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.
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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.
Financing Plan
A community energy project needs a solid business and financing plan. A sound financing structure will help you in inviting support from local authorities, grants, loans and access capital for your expenses in the planning and implementation phases of your project.
A financing plan is not only something that your members or external financiers want to see, it is a key document that can structure the conversation in your group. It helps you gain insight into the financial return you can expect from your projects, the types of financing that are available to you and the choices you want to make concerning ownership and risk. Most of the time, it covers three parts: the strategy, a cash-flow analysis and a fundraising plan.
Check this Financing Guide for Energy Communities for an idea of how this could look like, and a checklist of aspects that should be included for each part.
Importantly, the financing plan needs to be linked with your overall business plan, including the legal statutes of your energy community, the way you plan to mitigate risk, or how you want to reach out to the community. This is why the financing plan often represents a chapter in the business plan.
Only after you have developed a decent financing plan and have identified your first project you should start the process of looking for funds. This allows you to be more specific on the project or service you want to develop, its expected costs, risks and returns, making it easier to convince potential investors to support your project.
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?
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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.