We recently read that a school in Dorset was going to benefit from a £2m investment in energy infrastructure and would not have to pay a penny for it. A third party firm will fund and install all the new equipment but in return charge the school a monthly fee for power and heat.
That sounds good on paper but in return the school gives up the rights to a Government incentive called the Renewable Heat Incentive, which combined with the monthly charge for heating will, I imagine, come to a lot more than £2m over the term of the contract - which they will be locked into for a long period.
Funding is an often-misunderstood evil when it comes to a major investment in energy including renewable systems such as biomass or solar PV. Whilst there is often good logic behind a switch to one of these energy efficiency technologies, the question of how to pay for it can result in the project hitting the buffers.
This is ironic because of all the long-term investment opportunities out there, few offer such a good combination of cost protection, cost mitigation and income generation.
There are three ways to think about funding energy efficiency investments including renewable energy:
- Pay cash – Gain immediate ownership and access to long term cost savings and income generation, including Government incentives such as the Renewable Heat Incentive or the Feed-in tariff. However you may lose the opportunity to fund shorter-term priorities because you’ll have committed existing cash reserves.
- Finance the purchase – Gain immediate ownership but slightly reduced access to the long term cost savings and income for a few years, but then full access to those benefits for the long term. Cash is retained for short-term priorities but cost is spread over the length of finance contract.
- Long-term energy contract – Fixed energy costs with no price increase risk, but no ownership of assets, cost savings or income generation – including access to Government incentives. All cash is retained but with no ownership of benefits.
Each of these has it’s own merit:
- A cash rich school should use that cash for both short and long term benefit, and gain the best return (financial and non-financial).
- A cash constrained school that needs to reduce regular costs at almost any expense, can avoid any cash outlay and sensibly protect against energy price rises by entering a long term energy contract.
- But in our view, any large asset investment should ideally have the cost spread over a sensibly short period of time (say 7 to 10 years) through asset finance. The aim should be to ensure the effect of any loan is at least cash neutral, but then full long term ownership of the asset and all the benefits should be taken over as soon as possible.
Finance can spread the cost over an affordable period but ultimately you should aim to own it outright, especially if there are true long-term benefits that can be yours to own as well.
The devil is always in the detail so in all cases it is best to start any project off with a full financial and technical feasibility plan. That is the starting point for all our work with Independent Schools.
If you have considered finance for an energy project we’d welcome your views.