FREQUENTLY ASKED QUESTIONS
The information below is designed to give simple answers to some common questions.
In making any decision to invest you should rely only on the information set out in the Offer Document rather than on this leaflet. It is important that you read and consider the Offer Document as a whole with care, ensuring particularly that you understand the risks and that you take financial and other advice as necessary.
Highland Eco Design (‘HECO’) completed building a community hydro scheme at Arrochar (www.arrocharhydro.coop). The Arrochar project was supported by Energy4All (www.energy4all.co.uk), a UK social enterprise which has created 24 community renewable energy schems since 2002. (Energy4All has also won a prestigious international Ashden Award for excellence in promoting sustainable energy). As a result of what they saw at Arrochar, HECO proposed that Energy4All should manage a community stake in the six hydro projects they were developing in the Highland of Scotland. Five of the sites are on Forestry Commission land and one site is privately owned. Highland Community Energy Society Limited (‘HCES’) was established in 2018 to take up a community stake in these sites.
THE INVESTMENT OPPORTUNITY
The first two projects are Allt Dearg and Laggan which which have already been completed. A New share offer will be launching soon.
After the first financial year, Highland CES plans to pay a return to members of 4.5% per annum on their shareholdings in Highland CES, for the remainder of the proposed term of 20 years. All financial detail is provided in the Share Offer document. You are advised to read this carefully before investing.
WILL THE CO-OP GET INVOLVED IN OTHER ACTIVITIES?
HCES intends to support the local communities in partnership with local bodies. Surplus profits will be for the benefit of the community.
CAN I GET MY MONEY OUT EARLY?
Members do not have the right to withdraw Share Capital but the Board has the power to permit Shares to be withdrawn or to redeem Shares. It is anticipated to start repaying a proportion of each member’s share capital each year starting from May 2021.
WHEN WILL I GET MY FIRST PAYMENT?
It is anticipated interest will be paid on share capital in May each year with the first payment being made in May 2020.
WHAT HAPPENS IF I DIE?
It is understood that under current rules, Shares may qualify for relief for inheritance tax purposes, however Members should seek their own advice if this point is important to them.
WHAT ARE THE ENVIRONMENTAL BENEFITS?
HCES’s business activities are aimed at reducing carbon dioxide emissions through the generation of renewable energy at the sites and through funding projects that support its objects and priorities identified by members and local people. Each member of HCES will be benefiting the community through reducing their carbon footprint and contributing to the fight against climate change in a practical and measurable way,
WHAT MAKES UP THE HYDRO SITES’ INCOME?
Each hydro site will generate electricity to send to the grid. Electricity that is generated goes through an export meter which monitors the output of electricity. This electricity is sold to a distributor for an export rate per kWh. HCES will receive the Feed-in-Tariff (‘FIT’) which is additional income to the export rate. This is based on each kWh of electricity generated.
WHAT is the feed-in-tariff (fit)?
The FIT scheme is a government programme designed to promote the uptake of renewable and low-carbon electricity generation technologies.
Introduced on 1 April 2010, the scheme requires participating licensed electricity suppliers to make payments for both generation and export from eligible installations.
FIT payments are made quarterly (at least) for the electricity the installation has generated. Payments are made based on the meter reading submitted to the energy supplier (the ‘FIT licensee’).
FIT payments are made by the FIT licensee from the date the installation become eligible for the scheme. FIT rates for each of the first three sites can be found in the Share Offer document.
Further information can be found here (https://www.ofgem.gov.uk/environmental-programmes/fit)
WHAT FUNDS GO TO THE COMMUNITY?
The majority of the sites will be operating on Forestry Commission land where it has been agreed as part of the lease arrangement to pay £5000 per MW per annum to the local community. The projected total amount for all six sites is £5,750 per annum. In addition, any surplus profits in Highland Community Energy Society will be applied for the benefit of the local community. Once the members of HCES have been repaid, anticipated to take 20 years but being regularly repaid during that period, then HCES’s entire net income will be available for community benefit.
HOW DOES THE BUSINESS STRUCTURE WORK BETWEEN PARTIES INVOLVED?
HCES only invests and acquires a stake in each site (each held though a separate company (SPV) whose sole business is to own and operate that site) once the site is operational. The acquisition price is fixed, this reducing the construction risk for HCES. Under the terms of the Shareholder Agreements HCES will acquire a 25.1% stake in the share capital of each SPV for a nominal sum and will also lend to each SPV the balance of the capital it needs to acquire the hydro site, through the Loan Notes. The Loan Notes will pay interest at 5% and return capital over 20 years. These returns enable HCES to pay interest to its members and repay their capital.
The Loan Note arrangements are intended to ensure HCES gets the interest and capital return from the Loan Notes prior to any potential dividends the directors of the SPV could approve each year. The HCES loans are substantially larger than the loans made by Coille-Dhealain Ltd (‘CD’), the company which holds the remaining 74.9% share stake in each SPV. CD is linked to the contractor and developer but is not the same organisation. CD’s loans to each SPV are made on the same terms as the HCES Loan Notes. The financial model also projects dividend income accruing to HCES and CD in proportion to their shareholdings but the principal return in the early years of the project will be through the Loan Notes.
CD itself has bank loan facilities to support its long-term investment. Currently CD has enough funds to build the first two sites and once HCES acquires its stake in the first SPV its investment will enable a large part of CD’s loans to that SPV to be repaid. CD will then use the proceeds to fund the construction of the next site and so on until HCES has a stake in up to 6 sites. CD makes loans to each SPV during the construction process to fund the interim payments due to the contractor. This structure is designed to ensure that the contractor is paid its agreed construction price in the normal way.
The construction contracts are for a fixed price, so the risk of overruns (and the benefit of underruns) is taken by the contractor. However construction interest will be accumulating during the build. This is included in the financial model, but any time overrun and commissioning later will potentially increase costs and impact the HCES return. If there are material overruns then HCES is not bound to acquire its stake.
All the operating contracts have already been agreed as part of the agreements made prior to acquiring a stake in each SPV. They are on terms the current HCES directors consider reasonable comparing them to contracts made on other sites. The fee for the operating contract is a % of revenue generated from the site. This also provides extra protection if there is a year of lower generation and income, for instance due to a serious drought. Energy4All have an agreement to provide administration and accounting services to each SPV for the duration of the project.
There is an agreement between CD and HCES relating to the conduct of the affairs of each SPV. This prevents either party taking returns out of the SPV other than by mutual agreement or pursuant to the contracts the SPV has made with the prior agreement of CD and HCES, such as the Loan Notes. CD and HCES have equal representation on the board of each SPV and all strategic decisions likely to impact on the value of HCES’s interest requires both parties’ consent. This agreement is designed to protect HCES as the minority shareholder.
E4A has a long-standing relationship with HECO and have worked with HECO on prior projects. Technical and legal due diligence has been undertaken by Energy4All and by reputable consultants.
HAS THE ENVIRONMENTAL IMPACT, ESPECIALLY ON RIVER AND WATER LIFE BEEN CONSIDERED?
To work on these hydro sites an application was made to SEPA (Scottish Environment Protection Agency) for a CAR (Controlled Activity Request) licence to work on the sites and abide by the controlled activity and conditions for ‘the body of inland water’ and ‘body of surface water’. Activities include abstraction and impounding works on these sites.