A new way of financing renewables

Guy Lipman
Apr 28 · 6 min read

Some thoughts on a way that might allow householders to invest in renewable electricity, receiving a long-term revenue stream that goes some way to offsetting the uncertainty in their electricity bills.

The problem

The householder:

There are good reasons to put a solar panel on your roof. In many cases, as well as being a good thing environmentally, it makes a lot of economic sense — with investment returns being so low, you can pay now, and lock in cheaper electricity costs for the future. Most people that do this see this don’t even see this as having market risk, given that it is a natural (though imperfect) hedge (i.e. offset) for the electricity they know they’ll need.

But most people can’t put solar panels on their roof. Perhaps they live in an apartment, or are tenants, or are likely to move in the next few years. Or perhaps they don’t have the cash to invest. It would be great if these people could choose to invest in, and take the risk of renewable assets.

The renewable generator:

Renewable assets have long-term market risks that make them difficult to finance, particularly as feed-in tariffs disappear. Any bank wanting to finance a wind farm will want 10–25 years of reliable payments. Wind and solar generators earns revenue equal to the volume generated multiplied by the market electricity price. This exposes them to volumetric and the price risk, which together are challenging to manage.

Some developers hedge the price risk by selling futures or forward contracts. However, these products tend to assume baseload volumes, meaning that the wind farm will inevitably be overhedged during periods of low wind (when the price tends to be high) and underhedged during periods of high wind (when the price tends to be low). For solar farms, the volumetric risk is lower, but there still isn’t even much of a market to lock in, say, 9am–5pm every day. A bank will see infrastructure with this kind of uncertainty as reasonably high risk, and will demand a high return.

A better approach can be to sell the power under a power purchase agreement (PPA), in which a company agrees to buy your power for a fixed price. However, many buyers won’t want to accept the volumetric risk, knowing that they’ll have to buy more power in periods with low renewable generation. As a result, the seller may agree to sell fixed volumes, however this leaves the seller with volume risk. A further difficulty with PPAs is that many buying companies will not want to buy more than 5 years ahead, not knowing whether they’ll still be around or how much energy they’ll need.

The Solution

I’d like to see a way for householders to invest in renewable capacity, most notably wind and solar facilities. They would carry the volumetric and price risk, knowing that it to a fair degree hedges their natural and long term exposure to electricity prices. In many ways, they’d be putting themselves in the position of householders that are currently in the position to buy solar panels.

A renewable developer could collect the upfront investment funds of 100–1000 such householders, and use it to finance renewable capacity. The householders would then receive 20–25 years of revenue, linked to the production volume and the wholesale electricity prices. Both generation volumes and wholesale electricity prices are known almost immediately, so householders would know they were getting what they should. This revenue stream could offset their monthly electricity bills. They would continue to receive this revenue stream, even if they moved house or chose to change electricity provider.

Some Questions

That is the broad outline of the idea, however there are still some elements that could work in different ways:

  • Would people prefer to invest in one generation unit, or a somewhat diversified portfolio of units? The former is easier to monitor, while the latter reduces the risk.
  • What happens if the generation unit fails? I’d probably get the units insured to provide some return in case of mechanical failure, and avoid having people pay for the unit until it was operational.
  • Should people be able to sell their investments before the full term is up? I do want people to be able to sell their investment if they need to, which might necessitate a secondary market. But I don’t want this to become a product that people buy with the expectation of selling at a higher price. Perhaps if there was enough of a transaction fee for reselling, people wouldn’t buy with the intention of selling early.
  • Should people be able to buy this product without a reduced, or even no upfront investment? It might be possible to allow people to essentially borrow against their investment: letting them pay a fixed payment each month, against their variable revenue from the investment. I like the idea of letting people do this, especially as it would still offset against their electricity bills. But it does create risk that customers might default.
  • Should there be a limit on how much people can invest in this kind of product? The idea for the product is that customers would receive revenue roughly matching their electricity bills, otherwise the idea of it being a natural hedge to their electricity bills is no longer true. But really, I’ve got no fundamental objection with people investing significantly more.
  • Would electricity suppliers consider integrating this product into their offerings? This would allow customers to see their revenue from the generator directly offset against their bills, and it might encourage more customers to take up the deals.
  • Should customers who have invested in this product keep paying fixed rates for their electricity? The vast bulk of customers in the UK currently pay fixed rates for their electricity. However, these rates are still liable to change over time, at least on an annual basis, so much of the risk from investing in renewable generation would still offset their long-term price risk. But the product would also work nicely with time-of-use tariffs like Octopus Agile.
  • How much does it matter that customers’ electricity consumption profile doesn’t match the renewable generation? Obviously, the better their profile does match, the better a hedge it will be. And possibly this product will incentivise them to shift their consumption to match renewable generation, which would be a good thing. But in general, we need to acknowledge that it won’t be a perfect hedge of their demand.
  • How much does it matter that the electricity is being generated in a different place to where the customer is? I think about this question in two ways. Firstly, obviously you won’t be physically consuming exactly the electricity that you’ve invested in. But I don’t think that’s a problem, you’re still creating renewable electricity that this country needs. Secondly, it is important for developers to make sure we don’t put renewable infrastructure in places without the means to get it to consumers — but that’s something they’re already thinking about.
  • How do we ensure that investors properly understand the product? This is particularly important if it is being sold to regular householders rather than sophisticated investors. By limiting the investment size to something that hedges your electricity bill, and by ensuring investors pay upfront, it should be possible to reduce this risk.

If anyone is interested in discussing this idea, or knows any organisations that are trying this, please do let me know.

Guy Lipman

Written by

Fascinated by what makes societies and markets work. Undertaking a PhD in sustainable energy at UCL. http://guylipman.com.

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