With Energy4All, where perhaps half the investors are national, they are primarily motivated by doing something to tackle climate change and create an amount of renewable energy that is held in a different structure in Britain. People who are local, their motives are more mixed. In all cases, the financial return is of some significance, varying significance, and the EIS relief is absolutely crucial, I would say, particularly for the larger investors.

James Vaccaro: I would endorse that, but also to mention that Triodos Bank runs investment funds as well. Triodos Renewables is a plc. It is an unlisted plc but with 5,000 shareholders-in a way, it is like a community of interest-and that company owns and operates wind farms and hydro plant. There, it is about the direct connection. It is not about holding shares in a utility and hoping that somewhere along the line, as a secondary measure, there might be some energy projects they felt positive about. It is the fact that they directly own a stake in that collection of projects.

In terms of the risks, most of it, beyond the technology and procurement, is around the management and how it is all being pulled together. At the moment, beyond Triodos Renewables, Energy4All’s schemes and some of the co-operatives that Robert is working with like Bath & West, there is not a big diversity in terms of numbers of people managing these types of schemes. It is about being able to see how we might be able to get more. Where I might differ, though, is that all of our materials follow the Financial Promotion Order we do for the larger share issues. We follow the European Prospectus Directive, even though we are not a listed company for Triodos Renewables.

Under the FCA crowdfunding consultation, the fact that we are not listed might mean that we would not be able to market that generally. We would have to go through a process that is more like suitability and appropriateness and find out how much net wealth people had and those kind of things. That is quite a big barrier to promoting investment. There are certain things that, for the very few providers who are around at the moment, might be further roadblocks to more of this type of investing happening.

Q204 Neil Carmichael: Just before I ask what I am supposed to ask, Robert specifically, what kind of structure do you like to see in a community project?

Robert Rabinowitz: The structure we are used to, the legal structure, is one of an industrial and provident society, if that is what you are asking.

Neil Carmichael: Yes.

Robert Rabinowitz: The reason for that is it can attract investment, so it can take shares. There is democratic control over it, so one single party can’t come in and boss it. As soon as you let the public in, you then have to be answerable to everybody. The way it is set up, it has community benefit hardwired into it; so it is a charity in which you can invest. From our perspective, it is able to take an investment and give a fair financial return. 5% to 7% with EIS is a nice return. It operates on a commercial basis, but it has the charitable community benefit component hardwired into it. That is the one that we see. We either lend to industrial and provident societies or to charities, predominantly.

Neil Carmichael: James, Mike, do you have anything to add to that in terms of structure and the sort of things you want to see?

Mike Smyth: No. I agree with Robert. That is the model that is typically used for the community approach. If you are going into crowdfunding, they tend to adopt a plc model and quite often what they are doing is crowdfunding a debt, but it is a privately-owned plc that may or may not have any particular community interest at heart. It typically does not, but some do.

Q205 Neil Carmichael: Yes, because presumably the ones who are participating in crowdfunding would be bringing their own interests and representing their own financial interests.

Mike Smyth: Broadly, the crowdfunding is replacing bank debt, but it is presented in, and genuinely is, a more community and supporting and interested role than one would expect if you had bank finance. I think people who are crowdfunding do feel they have a degree of a say and are trying to make something happen with their money, but the underlying structure is that of a privately held company with some entrepreneurs behind it or a big business or whatever.

James Vaccaro: For a bank, when you are financing under non-recourse project finance, that means you just have the project contracts as security. Therefore, it is quite a belt-and-braces approach because if anything goes wrong you have to have all the things within the contracts to be able to find a solution. Typically, the security package would include a debenture over the owner of the company, which is usually a sole-purpose-vehicle company, the charge over the land lease, and the charge over shares.

For an IPS, that is more difficult. What has happened is that you have a co-operative that owns a subsidiary, an SPV, which could be a CIC, a community interest company, or it could just be a limited company. Then it is the charge taken over the shares in the limited company that is taken for non-recourse project finance. That can be set up. It adds a layer of additional complexity but, given the complexity and going through all the project finance documents, it is not that much more than what you have to go through if you are going to go through a full banking process.

Neil Carmichael: Yes. You have a structure that is effectively pretty robust, as you have just described.

James Vaccaro: Yes.

Q206 Neil Carmichael: Moving on to this question, what are the main sources of external financing that community projects can expect to reach? I am talking about the Green Investment Bank, but obviously we have named that already.

Robert Rabinowitz: Our projects have access to three types of external finance. The first was that, in the early stage, groups were getting grants through either local authority or big lottery or something like that.

Chair: Sorry, can you just explain what kind of grants from a local authority?

Robert Rabinowitz: Yes. If you have a swimming pool or leisure centre that has been transferred to community ownership, the local authority will still have an interest in it operating or if it is being operated on a long lease by a company limited by guarantee, which very frequently happens, they will still have some kind of financial interest and may be willing to put money in to make things happen.

Mike Smyth: It is quite rare at local authority level. Edinburgh is doing it at the moment.

Chair: But it does happen?

Robert Rabinowitz: It does happen. Unfortunately, the feed-in tariff rules have been written in such a way that, if the local authority does do that, it disqualifies the project from receiving the feed-in tariff. I dare say there are many hundreds of projects around the country that have been bitten by this because the change was not communicated to the grant-giving organisations who gave the grants and then the projects, after having invested, found out subsequently that they were not eligible for the feed-in tariff. We are in the process of trying to rescue one of those projects right now in a very deprived area. The grants are being phased out. The second source is community share issues. I think we have covered those.

The third source is social investors like us. For the larger projects, you might have Triodos or Co-op coming in to finance. For the smaller projects, the people who will provide debt will be social investors, people who are prepared to offer lower-cost capital or capital with lower due diligence costs on it. I was sitting with our lawyers yesterday to discuss a particular project. They recommended that we take a charge on the assets, a charge on the lease, a charge on the shares and a charge on the warranties. That may be appropriate for banking, but, as I was saying to the lawyers, "Look, we are talking about a community energy project here with a small loan".

For projects that can’t afford those due diligence costs, it has been mission-driven organisations like me, foundations, that provided debt. Even commercial organisations have put in some debt, but on preferential terms that is not replicable. At our level, there were grants. The grants have gone. The share issues are still there. There are still social investors, but there is no commercial finance provided on a commercial basis. Larger projects would be different.

Neil Carmichael: Would you like to see more commercial finance provided?

Robert Rabinowitz: I do not believe we are going to be able to get to 2 GW, 5 GW or whatever without accessing commercial-scale finance. We need to find a way to do it.

Q207 Neil Carmichael: Have you thought about making it more attractive and how that might be done?

Robert Rabinowitz: The problem is not the attractiveness of the returns. The problems are around the transaction costs and the risk management procedures. If you look at the transaction costs that would be imposed by a bank, even a bank that wants to help these projects, it has to be £1.5 million to be able to carry the costs. There is an issue around reducing those. The solution we are trying to promote is that we start using standardised documents, standardised business models and a standardised approach. At the moment, projects come to us with their own leases, their own finance models and their own prospectuses. We have to evaluate each one. If we knew there was a standard set that had been pre-approved by a bank and that everybody who came to us was prepared to use the same set, that would take out the transaction cost.

Neil Carmichael: A sort of an off-the-shelf approach by a larger commercial organisation going alongside in parallel?

Robert Rabinowitz: If you had the resources to build that pack and then to go out to a number of funders who are interested, get everybody to sign off and say, "If it fulfilled these following criteria, we’ll fund it", that might reduce some of those transaction costs. The second issue is around risk. My latest line to some of our borrowers is, "You are like Bruce Willis in the movie Sixth Sense", right? Bruce Willis in that movie is trying to make himself heard. You do not get it until the end of the movie. He is trying to make himself heard to his wife, when he is dead.

Neil Carmichael: I have not watched that film, I am afraid.

Robert Rabinowitz: Anyway, he is a ghost. To banks, industrial & provident societies are like ghosts. They can’t see them. The bank wants to see a local authority or someone with a big balance sheet, and that is where they want to square the risk off. They do not want the end of the contract to be this small entity that I do not understand. The other thing is, can we get local authorities in to underwrite some of the risk, to give some comfort, or someone like the Green Investment Bank, or large installers; the bank will not have to look to the borrower for comfort, but can look beyond the borrower to organisations-

Peter Aldous: A sort of fund capable and willing to step in. That is what you are looking at, is it not?

Robert Rabinowitz: A bit of balance sheet support to the entities. If we could have standardised documents to reduce the transaction costs and some kind of balance sheet support, then you could get the banks in, theoretically. I am not sure you can. That is what we are working on.

James Vaccaro: I would endorse a lot of that. The thing with a non-recourse basis, where there is no other security, is you can’t take many shortcuts. We standardised our loan facility documentation, but there is a limit to how much standardisation you can do. There is a limit to how much standardisation you can do when the rules on the power-purchase agreements change every so often and standardised lease agreements require standardised landlords, and they have not manufactured those yet. If you look at the smaller schemes where the transaction cost is impossible, our conclusion is that is not possible on a non-recourse basis. You need some recourse, at least part recourse to something. Within a community, that is quite challenging because, once they have subscribed the money in whatever community share issue, they have signed their bit of paper. To then go back and think there is some potential liability, that if something happens they have to put their hands in their pockets, that is difficult.

It is not impossible. We have worked with securitising of communities of guarantors, but having some kind of revolving facility, something that acts as some recourse and security for that transition, especially in the going through to getting something built, it would be something that might be able to get more banks into the space. The difficulty being, though, that, even when that is in place, unless there was enough volume coming through for large amounts, there is a huge investment in time and effort for what would be a quite small business compared to alternative opportunities for them. It would only be the commission-driven ones who would be interested in looking into that.

Robert Rabinowitz: We have asked banks that question. They have said, "Tell me how many billion the market is worth, and then we will educate somebody. But until then, we are not going to invest the time".

Mike Smyth: Just going back to Germany again, KfW do provide that backstop role. They have a set of standardised documents and transactions and they will then provide guarantees to the lending bank for a very modest fee. That is another way that Germany is driving the development of renewable energy and community ownership.

Neil Carmichael: Yes, but that is traditional in the German system, already. I am trying to tease out how we could do something similar.

Mike Smyth: The Green Investment Bank could undertake the role that KfW does in Germany, and I think should be, otherwise why did we bother to-

Chair: Is it that they are saying at the moment, "We can’t do that because of state aid rules? That might be a red herring.

Robert Rabinowitz: There are two things: there is the state aid rules and there is the issue of size, again.

Chair: Sorry?

Robert Rabinowitz: Size. When the CEO, Shaun Kingsbury, presented at the session in Guildhall, we heard it was, "£25 million we will do. £5 million and above, we have our funds that do it. Below that-" To get their attention, we need a £5 million fund that has enough volume of projects to do £5 million.

Neil Carmichael: It is that fund that you need, which is-

Robert Rabinowitz: Yes.

Q208 Chair: Just before I move on to Martin Caton and the European Development Fund, I was at a seminar in Brussels last week, and there was a lot of talk about energy and so on. Am I right in thinking that that is going to be distributed through the local enterprise partnerships and, therefore, you would expect all the local enterprise partnerships around the country to be flagging up the importance of this part of funding, for what they are given money for? Putting it another way, if there was a local enterprise partnership that had not included this whole energy theme, low carbon solutions, in their prospectus for the latest applications, they could perhaps be held to task over that. Would you agree with that?

Robert Rabinowitz: I am fairly ignorant of it, I will confess, but my inclination would be to agree. If we are looking to promote local economic development and the LEP has not considered community or distributed generation, that would be an omission.

Neil Carmichael: I am about to go and see my own LEP and, funnily enough, you have touched upon one of the issues that perhaps needs thinking about.

Chair: I am sure you have it on your agenda there, Neil.

Q209 Peter Aldous: Do you think there has there been a lack of policy certainty that has affected the financing of community level projects?

Robert Rabinowitz: I will talk from our experience.

Peter Aldous: I thought I would start off with the opener for expediency.

Robert Rabinowitz: Yes. There are two things that happened. The first was the very abrupt cut in the feed-in tariff and then the general uncertainty in the feed-in tariffs. I will relate a number of stories. The abrupt cut was quite good for us because it gave us an opportunity to finance a few things quickly that might have taken longer, but we have seen that, following that and the issue of state aid around grants, because a lot of organisations were in receipt of grants, and the uncertainty around that, we saw our pipeline projects tail off very dramatically for about 12 months.

It is now picking up again because it may be that some more confidence is coming back, but the recent debate around green levies again exacerbates that. There have been a number of groups that have been very badly burned. There are a lot of people who are now just beginning to get their confidence back, but we have spoken to social investors to talk about investing in us and a number of them have raised that they will not do it because they do not trust the regulatory regime. They say, "If we are going to invest £5 million or £10 million, we are not confident you are going to get the money out the door before the regime changes again."

Peter Aldous: I think we all do remember the abrupt change in 2011.

Robert Rabinowitz: Yes.

Q210 Peter Aldous: What has happened since then? Has it settled down? Do you feel more confident with it or are you always looking around the corner to see what might be on the way?

Robert Rabinowitz: In our sector, in terms of the people who are coming to see us, two things have happened. We are predominantly focusing on the built environment, which is where we are different to the kind of projects that James is focusing on. We are not doing wind and hydro. We are trying to make buildings more energy efficient, put more renewables on. Solar is a big part of it. Two things have happened. There is a feeling that there is a little bit more certainty, plus the price of solar has dropped dramatically. Of course, just when everybody was feeling confident again, then you had the trade tariffs on solar imports, but that seems to have worked its way through. I think there is more confidence, but I don’t think anybody in the sector does not live with the constant concern that something unexpected will just pop up. The feed-in tariff going off the energy bill into general taxation, does that mean the amount set aside for feed-in tariffs is going to change?

James Vaccaro: I just want to add that there is a big relation between perceptions and reality and there is a feedback loop. If you take the 2011 feed-in tariff reduction, it was not the fact that it was not necessarily the right level. It was the fact that it was the way it was carried out and the way that that was reported that pulled the rug under everybody’s confidence.

I think that what happens as well is there is a hiatus effect whenever something that is quite an interesting new thing comes on the horizon. Developers think, "Should I plough on with my project now, or shall I wait for something better?" That certainly happened during the ROC review when FITs were about to come in. At the moment there are some of these perception-reality things, and the reporting of the green levies, which is nothing to do with renewable energy and renewable energy targets, undermines confidence in the regime in people’s minds. That has to be looked at in one way.

There is other stuff in terms of effective planning guidance, aligning all the stakeholders, so non-statutory and statutory agencies like the Environment Agency for the hydro permits and those kind of things, that are more regularly flushed out as being issues in the German model and addressed; whereas here they can stagnate and put everybody off. In order to get a project done, it is only going to be as strong as its weakest link and only by being able to make sure that absolutely every part of it has been smoothed out and the things running through it can you be sure that you are going to be able to get a project through.

Q211 Mark Lazarowicz: Considering what you are saying about the uncertainties, even if you get Government decisions on whatever happens with green levies or with CFD, which are enshrined in stone for 50 years and so on, nobody is going to believe that there is not going to be a change in a few months’ time or a couple of years down the line. It is going to take a lot, isn’t it, to get that stability and confidence restored, no matter how much is said by Government? Can anything be done?

Robert Rabinowitz: Less saying and less doing, I think.

James Vaccaro: But there are specific things within the way that the legislation can be drafted that provide the certainties. No one is expecting there to never be drops in price support mechanisms, but the way in which those reviews can be taken out-

Mark Lazarowicz: Tell us.

James Vaccaro: The criteria can be set and be transparent. The frequency of the review mechanisms can be set appropriately so that is not whenever somebody decides to take it on as a political issue, but it is done, say, on a two-year rolling cycle. There are specific commitments that can be put in place. Even now, under contracts for difference, without going into too much of the detail, there is certainty of onshore winds that are £105 or whatever, but if you read it, it is only up to a certain amount of volume and then it is going to be bid into auction. There is the devil in the detail. If the legislation could be drafted so that there was real certainty that was legislated for-even ROCs, they went through to 2027, but then ROC banding could come in at some point. It undermines the entirety. It is like, "Who cares if they come in for such a period", but then it is undermined by some of the more detailed changes. There are absolutely ways of drafting the legislation that can give the certainty and enshrine that in things that cannot be moved, given the political cycle.

Peter Aldous: Mr Smyth, do you have anything to add?

Mike Smyth: I was just going to make one comment. One of our schools went through 10 regulatory changes before we built the panels. That gives you an idea of the extraordinary uncertainty and why people drop out in droves, normally having lost time and money. At the moment it has settled down for solar for communities. The problems are difficult on wind because of longer timescales, and the renewable heat incentive, which frankly has not worked as well as it should have done, has complete uncertainty built into it. Broadly, the rates can be changed at any time without any criteria applying. On a project that might take a year or 18 months to deliver, you do not know what the end point is and that is one reason why there has been a low uptake.

Q212 Peter Aldous: Finally, from each of you, what one thing do you think Government could do to increase policy certainty?

Chair: One each. Who is going to go first? You do not have to.

James Vaccaro: If you want it to be simple, then I would say to commit to a feed-in tariff level for, say, a period of five to seven years for a banding, whatever that is, and accept that in the short term there may be some things where it is just like, "Well, is it value for money", and all these sort of things, but that will deliver a supply chain that will drive costs down in the longer term.

Robert Rabinowitz: I did not come up with anything so specific, but just to go back to the German cultural comment. One of the things that they do there is they set it and then they stick with it; if we can just have one thing and then stick with it for a fixed period.

Mike Smyth: I do not have one thing to add, other than look at it holistically rather than issue by issue. At the moment we have a mentoring project starting but in a vacuum, without addressing all the other issues.

Q213 Dr Offord: How difficult is it for community groups to access external finance, or is it easy?

Robert Rabinowitz: External finance that is not local finance-

Dr Offord: Yes.

Robert Rabinowitz: -is not local share issue, is difficult. We try to make it easy, but we are a relatively small pot. Apart from us, you have to ring around all the various foundations and philanthropies. They will make it easy to a degree. After that, as soon as you are into commercial finance, it is very difficult below this scale. The scale and the type of project is crucial. The type of projects we are trying to support, there is no commercially-sourced finance that is being offered at a commercial rate. It is not there at all.

Q214 Dr Offord: All right, I will bring it back to you then. How would you describe what a viable proposal would look like?

Robert Rabinowitz: For us?

Dr Offord: For you particularly, yes.

Robert Rabinowitz: We will lend money over 5 to 10 years. So we are looking for a project that will repay our loan over 5 to 10 years and give a margin of at least 20% between what the project’s net income is and the loan repayments. Generally that means, for solar, they have to provide something over 50% of the capital. For some of the biomass projects we are looking at, they do not have to provide very much of the capital at all. We need to take security over the assets and we need to see it is an organisation that has community benefit hardwired into its very structure-if we see those things then we are very happy-and then the ability to raise the other amount of money.

Q215 Dr Offord: My second point from that is how do you make that balance between lending to those that you hope will be successful and also expanding the range of people who you assist, because they may be considered more risky, from how you describe that you provide lending?

Robert Rabinowitz: We are at the moment considering a loan from a very small organisation. It is in great financial distress in a very deprived part of the country. We sat down with our investment committee yesterday and we decided to keep looking at it because of the level of distress in such a deprived area. We are not relaxed, but our risk appetite is greater because we are a social funder and because of the way our funding goes back to Big Society Capital. We take a first portion of the loss on our loan portfolio and they take the rest, which allows us to take that risk.

At the moment we will only lend this amount of capital to projects that are located in the bottom 50% of the country, as measured by the Index of Multiple Deprivation. We are, of necessity, restricted from lending to some of the wealthier areas. We are already probably, de facto, into the riskier areas, but there is probably a layer of projects yet that we do not have access to because they do not have the local human capital to bring us the projects. The areas we are lending to, they have people to bring us the projects but they are short on capital. As long as they are coming to us with a project, we can probably help find a solution that is a combination of our finance plus someone like Energy4all’s network of investors will come and provide some outside capital.

Where we have the problem is where they do not have the people with the time or skills to provide it. That is where we have a real problem. If we are to scale up the financial risk issue will become more pressing, but right now the major constraint is that human capital issue.

Q216 Dr Offord: That is helpful and very interesting to hear as well. How would you describe yourself, particularly in contrast to some of the commercial banks? What would you say are your main assets?

Robert Rabinowitz: Our assets: we are willing to lend to organisations that do not have balance sheet; that do not have trading history. If you look at a debenture, we take a charge over the assets that we lend against. The first draft of the debenture I obtained from the lawyers had so many things in it that I just thought, "If any of the community groups read that they will be scared off". The lawyers were doing their job of giving me everything, and it was my job to say, "Look, tell me what I need, rather than what would be nice to have". We are trying to take an approach where we pare down the due diligence to a risk level that is appropriate and bearable for the project. Because we do not have shareholders or depositors to answer to if we have losses, that also allows us to take more of that risk approach. The fact that we do not have depositors or shareholders and, I suppose, in our processes we are trying to be rigorous within an appropriate level and we are able to step down from the demands that are placed on banks for their due diligence. I do not know if that is-

Dr Offord: No, that is very helpful. I think that covers everything. Thank you very much.

Mike Smyth: Dealing with Pure could not be more different than dealing with a bank. In one case you are dealing a charity that is mission-led and trying to deliver community-owned renewables and in the other case you are dealing with an organisation that wants to minimise risk and maximise return. They are not the same at all.

Q217 Martin Caton: You have already mentioned local authorities as grant givers and the problems with accessing FITs after that, but you have said it has been a very limited role. On the face of it, that seems quite strange because local authorities, at least superficially, seem to have something to bring to the table. They are often major landowners who therefore could provide sites and, also, they are more expert than anybody else in the planning process, which, again, you need to engage with. Do you think there is considerable potential for involving local authorities to a greater extent as partners, and how do we make that happen?

Robert Rabinowitz: I agree with you 100%. I do not believe we are going to scale up to the level of 2 GW without local authorities. That is an increasingly common realisation across the people in our sector. They have property portfolios. They have a source of projects, especially where they have social housing that has not been spun off into housing associations. They have ALMOs or their own housing. Leisure centres or schools are all things that communities will want to fund. They have the expertise, they have the ability to execute, and they have finance.

The biggest challenge for local authorities is determining a policy that needs to be executed, but they are not the ones that are going to execute it. Creating the partnership and saying, "We want to have solar panels on our 10,000 houses and we are going to work with a community energy group to do it". They either want to procure it and own it or they want to do a procurement that involves getting private capital in, through a procurement process. It is very hard for them to say, "Okay, we have a preferential approach to something we want to have happen through community energy".

We are currently working in very early stages with three local authorities, one of whom we have persuaded to carve out part of their portfolio. They want to do £30 million of solar. We have said to them, "Give us £1 million or £500,000 for the local community energy groups to do". We are getting there with that one. Another one is, again, taking that approach. So we are just beginning to work with them. If we can create these replicable models-I think it goes back to the issue of inequality and geographical spread-we could start doing a lot more projects where we are currently not doing projects, which is the urban areas around the Midlands, the north-west and the north-east where community energy does not have as much penetration, because the local authorities would be the key. They have massive estates to make available and expertise and finance. I agree 100%.

Q218 Caroline Lucas: When you said that it is difficult for them to choose to go with a community energy programme, do you mean it is difficult in terms of they want to do things on a level of scale just because it is cheaper to do that or it is difficult for them legally to do it?

Robert Rabinowitz: I think it is more psychological than legal. I am sure there are ways of doing it. Mike and I funded a project in a school. The local authority would not give us an answer-we needed their permission to do the project-and part of the reason was, "It is one school and I am not going to put my neck on the line to give you permission to do one school when I have 300 other things to do and we are thinking about the whole estate". It is more of a bandwidth issue, but our experience has been they either want to procure it themselves and do it themselves or have it procured and done for them. The idea of partnership is quite difficult for them. I do not think it is legally problematic. I think it is more to do with, in an atmosphere of cuts and feeling imposed upon and having a million other things to do, it is quite difficult.

James Vaccaro: I would endorse that. We have been very keen to work with more local authorities. We work much more with local authorities and the regions in, say, the Netherlands. I would say that things are changing and there are some local authorities who are trying to take leadership, but they have to do it themselves a little bit first to show they are serious because there is not a wealth of community energy groups there for them to choose. It is a bit of a chicken and egg situation and, in a way, they have to be able to show they are committed to it for the long term to be able to generate the interest.

Q219 Martin Caton: Is there anything that central Government should be doing, either to help create the opportunity for local authorities to get involved in that way or even just to encourage it?

Robert Rabinowitz: Certainly, encouragement, yes, a massive role. As I say, we are working with three at an early stage. I am sure there are others out there. The encouragement and the promotion of the ideas, absolutely. I do not understand the balance of powers between local and national Government well enough to comment on that legally and whether it is mandated. Certainly, on the encouragement and promotion, there could be investment in time, convening power, research and promotion that can be done.

James Vaccaro: This is on the edge of my knowledge but, as I understand it, how the national minerals plan works is you look at where the resources are and then you divvy that up with the different regions. They have to work out, "What is the best way to get to these things, given all the other things you have going on in your particular area?" A similar type of mechanism, where there are certain resources that can be deployed in different ways, to be given targets for local authorities where then they can, in some way, be incentivised to make sure that they reach those in a "race to the top" kind of mechanism, could be a way of being able to promote more action.

Robert Rabinowitz: With permission, I am embarrassed to admit that I forgot the one thing about local authorities that we submitted to the DEC community energy strategy. It is almost like a community asset type thing. Where it is identified that a local authority property is suitable for renewable energy and they do not have the capital to do it themselves, community energy should have right of first refusal to fund that installation, as long as it is pari passu with commercial. One of the challenges community energy has is the projects we fund do not have a big enough asset base to throw off enough revenue to fund professionals. Local authorities have that asset base and, if they can’t fund the renewables themselves, that would be an immense opportunity for community energy groups to get access to a large enough asset base that, if they can fund or generate enough revenue, they can then hire professionals and they can up their game. I am very embarrassed not to have thought of that straight away.

Mike Smyth: If I could add one brief point on that, because it is not just local authorities. One of the biggest landowners of suitable buildings in the country is the NHS and it is one of the most difficult, unhelpful and obstructive organisations when it comes to community energy there is. There has been a handful only of projects, but it is a very difficult organisation to deal with. The Ministry of Defence is another one; very big landowner, but utterly unresponsive, which is a shame.

Robert Rabinowitz: Local authority and the public sector.

Q220 Chair: Basically, what you are saying is that the local authority and the Government estate-MoD, the NHS-should be looking at this. I am just thinking of some evidence that we have had whereby there is a suggestion that community energy groups do not have the economies of scale to make it worthwhile; so it is much more important to prioritise the big investments rather than the small-scale community energy ones.

Robert Rabinowitz: It is a chicken and egg and, if you look across to Germany, it can be done. What we have is a set of rules that are inherently built against the groups.

Q221 Chair: Okay. Finally, I read somewhere that IKEA, for example, had gone down this route. To get the step behavioural change that we need, do you think it is worth having a demonstration of projects from companies, be it IKEA or other ones, who can demonstrate by doing this just what a benefit it could bring?

Robert Rabinowitz: We have approached a major retailer that has a distribution centre with significant capacity for solar panels. They are intending to install some, but not all, and we have offered to install solar panels on the rest of the roof free of charge. The local community can invest and then all the surplus will be reinvested in local schools and community centres, at no expense to them and they will get cheaper, green electricity from it. There are huge possibilities for them, at very little cost or risk, to get significant reputational benefits from it.

Mike Smyth: One difficulty with that is the landholding structure of commercial buildings. The occupier, the retailer for instance, is often very supportive and would like to do something. The freeholder either has no interest in it or is after the entire value added. That is one reason why the commercial buildings in particular are struggling to engage in this, because of the split of ownership. We will probably have to wait for some of the energy efficiency requirements to come into force in letting commercial buildings in a few years’ time-and for those possibly to be strengthened-before that can be grappled with effectively.

Chair: On that note, I am going to bring our session to an end. Thank you very much, each of you, for coming along this afternoon and I hope that when we do produce our report, you will read it with interest. Thank you very much indeed.

Prepared 5th March 2014