Repowering Communities by Vaze Prashant;Tindale Stephen;Tindale Stephen;

Author:Vaze, Prashant;Tindale, Stephen;Tindale, Stephen;
Language: eng
Format: epub
ISBN: 1596752
Publisher: Taylor & Francis Group

The Financing Vehicle — Managing Risks

Uncertainty kills investment prospects. Novel investments in community energy have a myriad of risks and uncertainties that could blow up in the investor's face. Few public officials, elected or appointed, want to take a gamble on an investment that might become an expensive fiasco. The smaller and lower-level the governmental unit, moreover, the more likely it is that the public officials will look up for guidance. In the US, where full government powers are given to really small communities, that nominal power is often a source of stasis and resistance to change. The expertise to consider options may not be available. The prospect of change is thus scarier than it would be in settings where the alternative paths forward can be carefully compared.

This point is even more true of investors than government officials, even investors whose role is nominally to take on exceptional risks. The joke about venture capitalists — those who sink funds into innovative high-risk, high-return start-ups and small firms that have yet to show profits — is that they like to be first in the queue for the second-of-a-kind project. They want to build on others' experiences in order to reduce their uncertainty. They are willing to take on risks, so long as their magnitude is known.

The choice of appropriate financial vehicle is really a means of sorting through the morass of things that could go wrong and allocating these risks (and also the potential for rewards) between the investor and community as cheaply and as straightforwardly as possible. It involves selecting, or maybe combining, different sources of capital or absorbing the risk that otherwise drives up the cost of capital. Who bears what risk? How are benefits shared? What is the precedence among investors in getting paid off, especially in the event of the failure of an initiative?

In the idealized case, communities would choose a strategy by:

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planning the infrastructure and capital needed (and political capital, in some instances) and integrating these plans with broader ambitions for the community, for instance, creating jobs and local economic development;

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determining the returns on investment available under best-possible future conditions; this will include non-energy benefits and ensure the vision is shared so the programme is widely owned;

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determining the alternative futures that might exist — the conditions generating the risks — this might include project over-runs, overly ambitious take-up rates, changes in prices and poor performance;

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managing the risks — perhaps by using financial markets, co-opting opposition or handing over the risk to someone else (for example contractor, insurance company);

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sourcing the capital and investment vehicle to reduce the cost and risk of the project.

There are a variety of energy service contract models. In some the ESCO takes over the risks of an energy investment failing to perform.10 Here the ESCO is paid from the savings they make, rather than the value of kit they sell. Such ESCOs assess buildings' energy-saving potentials and then undertake the necessary retrofits, from whole heating and cooling plants to insulation and control systems.

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