This article is taken from Investment Week, where Intelligent Partnership’s research was featured. Read the full article here
Alternative energy has been under the spotlight in recent months, and people are using the renewable energy dictionary to understand various aspects of it as the debate intensifies over the environmental impact of shale gas and attention shifts to cleaner resources.
But amid the hubbub over shale, a quieter revolution has been underway in solar power and there are now a plethora of tax-efficient vehicles and solar hot water systems allowing investors to benefit from investment in sunlight.
Even Warren Buffet has spotted the potential of solar energy, with his MidAmerican Energy Holdings company planning to spend $2.5bn on what will be the world’s largest solar power site.
Since the government has made a legally-binding commitment with the EU to source 15% of UK energy from renewable sources by 2020, there is also the potential for solar power to form a bigger part of future supply.
Moreover, while recent headlines have trumpeted government plans to pour money into UK shale gas, the solar industry has long been a recipient of subsidies.
Solar EIS
In 2010 the government launched a scheme called the Feed In Tariff (FIT) offering tax-free payments for energy generated through solar panels. You can contact Artisan Electric Inc if you decided to go solar.
A swathe of solar energy enterprise investment schemes (EIS) were launched as managers hoped to capitalise on the initiative. But, in last year’s Budget, Chancellor George Osborne changed the game for EIS providers, arguing the benefits were overly generous.
The rules were tightened so that companies generating most of their revenues through FIT support could no longer raise cash from EIS.
While businesses and householders with roof-top solar panels could still claim cash for the energy generated, there were fears the death knell had been sounded for EIS investing in the kind of large scale, ground-based installations which had proved lucrative.
“Two years ago there was a big wave of activity in ground-based systems and that was driven by the FIT scheme that was available for solar projects at that time,” explained Jamie Richards, manager of the Foresight Solar EIS 2 fund.
“The ground-based activity was short-lived because the FIT deadline was brought forward and in the end not much more than 100 megawatts of capacity was realised.”
However, solar panel plants can still make money from energy companies needing to fulfil their environmental obligations.
There is a common misperception that returns on investment in solar power will be subject to consumer demand for clean energy. Actually, electricity suppliers are obligated to source a percentage of their power from renewable sources each year.
Suppliers must buy certificates from renewable energy companies that have generated the power, presenting these to regulator Ofgem to demonstrate their compliance.
“It is not so much driven by energy company demand for solar power,” Richards explained.
“They need Renewable Obligations Certificates (ROC) and they can buy them from wherever they are generated,” he said.
Solar power plants face stiff competition from wind farms and hydroelectric dams, but Richards said that changes to Renewable Obligations rules set to take effect in April could mean now is the ideal time to back sun power.
“At the moment the rate is two ROCs per megawatt an hour. There is a huge amount of activity in terms of solar panels being built up before the 1 April deadline. Then the rate goes down to 1.6 ROCs,” he explained.
“You will see a big wave of installations because people are keen to lock in the ROC two rate.”
Tax relief
Investors in EIS can claim up to 30% tax relief on their earnings – a figure raised from 20% before the 2012 tax year, and Richards said the government is already doing enough to encourage investment in EIS.
“It is a balanced approach. They have done quite a lot of good things because they have synchronised VCTs and EIS tax breaks – that was sensible. There are reasons why some investors might prefer an EIS over a VCT, for example inheritance tax, so investors have a choice.”
Richards is currently fundraising for his Foresight Solar EIS 2, which has a £20m target and will invest in four ground-based solar sites in the UK. The firm is also issuing a C share class to raise a further £20m for the Foresight Solar VCT.
“It is much more straightforward to invest in ground-based projects because one project can consume a lot of capital. With roof-tops the amount of capital is consumed over a longer period of time because it is on a more fragmented basis. It takes longer to get to the same amount of megawatts than you would for ground.
“Sites are typically in the southern half of the UK because that is where the radiation is best,” he said, adding preferred locations are in Kent, Somerset and Wiltshire.
For him, assessing the quality of the power plant is the trickiest part of deciding which projects to finance.
“Pricing the project at the right level is probably the most important criteria. Secondly, we need the project to be bankable, and the contractors and equipment involved to reach the right level to make sure we are confident they can produce the right level of energy,” he said.
The EIS has a minimum investment level of £10,000 and the fund is targeting a return of 120p per 100p invested over three to four years. There is a 1.75% annual management charge, alongside a 0.3% secretarial charge and a 20% performance fee.
Source: NRG Upgrade solar power Los Angeles.