Tax breaks key to driving green energy investment

by Will Nichols

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16 Oct 2012

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DEVELOPERS ARE CALLING for tax breaks for investments in smaller clean energy projects as way of bridging the funding gap.

Working out a way to accelerate investment from high-net-worth individuals in small to medium-sized renewable energy projects will be crucial to bridging a widening funding gap as bank lending proves more and more difficult to come by, Accountancy Age's sister publication reports.

That was one of the conclusions of a roundtable conducted this week by NGO Carbon Leapfrog, which brought together financiers, community project developers, lawyers and entrepreneurs.

Renewable energy projects with less than 5MW of capacity have been struggling to attract funding from banks, which often consider them too small to justify investments, leaving many schemes – and start-up businesses – stranded between genesis and operation.

Wealthy individuals are seen as being more open to the higher risks typically associated with smaller projects, but experts warned investment from so-called high-net-worth individuals is not being maximised because of restrictions on the tax breaks available to renewable energy projects.

One attendee at the meeting, which was conducted under Chatham House rules, said Venture Capital Trusts (VCTs) have proved popular in the past as a means of generating funds for higher-risk enterprises, but many renewable energy projects are no longer eligible for them.

"The government should look at creating something like VCTs so high-net-worth individuals can pool funds to spread around projects," he said. "High-net-worth individuals have consistently shown they are willing to invest [in projects] if there is tax relief. Then the projects become big enough for banks to fund them."

He added this option is equally attractive for any higher-rate taxpayer or for individuals who have reached their pension cap and are looking to shelter their money somewhere else.

Community schemes were thought to provide an ideal investment opportunity for these potential investors, as they offer societal benefits alongside stable financial returns, but delegates agreed access to wealthy individuals was limited and barriers of scale are proving difficult to overcome.

One banker said he could not recommend small-scale projects to his wealthy clients without detailed due diligence on the project, which for projects under £1m can account for significant costs.

One solution might be to aggregate projects to share purchasing and development costs, although again this could prove difficult for financiers to get the transparency necessary for investment.

An alternative would be to work with banks to create standardised methods for assessing project risks, making it easier for project developers to meet banks' requirements. For example, the Anaerobic Digestion and Biogas Association (ADBA) has created a spreadsheet to try to standardise due diligence for smaller projects.

Ultimately, project developers have to think more like banks to garner funding, one financier said.

"The smaller you go, and the less money you have, the more professional you have to be," he told delegates. "[An investment decision] is nothing to do with scale; it's all to do with professionalism – and I have an obligation to shareholders that for every £1 they give me, I give them £1 back at least.

"Everyone thinks like a developer and gets frustrated. But if the market was safe and it was easy, you'd see a lot of independent players [offering finance]. It's not easy."

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