Ministers may wish to cut solar energy subsidies, but there is still funding around for renewable power projects. Public bodies need to make the most of this ‘Golden Age’ before it disappears forever
An easy way to ascertain somebody’s age is to ask them which decade of their life was the best. I am too young to remember the 1960s, so once I have had my Saturday night bottle of wine, I tend to look back fondly on the 1970s as a 'Golden Age'. This is quite dull for my wife as she is eight years younger than me, but these truly were the days of miracles and wonder. In 1976 alone, my family got a colour telly, a brown Ford car with a vinyl roof and I ate my first pizza. I don’t think any three things have made me so happy ever since and each subsequent decade has been slightly more disappointing.
However, the problem with golden ages is that you rarely realise you are living through them. In the same way that I didn’t appreciate how good Opal Fruits were until they became Starburst, I don’t think most people in the public sector understand that we are coming to the end of a golden age for developing renewable power.
Although everybody speaks the new language of austerity, the government is still throwing hundreds of millions of pounds at renewable power and, thanks to the Chinese, the price of the technology is dropping faster than Eric Pickles from a hot air balloon. A lot of people are making money by being green and worldwide investment in renewables last year was $260bn.
However, the party wont last forever and our European neighbours have already called the police about the noise. The Spanish have slashed their subsidies, the Germans are placing annual caps on the levels of installation and the UK Government is appealing against last week’s reversal in the courts over the level of solar subsidy.
One day this will all be over and my worry is that the public sector will turn up to the party to find all that is all left are stale Twiglets and a strange bottle of red wine that nobody owns up to bringing. The next couple of years is the best chance your organisation will ever have to make money by developing renewable power projects, so how do you do it? Here are my eight easy steps.
1. First find your project – you need a big user of energy. Schools, offices and leisure centres are good but, bizarrely, care homes and poultry farms are better. Because of the way the subsidies work, the higher your use of energy the more subsidy you will receive. Although neither of them do much, old people and chickens both need a lot of daytime heat so these facilities attract the highest level of subsidy. There is an important distinction here between heat and electricity. To get the subsidy for heat you actually have to use the heat whereas for electricity you get paid even if you just sell it on to the grid.
2. Pick a feedstock – In essence all renewable energy projects take a latent form of energy like the sun or the wind and turn it into a useable form like electricity or heat. Your skill is spotting this energy source and finding a way of converting it. The key here is the level and predictability of duration ie there is enough energy available to make it worthwhile and it will continue to be there.
You can rely on God to make it windy or sunny or you can utilise the energy trapped in bio mass or waste. Whichever you choose, you will need to provide evidence that you can access this energy for at least ten to 15 years so measuring just one sunny or windy day is not going to be enough. Typically, you will need a year’s worth of data or a technical consultant with a very good professional indemnity policy.
3. Find a subsidy – British renewables’ projects and British agriculture have three things in common: they conjure up nice ‘green’ feelings in the electorate, they have lots of support from either the LibDems or the Conservatives and they need lots of other people’s money to keep going. Government may use nicer sounding phrases like grants or tariffs but ultimately these are industries that rely on the taxpayer to keep writing welfare cheques, otherwise they will fall over like a giddy toddler dancing at a wedding.
You may of course wonder how this differs to using taxpayers money to prop up coal mining in the 1980s, but I think you will find the answer is that there are not many miners in the current government coalition whereas there are lots of environmentalists and farmers. Your trick is to find a subsidy that suits your project and take advantage whilst its still there.
As we have seen with solar, the government has an unnerving tendency to try to change the rules so you will need to move quickly. My guess is another two to three years at best before the electorate decide that those nice ‘green’ feelings are like employing a cleaner, seemingly a must-have when things are good but feels like a ridiculous extravagance in more austere times.
4. Pick a technology – this is the living beating heart of your project, the thing your funder is paying for. Your biggest temptation at this stage is to try and reinvent the wheel. It has been 150 years since the industrial revolution, so most of what you need has been invented by now. However, expect to be assailed continually by engineers trying to persuade you that they have invented a rounder circle, which is just perfect for your project. Ignore them. Your life is hard enough without trying to persuade your funder to back an untried horse.
5. Get planning permission – this sounds deceptively simple but navigating the choppy waters of the planning process is where you earn all your profits as a developer. The English planning system is the Bermuda Triangle for micro generation projects. Solid seaworthy projects blithely sail in only to be sucked down by the whirlpool of middle-class Nimbyism. Everybody wants to save the planet but nobody wants the solution to be built anywhere near their nice wisteria-clad semi thank you very much.
6. Engage a builder – in technical terms, this is your EPC (engineering, procurement and construction) contractor. He is the chap who promises to build your shiny plant on time and on budget. More importantly if he doesn’t deliver as agreed, he will pay you for the loss of income until the project is up and running. Usually this is all agreed in the heady early days of your relationship and the builder never actually expects to write you a series of daily cheques. Things, of course, happen and you and the builder are unlikely to be close friends at the end of the process.
7. Document the legals – another deceptively easy sounding phrase that will prove to be a trying time. You will eat lot of posh biscuits in fancy meeting rooms, you will be regularly astonished by how much those biscuits and meetings are costing you and you will become obsessed by the meaning of individual words. The legal profession is built on a foundation of definitions and you ignore this fact at your peril.
8. Finally, find a funder – despite the credit crunch there are still lots of funders who are keen to back renewable looking projects and if you follow the steps in this article you will be seven-eighths of the way there. However, before they start writing cheques, they will also need to be convinced that you are the sort of person they want to be in business with. This is not easy. Bankers don’t ‘quite’ deserve the bad press they get in this country but that ‘quite’ is an important qualifier. They speak a different language to you and I, they have a different, let’s say more ‘defined’ set of values and they are, understandably, very focused on not losing any more of the banks’ money.
This means that they will give you a hard time, they will regularly appear to be completely unreasonable about things nobody else cares about and you will harbour fantasies about a left-wing revolution involving rope and lampposts. However, you are going to have to get past this. The bankers are the people who will write the cheques that make your dream a reality, so play nicely.
We are clearly living through the golden age of subsidies for renewable power but the party won’t last for much longer. Either the electorate or the government will realise the obscenity of laying off war heroes whilst wasting money on subsidising inefficient micro power production and call a halt. Like flared trousers, Findus crispy pancakes and Showaddywaddy, one day we will look back on this time and wonder why we ever thought it was good idea. Until this happens, my advice is to start running until you are adjacent to the bandwagon and then climb on.
Michael Ware is corporate finance partner at BDO
