SUMMARY/PURPOSE
1.
To
determine an organisational structure for the formation of the Isle of Wight
Low Carbon Company, giving effect to a resolution of Full Council on 15th
September 2004.
BACKGROUND
2.
The Isle of Wight
Council has shown a commitment to sustainable energy through Agenda 21 and
specific strategies for renewable energy, energy efficiency and fuel poverty.
3.
The Renewable Energy
Strategy for the Island reflects the view of local people that the Island
should contribute fully to the Government target of at least 10% of electricity
generated from renewable sources by 2010. The Strategy indicates how this could
be achieved using commercially viable technologies. The Strategy also states a
desire for renewable energy developments to provide lasting benefit to local
communities.
4.
In order to analyse how
these twin aims could be achieved, a study was commissioned, with funding from
SEEDA and GOSE, to investigate the possibility of developing a community
renewable energy company on the Isle of Wight. The study was carried out by
consultants Whitbybird and Element Energy and recommends the establishment of a
self-catalysing company (Isle of Wight Low Carbon Company, IOWLCC) which uses
the profits from renewables development to foster further renewable energy
sources, helping to meet the renewables target of 10% by 2010, maximising the
benefit to local communities and improving the economic prospects of the Island
through job creation.
5.
The need for the IOWLCC is highlighted by the lack of concrete renewables
projects to date in either the public or private sector. There are a number of
reasons for this including a limited renewable energy resource as a result of
which renewable energy developers have focused elsewhere (e.g. Scotland); the
need for a multi-party approach to some projects (eg linking wood growers with
heat users); the limited resource available for establishing new RES projects
as no-one on the Island is specifically tasked with establishing renewables
projects; and recent objections to wind developments on the Island. The IOWLCC
will be a mechanism for overcoming these constraints.
6.
The IOWLCC will only
develop projects which have a positive net present value and are therefore
viable in the short-term. Projects requiring minimal capital expenditure will
be developed and operated by the Company providing a revenue stream. Projects
requiring high capital expenditure will be developed into a viable company and
then sold with a margin paid to the IOWLCC to recover the development costs.
Local residents will have the opportunity to become shareholders in these new
companies once the risks are minimised. Surplus profits from the IOWLCC will be
returned to the community for environmental improvements.
7.
Four viable projects
have been identified for immediate development. These are wood fuel supply for
heat, bio-diesel production, small-scale wind farm development and energy
management for public sector organisations. Technologies which are not likely
to deliver economic returns in the short-term e.g. tidal stream, microCHP,
photovoltaics and wave power, will be regularly reviewed by the IOWLCC and are
likely to form part of the core business of the Company in later years.
8.
Detailed cashflows
indicate that a Company based on the projects outlined above would be viable.
It is likely to break even within 5 years and could then go on to make
substantial profits. Seed finance of £450,000 is required for start-up costs.
9.
A
presentation on ‘Sustainable Energy for the Island and the Formation of a
Renewable Energy Development Company’ was made to a meeting of the Full Council
on 15th September 2004, following which it was resolved:
That
the Isle of Wight Council recognise the potential benefits of the formulation
of an Isle of Wight Low Carbon Company as the most effective way to meet the
aims of the Renewable Energy Strategy and asks the Executive to consider the
possible formation in detail.
STRATEGIC CONTEXT
·
It
contributes directly to two of the Council’s Corporate objectives, namely
“encouraging job creation and economic prosperity” and “protecting the Island’s
physical environment”.
·
The Island’s Agenda 21
Strategy makes a commitment to sustainable development. A specific action under
the energy theme is to research the optimal use of the Island’s natural and
waste resources in the local generation of electricity and identify specific
initiatives which will develop the use of this generating capacity.
·
The Renewable Energy
Strategy requires the installation of 18 megawatts (MW) of renewable capacity
to meet the 10% target, although a resource assessment shows the possibility of
an accelerated rate of deployment to 28MW (18%) of renewable capacity by 2010.
CONSULTATION
11.
The
Agenda 21 and Renewable Energy Strategies were written following extensive
consultation with the local community. These show considerable support for the
development of renewable energy on the Island. A number of stakeholders were
consulted during the formation of the Business Strategy Proposal for the IOWLCC
to test the basis for the proposal. These include Isle of Wight Economic
Partnership, Arreton Valley Nursey, IW Healthcare Trust, Island Grains, Island
Waste, Southern Vectis, Wight Bus, Forestry Commission, Vestas, SEEDA and IW
Council staff from Planning Policy, Legal Services and Environment Services.
12.
The
proposal for the formation of the IOWLCC was taken to a meeting of the Full
Council on 15th September 2004.
FINANCIAL/BUDGET IMPLICATIONS
13.
The
Council has contributed a considerable amount of staff time to both the
development of the Renewable energy Strategy and work on the Isle of Wight Low
Carbon Company.
14.
Seed
funding necessary to deliver the IOWLCC amounts to some £450,000 and the
options outlined below indicate the range of opportunities available for the
Council to fund the IOWLCC, which includes grant aid, loan finance or an equity
stake. However, the recommendation is made on the assumption that no Council
funding is available at this stage.
15.
A
small amount of additional work is required before the Company can be legally
constituted and able to secure investment funding. This includes producing a
prospectus and constitution. This work should be carried out by a lawyer
specialising in social enterprises at an estimated cost of £15,000.
16.
Funding
for the next phase of development work will be from existing budgets
LEGAL IMPLICATIONS
17.
The
power to develop a low carbon company is, having regard to the Community
Strategy, within Part I Local Government Act 2000, the power to promote the
economic, social and environmental well-being of the Island.
OPTIONS
18.
The
IOWLCC is a social enterprise which is
defined as a “business with primarily social objectives whose surpluses are
principally reinvested for that purpose in the business or in the community,
rather than being driven by the need to maximise profit for shareholders and
owners.”
19.
In January 2005, the
Council commissioned consultants Baker Brown Associates to identify and
appraise the organisational options for establishing IOWLCC as a social
enterprise and the most appropriate legal format for each option. It was also
asked to consider the degree of involvement the Council should have in this new
organisation and to propose different organisational mechanisms for community
involvement.
20.
There are two key
variables affecting the organisational design of IOWLCC: the treatment of
profit (not-for-profit, or profit distributing) and the level of community
involvement (none, beneficiaries, members or investor-owners). There are five
main organisational options, shown in the table below. Options 1 and 4 cannot
be described as social enterprises because there is no community involvement,
but these options have their strengths and should be considered.
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Table: Organisational options
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Treatment of profit
|
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Not-for-profit
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Profit distributing
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Community
involvement
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None
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Option
1
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Option
4
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Beneficiaries
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Option
2
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Members
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Option
3
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Investor-owners
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Option
5
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Option 1:
Council controlled company: The
Council establishes a wholly-owned subsidiary to develop one or more of the
four projects identified by Whitbybird. The legal format could either be a
company limited by guarantee or a company limited by shares. Directors are
nominated by the Council. Investment capital would principally come from the
Council’s own budget and grants from public sector agencies such as SEEDA and
the Carbon Trust. All actions of the company would be subject to the laws
governing local authority controlled companies.
Strengths: Potential profits flow directly back to the Council.
Projects requiring large amounts of capital can be sold or spun-out to the
private or the social enterprise sector. No external fund-raising costs
involved. Council maintains full control.
Weaknesses: All risk carried solely by the Council. Could place
large burden on Council budgets. Offers little scope for community involvement.
Creates potential for conflict of interests with the community.
Option 2:
Community-beneficiary, not-for-profit social enterprise: The Council creates a not-for-profit company limited
by guarantee with articles of association that restrict the number of Council
nominated directors to no more than one-fifth of the total, with other
directors nominated by community organisations and/or the private sector.
Directors are usually unpaid (although this is not a requirement unless the
enterprise wants to obtain charitable status). The company memorandum could
list community benefits as its primary objects and could become a Community
Interest Company (CIC – a new model for social enterprise being promoted by the
Government and available in summer 2005). Investment capital could be in the
form of grants (from the Council and other public sector agencies, as well as
charities and the private sector) or loans (from Community Development Finance
Institutions (CDFIs) and/or commercial sources). Any surpluses after
reinvestment could be used for community benefit purposes via a charitable
trust.
Strengths: Attractive and familiar structure, acceptable to
grant-givers. Reduces ongoing risk to the Council.
Weaknesses: Might be unable to raise sufficient investment
capital (grants or loans) to develop any of the four projects even to the
investment-ready phase. May be difficult to attract and motivate
entrepreneurial directors. Does not encourage much community involvement and
participation.
Option 3:
Community-member, not-for-profit social enterprise: The Council creates an independent not-for-profit
social enterprise with a membership structure open to anyone who lives or works
on the Island and supports the aims of the enterprise. The legal format could
be a company limited by guarantee, possibly with CIC status, or an IPS for the
benefit of the community (Bencom). The latter format offers a democratic
membership structure and has charity exempt status, but the Financial Services
Authority, the body which registers IPSs, must be convinced that the enterprise
should not use a company limited by guarantee format instead. This might be
difficult given that the primary purpose of the enterprise is to develop
profitable renewable energy businesses. Directors are elected by the
membership, on a one-member-one-vote basis. Directors can be paid or unpaid.
Investment capital sources would largely be the same as for Option 2.
Strengths: Independent from the Council. Open membership and
democratic community control. Good structure for encouraging community
involvement and participation. May attract more financial support from the
community.
Weaknesses:
May not attract directors with a
strong commercial focus, unless they are paid. Reliant on grant funding and it
is unclear how any shortfalls in funding would be met. Recruiting members and
encouraging participation could be very time consuming.
Option 4:
Joint venture, for-profit enterprise:
The Council forms a joint venture with one or more private sector contractors
willing to invest in and develop the business opportunities. The legal format
for this option could be a company limited by shares or a limited liability
partnership. The latter format would suit the proposed energy efficiency
project because it would allow for profit-sharing without the Council having to
invest capital in the venture. Directors would be elected by shareholders on
the basis of one-share-one vote, or according to some other method set out in
the constitution.
Strengths: Strong commercial model with limited risks for the
Council. Comparatively cheap way of raising finance.
Weaknesses: Depends on ability to find private partners. Might
count as a Council controlled or influenced company. No community involvement,
which may exacerbate opposition to some or all of the projects.
Option 5:
Community investor-owner, for-profit social enterprise: The Council establishes a for-profit enterprise
owned by community investors, including anyone who lives or works on the
Island, local businesses and the Council. There are three legal formats that
could be used for this type of social enterprise: a community interest company
limited by shares, a community interest company with plc status, and an IPS
co-operative. These formats allow a range of equity-style investment mechanisms
to be developed, incorporating the social ownership features of democratic
member control, upper limits on dividends and asset lock protection. Directors
are elected by the membership. There are a range of membership options for this
type of social enterprise, including structures with a single class of
membership granted equal voting rights, and structures with two classes of
membership, with 75% of voting rights held by community members and 25% held by
investor members.
Strengths: Attractive to investors and entrepreneurs, whilst
also clearly in the community interest. Independent from the Council, but
protects any investment by the Council by giving it an equity stake. Highly
innovative structure, which is likely to attract national interest.
Weaknesses: Complex and unfamiliar model. A lot of external
support required to launch this type of enterprise. Can be an expensive method
of raising finance. Negative consequences of failure far greater than for any
other option because of the impact on the community investor-owner.
EVALUATION/RISK MANAGEMENT
21.
The choice between
these options is contingent upon the willingness of potential stakeholders,
including the Council itself, to invest in the new enterprise. The
not-for-profit options (Options 1, 2 and 3) are appropriate for public sector
grant funding, whereas the profit-distributing options (Options 4 and 5) are
appropriate for private and/or community investors. Whitbybird estimates that
the company will require initial financing of £450,000 over three years in
order to develop all four projects. It says that the company will be able to pay
back the initial financing after five years.
22.
If the Council is confident it can raise £450,000
from public sector sources, then Option 3 is recommended. This option offers the best structure for community
involvement. Specialist legal advice should be sought to determine whether the
company should be established as an IPS Bencom or as a CIC-CLG with community
membership built into its articles of association. Consideration should be
given to having a paid board of directors, elected by the membership, in order
to strengthen the commercial calibre of the board. If grants in excess of
£250,000 are secured, it may be possible to lever-in the balance of the finance
required in the form of loans made through CDFIs. Loans made through accredited
CDFIs to social enterprises qualify for Community Investment Tax Relief.
However, the cost of such loans has not been included in Whitbybird’s financial
projections for IOWLCC.
23.
If the Council is
NOT confident that it can raise in excess of £250,000 from public sector
sources, then Option 5 is recommended. This is the better of the two
profit-distributing options for encouraging community involvement. However, it
should be noted that Option 5 is a highly innovative design for a social
enterprise and would require further investigation before any structure was
incorporated. If the Council does choose Option 5, Business Link Wessex have
agreed to support further development work, including the targeting of local
social business angels who are successful business men and women willing to
invest in social enterprises. This would make the equity offer a private offer
and avoid the high costs of a public offer.
24.
The establishment of
the IOWLCC as an entity separate from the Council mitigates the risks
associated with the operation of the Company, which are:
Aggregation
of projects – The Isle of Wight has seen little private investment
in RES projects over the past decade. This is due to the limited scale of the
renewable resource and the resultant limits on developments for the larger
renewables developers. To overcome this problem, the IOWLCC is based on
aggregation of a number of small profitable projects. However if a single
project fails and becomes a drain on resources, this risks other profitable
ventures. The IOWLCC will be carefully managed to ensure that failing projects
cannot become liabilities large enough to threaten profitable projects.
Community
issues – there is a history of
objection to renewables projects on the Island. The IOWLCC not-for-profit
community company status will help to make the case that RES development can
benefit the local community.
Multi-tasking requirement – the nature of the aggregated approach to low carbon
projects on the Island is such that those operating the company must have a multi-tasking
approach to energy projects. A skilled managing director will be appointed to
operate the company.
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RECOMMENDATIONS
25.
It
is recommended that the Executive:
(i)
Determines
to develop a community investor-owned, for-profit social enterprise
(ii)
Receives
a future report in September 2005 to take further decisions in relation to
the creation of a Low Carbon Company
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BACKGROUND PAPERS
26.
dti – ‘Our energy
future – creating a low carbon economy’, Energy White Paper, February 2003
27.
Local Government
Association – ‘Energy for Sustainable Communities’ – revised energy policy
document, March 2004
28.
Isle of Wight Council –
‘Agenda 21 Strategy for the Isle of Wight’, undated
29.
Isle of Wight Council –
‘Powering the Island through renewable energy’ – a Renewable Energy Strategy
for the isle of Wight to 2010, September 2002
30.
Whitbybird / element
energy – ‘Isle of Wight Low Carbon Company: Business Strategy Proposal for Isle
of Wight Council, November 2004
31.
Baker Brown Associates
– ‘IOWLCC Organisational Options Appraisal’, February 2005
Contact Point : Jim
Fawcett, Principal Policy Officer (Health & Sustainable Development)Tel:
823204 Email: [email protected]
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DEREK ROWELL
Director of Environment
Services
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TERRY BUTCHERS
Portfolio Holder for
Sustainable Development, Environment and Planning Policy
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