Community’s 20% stake in wind farm dismissed as ‘hollow offer’

There’s a standing joke in my house. Whenever I’m writing a blog post, my husband will drift by and say: “Ooh, is it about wind farms?” So apologies to anyone if I’m boring you but I will keep on following this story because there’s a lot at stake.

My first blog about wind farms was more than a year ago when four crofting townships applied to the Crofting Commission for the rights to develop turbines on their common grazings under Section 50B of the Crofting Act. It was the first time anyone had attempted to use that piece of legislation and they’re still waiting for a decision from the Crofting Commission.

I’ve been following the story ever since, with a number of blogs in August when Lewis Wind Power — the disingenuously-titled partnership of multinationals EDF Energy and Amec-Foster-Wheeler — applied to the Scottish Land Court for permission to develop their own turbines under Section 19A.

It was a move seen as deeply hostile as it would mean the crofters could not develop theirs.

It is natural for a community to want to develop their own turbines, especially when they have seen the success of Point and Sandwick Trust, who donated £30,000 to Bethesda just days ago.

This was the second tranche of annual funding totalling £55,000, which Point and Sandwick will be giving to the care home and hospice for 25 years, for as long as the turbines keep turning.

CYNICAL

Point and Sandwick’s profits from their three turbines is now around £800,000 a year. By comparison, Lewis Wind Power (LWP) is offering the community just over that, £900,000, from 36 turbines.

Going by Point and Sandwick’s model, if LWP’s 36 Stornoway Wind Farm turbines were community owned the profits could be around £9.6million. It hardly compares, does it?

However, the big carrot that LWP are dangling is their offer that the Stornoway Trust can buy 20 per cent of the wind farm after completion. The important word is “buy”. It would not be free.

There is a perception out there that this would be just handed over. Somehow just acquired, as if by osmosis. But the fact of the matter is that this 20 per cent would not only have to be bought but would cost around £50million.

Stornoway Trust don’t have that kind of money and I reckon their chances of borrowing it are as good as the proverbial snowball’s in Hell.

When I wrote about this in August, so many people told me they had had “no idea” what was going on. There is even less awareness of the 20 per cent offer — what it means and how feasible it is.

A deeply cynical move, I’d say, by a massive corporation who know how appealing it sounds – ‘hey, free money, without any of the hassle or responsibility’ — but how painfully unrealistic it is.

A beautiful mirage.

We need to examine it closely and critically now because EDF are at the very last stage of getting permission. They have planning consent. The only thing they lack is Land Court consent to take over the crofters’ common grazings. They are almost over the line.

There is the added urgency because Lord Duncan (Parliamentary Under Secretary of State in the Scotland Office) confirmed last week that island wind farms would be allowed to bid for subsidy in 2019. If they are successful, the interconnector can then be built and would take about three years to complete.

EXPERT

I put out a news story today on the issue of the 20 per cent, following an extensive conversation with one of Scotland’s leading green energy experts, someone who advises major banks and Government bodies on renewables energy finance.

That expert is Mark Stewart, Head of Infrastructure and Renewable Energy at Johnston Carmichael, the largest independent firm of chartered accountants and business advisers in Scotland. (Mark is pictured above — he’s the one with the hat on)

I asked him what he thought about EDF’s 20 per cent offer. He dismissed it as something that would “probably never happen”.

Mark’s team has transacted on more than £1.5billion of deals, including most of the significant community energy deals in the market. Johnston Carmichael is also an adviser to the Scottish Government’s Community And Renewable Energy Scheme (CARES), where they help communities work out their finance options in the tricky early stages of a development.

This is what he said.

“I understand that Lewis Wind Power has offered a 20 per cent equity investment in the post-construction phase of the project. This will be in the order of £50 million, I would imagine.

“On the face of it this looks appealing but in reality, it is probably an offer that can never be taken up as the Stornoway Trust does not have that sort of cash and no one will lend them money without having any security over the income stream of the project. EDF has all the control.”

He explained that it would be much easier for the crofting townships to raise the required finance if they undertook the project themselves.

“A stand-alone community-owned vehicle would be able to provide funders with the required security package at the outset to make the deal viable.

“We have advised on a number of 100 per cent wholly-owned community projects and I am confident that a project of this magnitude would attract interest from a number of funders. The perception of a genuine community group not having the sophistication to deliver this deal is a false one and funders are very comfortable with this business model.”

He added: “The major difference between the two alternatives, of course, is that under a community owned project the entire profits would remain within the island community, rather than 80 per cent flowing out of the community and ultimately out of UK plc under the EDF offer.

“We have seen in other island community projects the manifest difference that this income can have to local community initiatives such as hospices, drug and alcohol rehabilitation centres and homeless shelters.”

He added: “Why would anyone want 20 per cent of something so valuable when they could have 100 per cent?

“The key here is for the community not to rush into any decision without conducting detailed due diligence on the LWP offer whilst evaluating in detail the financial benefit of a 100 per cent community-owned project. This is a once-in-a-lifetime opportunity to transform the fortunes of the islands and protect them for future generations. They need to make the right decision based on thorough due diligence.”

SECURITY

Western Isles Councillor Angus McCormack, chair of the award-winning Point and Sandwick Trust who operate the UK’s largest community wind farm, completely agreed.

Mr McCormack said: “Based on our experience with funding our wind farm, which cost £13million, it is extremely unlikely that any funder would finance this given that they have no security over their lending, they have got no step-in rights over the wind farm, they have no control over the money flow.

“From a lender’s point of view, lending £40million to the Stornoway Trust to buy 20 per cent of EDF’s wind farm would mean that they would actually have less control over the assets than when they are lending an ordinary householder £100,0000 for a mortgage — and that’s never going to happen.

“The only way that a minority share offer can work is if it is locked in with a detailed and watertight legal and commercial agreement at the very outset before you even agree the feasibility study.

“That’s what the Shetland Council did, for example. They have a 50/50 agreement with SSE, but they’ve had it since 2002. They have equal rights over the windfarm. The Stornoway Trust have nothing like that. They have a vaguely defined aspiration to buy 20 per cent but they have no detailed commercial agreement and without that they will never get funding.”

Community share options are fraught with difficulty. One particular example is very close to home.

Almost incredibly, Stornoway Trust already have the offer of a community share option on the table from an existing wind farm – and they haven’t touched it.

To be fair, they say they still intend to.

Stornoway Trust Factor Iain M Maciver was quite upfront about the situation relating to the six-turbine Pentland wind farm, which is privately owned.

UNCERTAINTY

This scheme, on leased Stornoway Trust ground, has a 13.8MW connection to the grid but is set up and approved for a total of 18MW. It is currently constrained due to lack of grid capacity. Because there is no room on the existing subsea cable to export any more energy, Pentland has dialled down its output.

Stornoway Trust have set money aside to buy the proposed 15 per cent at some point.

However, as Iain M confirmed: “Uncertainty over the generation of the 4.2MW has resulted in a mutually agreed delay in the Trust progressing the community equity option.”

Kinda shows you, doesn’t it? You can’t conclude a purchase when you can’t establish the value of what you are buying.

PROFIT

Anyone who has ever done self-assessment for HMRC knows that it’s easy to adjust your official income. Just choose what expenses you include or leave out.

Think EDF couldn’t adjust their top line? With a business that size, and the way energy prices fluctuate, it would be so easy. And who is going to lend anyone money to buy into that, when the income could end up all over the place?

As Calum Macdonald, the former Western Isles MP who now develops community wind farms, said: “If you’re EDF, like any multinational, how much profit you decide to declare is really up to you.

“Can you imagine how this profit could leak out when it gets transferred between different elements of the EDF machine? How much is EDF retail paying EDF productions for this power? It’s all entirely controlled by EDF. It’s totally up to what suits their overall business and they can shift profit around from department to department.

“EDF could easily bill the wind farm for all sorts of head office support, branding, all kinds of stuff, and reduce the supposed profit the wind farm has made.”

He stressed the key point regarding the 20 per cent was that the commercial details — including the definition of the profit — “must be fixed now in a binding and comprehensive” legal agreement.

“Otherwise the offer is worthless.”

Katie

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