Financial Aspects

Project Financing

Turning a community renewable energy (CRE) project idea into a reality requires a wide range of capital, including human and natural resources like the sun or water that fuels heat or electricity generation.

Financing is a key aspect enabling a community to develop its activities. If we want the development of community energy to be successful, access to funds needs to be available every step of the way.

Energy communities have specific financing needs to keep project ownership within the community. Ensuring that money flows in and out of the project is not enough. It is critical to safeguard the community’s autonomy, citizen democratic participation and vision to ensure its continued function as a legitimate Energy Community. These specificities of community RE projects often create certain barriers to access financing, and communities have to invest considerable time and energy to solve these hurdles, using a mix of innovative approaches and existing instruments. But don’t despair! There is a variety of innovative solutions to choose from and thankfully there are also many examples to look at for inspiration but also organisations that can offer their support.

Financing and Business Plan

Financing an Energy Community depends greatly on the type of project planned and factors that include the governance, type of activity (production, supply, distribution), scale and technology.

To decide on what type of financing is suitable for each project, it is important to consider these aspects (usually reflected in the business model) and study the different financing tools available while accounting for the specific national regulations in your country.

Note that the type of investments available are largely regulated in certain countries depending on your activity and the nature of your organization (cooperative, association, etc.). Therefore you will have to gather information on the legal framework of project financing in your country early in the setting up of your project planning.

The particularity of financing energy production projects is that the costs of producing electricity from renewable sources are mostly initial capital investment, the operating and maintenance costs comprise a low percentage of the overall costs (except for biomass). This means that Community Renewable Energy Projects need large amounts of capital at the start of the project. This represents a difficulty because investors have to be ready to take the risk before the project can produce its first kWh. The good news is that in Southern Europe the payback period is relatively short, 5-7 years, on average.

SOME POINTS TO CONSIDER:

• How much money do we need? When do we need it?
• What are the bottlenecks in the financing plan?
• What kind of financing is adequate?
• What ownership model is best for the project?
• What are our revenue streams?
• How do we allocate the revenues?

CHECK OUT:

• Financing Guide for Energy Communities

Business Plan: A tool to help you navigate the complex landscape of financing pathways and mechanisms

A well-constructed business plan is a critical tool for any project, and a CRE project is no different. It serves as both a roadmap and a communication tool, essential for engaging with potential financial partners. Beyond its practical applications, the process of creating a business plan can be very useful in guiding discussions about the group’s vision and in clarifying the project’s goals.

Key considerations when developing a business plan for financing your CRE project include:

• How will you finance your project?: Determine how the project will be funded. Consider various financing mechanisms (grants, loans, member investment, etc.) and identify the most suitable options for your community’s needs.
• Will your project be economically viable?: Evaluate the financial feasibility of the project by estimating expected revenues and costs. Consider factors like energy production, operational expenses, and potential subsidies or incentives.
• How much revenue and how much costs can you reasonably expect?: Analyze how the project’s financial performance might change over time. This includes forecasting future revenue streams, accounting for maintenance costs, and planning for unexpected financial challenges.
• How will that evolve?: Recognize that a business plan is a dynamic document that will evolve. It should be updated regularly to reflect new information, changes in the project scope, and feedback from stakeholders.

It is important to ensure that the business plan is a collective effort involving input and consensus. Such a collaborative approach not only enriches the plan but also fosters a shared commitment to the project’s success. By approaching the business plan as both a practical tool and a collaborative exercise, you can better navigate the complex landscape of financing pathways and mechanisms for your community’s renewable energy project.

Financing a Project

Different types of financing phases can be defined for a project, depending on its primary activity. Each phase represents a different financing stage and can often require a different type of financing. Understanding these stages and their respective financing needs is crucial for successfully launching and sustaining a renewable energy community project.

1. Pre-Planning Phase

In this initial phase, the groundwork for the project is laid out. The focus is on planning and assessing the feasibility of the project.

• Project Planning: Outline the project’s scope, goals, and timelines.
• Identification of Project Site and Type of Renewable Energy Source (RES): Select the optimal location and energy source (e.g., solar, wind).
• Feasibility Study: Analyze the technical, financial, and environmental viability of the project.
• Business Plan: Develop a detailed plan outlining the financial model, projected costs, and expected revenue.
• Legal Agreements: Draft and review preliminary legal contracts and agreements.

2. Development Phase

This phase involves securing the necessary permissions and finalizing plans to move towards construction.

• Business Plan Refinement: Update the business plan based on further analysis and feedback.
• Permitting Procedures: Obtain the required permits from local and national authorities.
• Grid Access Permit: Secure permission to connect the project to the electricity grid.
• Legal Agreements: Finalize legal contracts, including land leases and partnership agreements.
• Financial Due Diligence: Conduct a thorough review of financial assumptions and secure initial funding commitments.

3. Construction Phase

In the construction phase, the focus shifts to building the infrastructure needed to produce energy.

• Construction Contracts: Contracts with builders and contractors.
• Material Procurement: Purchase the necessary materials and equipment for construction.
• Connection to the Grid: Establish the physical connection to the electricity grid to enable energy distribution.

4. Operating and Maintenance Phase

Once the construction is complete, the project moves into the operational phase, where the focus is on producing energy and maintaining the infrastructure.

• Production: Begin generating and distributing energy.
• Operation and Maintenance Contracts: Manage ongoing operational tasks and maintain equipment to ensure continuous energy production.

Financing Pathways and Mechanisms for CRE Projects

As already mentioned, a key consideration when looking at financing options for your Energy Community and project is how this choice impacts your project’s ownership as it can influence the autonomy of the energy community.

For example, in an energy community that is 100% equity-funded by citizens or funded by a non-repayable grant, the full control of all assets and strategic decisions lies with the members. With debt financing, often there is a decrease in control or ownership of the citizens as stakeholders pose their limitations and requirements.

Different types and models to finance energy communities and project initiatives are available. The most common types are equity financing and debt financing, but there are also other options such as grants, donations (including crowdfunding and crowdlending) and even in-kind contributions that can contribute greatly to small-scale initiatives.

CHECK OUT:

• Funding Basics Guidebook for Community Energy Projects
• Video: LIFE-BECKON Webinar: Unlocking Sustainable Futures: Financing Energy Community Projects
• RESCOOP.eu Financing Tracker

Overview

Traditional financing mechanisms such as debt financing are often not available or appropriate for the financing of CRE projects. Small to mid-scale CE projects (under 1MW) can generally attract 100% community investor funding in the form of equity.

CHECK OUT:

• Matrix methodology: to help you choose the right investment scheme for each phase of your project based on the complexity of your project’s technical and legal characteristics and the level of citizen involvement.

Equity Financing

Equity financing is a vital mechanism for funding energy communities, particularly within renewable energy cooperatives (REScoops) in the EU. This approach not only raises the necessary capital, but also fosters community ownership and empowers local communities’s direct participation in energy projects that impact their lives.

This is where the financing mechanism and the ownership model are interlinked:

• Members finance the community as they purchase shares, which collectively form the cooperative’s equity capital.
• Each share provides members with governance rights, by giving them voting rights on cooperative decisions. In a cooperative model, each member gets one vote regardless of the number of shares owned ensuring democratic and equitable decision-making processes.
• Share offers are typically open to everyone while prioritizing community locals.
• Members may receive returns on their investment that can range from financial returns, energy shares or other social or environmental benefits.
• Members become users of the cooperative with the right to benefit from its services.
  Energy Communities use this mechanism in different ways. Some use project-specific share offers to collect the funds needed for a specific project, while others opt for an open share offer where members can purchase shares at any time.

EXAMPLE: Som Energia’s (Spain) financing model is mainly based on the investment of members into the cooperative through 2 options:
• Buying shares of the cooperative to become a member (1 share = 100€ with dividends around 3,5%). Coopernico (Portugal) operates on a similar model.
• Buying participatory securities – invested for 5 years to finance new projects of the cooperative (with an expected return on investment of 4 to 7%).

Debt Financing

TRADITIONAL BANK LOAN

Securing a traditional bank loan for a community energy project can be challenging, particularly in southern Europe, as many conventional banks may lack the willingness or expertise to support such initiatives as they may prove less profitable. New projects without an established track record, often face difficulties in obtaining loans from traditional banks. Even if successful, banks typically finance up to a percentage of the project costs, leaving the community to secure the remaining amount. A traditional bank loan requires collateral and involves the repayment with interest over time.

ETHICAL OR COOPERATIVE BANK LOAN

These banks, often members of the European Federation of Ethical and Alternative Banks (FEBEA), are typically more supportive of smaller projects and aligned with social, cultural, and ecological values. Unlike traditional banks, they avoid financial market investments and instead provide loans exclusively to economically viable projects within the social economy, such as organic farming, renewable energy production, and cultural initiatives and are usually structured as cooperatives.

Ethical banks typically spend more time with project leaders and are more attentive to the needs of small and cooperative projects compared to traditional banks. Although they are not involved in financial markets, they remain competitive with traditional banks. Interest rates are determined by factors such as returns to savers, credit costs, and risk, usually resulting in rates around 4% to 5% for loans with terms of 10 to 15 years. Unlike traditional banks, ethical or cooperative banks do not influence the governance of the project. Their role is more focused on supporting projects that align with their mission, rather than exerting control over them.

COOPERATION WITH OTHER ENERGY COMMUNITIES AND COOPERATIVES

Existing REScoops can help the creation of new initiatives by financially supporting the first stages of new REScoops project development by providing a loan with interest (lower than the bank) or by becoming a shareholder of the project under development.

EXAMPLE: In Portugal, a citizen RES initiative that provides citizens and organizations with investment opportunities in the RE sector developed 4 PV projects that needed an investor before the deadline for the feed-in-tariff application. REScoop.eu communicated these projects for different REScoops in Europe to invest in. The REScoops that were interested in the projects (Som Energia/ Ecopower/ Beauvent/ de Windvogel). decided amongst each other that it would be against their principles to be foreign investors without giving Portuguese citizens a chance to invest as well. Boa Energia agreed to set up a local REScoop which was named Coopernico. The joint venture agreed to buy the projects and become the owner of the PV installations. Coopernico would get a 4% share in the joint venture with the possibility to buy back up to 100% shares of the joint venture, when their member base, and social capital, would grow and in the end will end up becoming an autonomous REScoop.

CHECK OUT:

• Financial Handbook for REScoops

Subsidies & Grants

Access to EU or national public subsidies and grants can be helpful in the processes of pre-designing projects, or in creating opportunities and synergies for exchange.

GRANTS

Applying for grants can be a way to fund your energy community project, particularly in the early stages. Here’s how to approach this funding option:

• Explore Available Grants: Investigate the grants offered at the national or regional level. Many EU countries provide community development grants through government programs, which can help cover initial project costs.
• Prepare Your Application: Most grant applications will require you to submit your group’s official statutes or mission statement. You’ll also need to clearly outline your goals and how the grant money will be used to achieve them.
• Seek Feedback: If you’re new to writing grant applications, seek advice from people in your community who have experience with this process. They can provide valuable feedback to strengthen your application.
• Persevere Through Rejection: If your first application isn’t successful, don’t get discouraged. Use the feedback to improve your proposal, and be ready to resubmit.

EU FUNDING

European funds are not always suited to small and local projects. But they can be very interesting funding options in case of an aggregation of projects or if a particularly innovative approach is taken. The European Commission is running several funding and granting schemes across Europe. Those funding schemes have different targets, objectives and procedures for applications. The complete list can be found here.

CHECK OUT:

• Briefing: Public Financing Opportunities for Energy Communities in Europe

Some funding programs of interest might be the following:

• Horizon Europe: A program of the European Commission centered around research. Energy Communities can participate in innovative projects and technologies. The co-funding rate is high.
• LIFE program: Capacity-building and demonstration in various environment and climate topics. LIFE is also taking a strong place in the development of citizen-based and territory projects. The co-funding rate is rather low.
• INTERREG: European program managed in regions of Europe. General focus on local authorities and regions. It supports the development of a local project that will have a strong impact on municipalities and territorial cohesion. The application process is a little lighter and better supported by regional secretariats, but the co-funding rate is lower than LIFE.
• Erasmus+: Focuses on the training and development of individuals and organizations. Funding a whole range of capacity-building activities, including initiatives related to climate and environment training. A smaller funding opportunity that can be very useful to support the development of community-building. In general, the application process is made simpler for a smaller organization by the national secretariat that supports the development of the proposal.
• Climate KIC: Funding program centered around the support of business-friendly climate initiatives. The Knowledge and Innovation Community (KIC) is spawning from the EIT (European Institute of Technology) to support innovation, create capacities and invest in impactful business initiatives. The grants of Climate KIC are smaller than the traditional innovation funding programs, but provide a great deal of support and coaching throughout the development of the project. The national secretariats are supporting organizations to make proposals, and the program has a good co-funding rate.
• NESOI (European Island Facility): Supported by the directorate of the Energy of the European Commission. This European consortium is opening calls to support 60 European islands, over a series of an open call for projects. Island communities will benefit from technical training and financing support.

NATIONAL FUNDING

Most Member States have grants and support dedicated to the development of renewable energy projects. You can often find out a lot of information by consulting your national development agency, your ministry of energy or your national energy agency.

MUNICIPAL FUNDING

Municipal grants are the best and most simple way to get a community project started. The local municipality is the best and first partner of a citizen group looking to launch a new renewable energy project. In many Member States, many support schemes are relying on municipalities to be delivered.

Keep in mind that:

• Energy communities often share political objectives around climate action adopted by the municipalities. In this case, the municipality can provide endorsement, visibility and sometimes capacity building or small grants to the starting renewable energy community.
• Municipalities can be a partner in local projects together with an energy community. In this scenario, two separate entities invest jointly, and public funds are allocated to a joint investment vehicle.
• Municipalities can participate in an energy community by becoming a member or by providing the physical space for the RE system.

Donations

Crowdfunding is another option for Energy Communities to collect funds. It is a way to “crowdsource” money to finance projects through open calls to the wider public usually via online platforms. It directly connects the communities that need financing with contributors who want to financially support the project’s vision and goals.

Usually, crowdfunding campaigns last for a specific and limited period when small individual contributions are collected from a large number of individuals. These projects usually have relatively small funding targets (there are some exceptions) and the funds are raised for a specific intended use. At the end of the crowdfunding campaign and depending on the pre-set agreement, project owners can either keep any amount that has been offered or keep the money only if the pre-defined target amount has been reached.

Such campaigns can be solely based on donations or even offer rewards in exchange for contributions. These rewards can include products or services typically of a lower value, simple shout-outs or other ideas that the campaign beneficiaries can support.

Multiple platforms can host an energy community’s crowdfunding activity. To find one that suits you you can consider the following:

• Platform specificities: Some platforms are specialized in types of projects.
• Popularity at the scale needed: It is important to find platforms that have the maximum number of users based on the geographical scope desired by the project (regional, national, European).
• Fees and remuneration schemes: Always be aware of the fees of the platform (fixed or commission are most common).
• National rules and regulations: Be aware of the rules, many member states have implemented strict rules to protect private investors.
• Headquarters: Is the money travelling and where is it stored by the platform are criteria to consider while choosing a safe platform.
• Features: consider the various features you will need to run a successful fundraising campaign.

An alternative is to also collect debt financing from private persons. This is referred to as crowdlending.

In crowdlending (Peer-to-peer lending), multiple private investors lend money with the understanding that the money will be repaid with interest. Crowdlending is a way to receive individual loans from citizens. All those individual micro-loans add up to a larger sum.

As in the case of “dept financing” there is interest and risk, so you should always be clear in communicating what will be the impact of project failure on the individual’s investment.

EXAMPLES

Practices of cooperatives that created their crowdfunding / crowdlending platforms:

HYPERION (Greece) financed its project mainly through member equity participation but also organized a small crowdfunding to subsidize the membership costs of some energy-poor households. The crowdfunding campaign was organized using the crowd-investment platform Genervest to provide low-interest micro-loans by some of the members.

The crowdfunding campaign was organised in coordination with Genervest and Greenpeace Greece which helped with the media outreach. Members were thoroughly involved in the analysis of the benefits (and costs) of receiving a loan, and during the General Assembly, they agreed to proceed with a positive vote. Genervest.org – it allows for micro and medium-sized investments in renewable energy projects that also have some sort of social impact, e.g. energy communities.

ZEZ (Croatia) has supported various crowdfunding campaigns:
• Energy independent school Kaštel Lukšić (donation-based crowdfunding)
• Investing in two solar power plants in the city of Križevci (reward-based crowdfunding)
• Solarna Pecka (donation-based crowdfunding)
The crowdfunding has been organised through Indiegogo and ZEZinvest.

COOPERNICO (Portugal) created a crowdlending platform to finance its renewable energy projects. The platform is open to members of the cooperative only. The members are lending funds to the cooperative to develop and install solar production on large roofs, and are getting 3-4% interest rates on their investments through the platform.

CHECK OUT some crowdlending platforms:

• GoParity
• Genervest
• Citizenergy

CHECK OUT some crowdfunding platforms:

• Indiegogo
• Kickstarter

Financial Terms

Some common financial terms it’s useful to know:

• CAPEX: Capital Expenditures are costs that occur when purchasing, improving or maintaining physical assets of an investment project. Examples include costs of planning processes, installation or equipment.
• OPEX: Operational Expenditures are the costs that occur in the daily operation of a project. Examples include maintenance costs, staff costs, costs for external subcontracting, etc.
• ROI: Return on investment is a performance measure used to evaluate the efficiency or profitability of an investment. It is used to measure the amount of return on a particular investment, relative to the investment’s cost. Key factors influencing ROI include the initial investment amount, ongoing maintenance costs, and the cash flow generated by the investment.
• Discount rate: The interest rates applied to calculate the present value of future cash flows. As part of a Discounted Cash Flow Analysis, the discount rate is used to calculate the Net Present Value (NPV) and contributes to accounting for the time value of money and the riskiness of an investment as well as making different investments more comparable.
• Payback period: The time taken to recover the initial cost of investment.
• Citizen Finance: A financial scheme that uses citizens’ investment to fund a project. In this financing scheme, citizens or communities pool together their financial resources to implement a project aimed at their common good. Citizen financing is also sometimes referred to as citizen funding or public financing and can be organised in different ways, e.g. crowdfunding, cooperatives, etc.
• Revenue: The income generated by the daily operations performed within a project. Revenue streams can include, for example, energy savings generated, operation and maintenance fees, energy supply, etc.

CHECK OUT:

• Prospect+ Financial Terms Glossary