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It's Time for Tax Relief for Community Energy Investment

                                                                                                                                  Photo credit: Westmill Solar 

Last week the Intergovernmental Panel on Climate Change (IPCC) released a report highlighting the potentially catastrophic results if global warming is not limited to 1.5°C. In a strongly worded message it warned that failure to meet this target could lead to food shortages, a rise in extreme weather events such as droughts and storms and a mass die-off of coral reefs.

In order to limit temperature rises the report says that cutting emissions by 45% by 2030 and getting almost all of our electricity from renewables by the middle of the century is essential.

The worrying thing is that this is against a background of declining investment into renewable energy. In the last few months there have been several high-profile reports including one from the Environmental Audit Committee highlighting the fact that in the UK green investment is at the lowest for 10 years and in 2017 renewable energy investment fell by 56%.

The Community Energy sector also recently launched its 2018 State of the Sector report which showed the extent to which the sector has been impacted by the removal of both tax reliefs and feed in tariffs in recent years. In 2017 there was only one new project, 30 fewer successful projects and 31% less generation capacity installed or acquired.

In contrast, the UK government in June also issued a public document outlining how they intended to grow a culture of social impact investing in the UK.

Given community energy is one of the most developed social impact investment sectors both in terms of products and an investor appeal, and with the pressing need to further decarbonise the UK’s energy sector in light of the IPCC report there is a strong case for changes in government policy to de-risk these investments further, whilst also growing social impact investing and helping to reduce carbon emissions to limit global temperature rises. 

The importance of Community Energy in promoting the social impact investing agenda

Community energy groups help regenerate physical and social infrastructure, they also can help address fuel poverty and promote environmental sustainability across the UK. They play an important role in giving local communities control over their own energy supplies whilst generating much needed revenues at a local level. They play important role as an influencer encouraging individuals to reduce their carbon footprint, something that everyone will need to do in order to meet the 1.5°C.

These organisations are also a key player in developing innovative approaches contributing to the creation of a sustainable energy infrastructure for the UK. Social investment organisations such as Big Society Capital and Friends Provident Foundation have recognised the positive impact of community energy and have invested significant amounts into the sector.

Although Ethex is supportive of calls for there to be a less steep taper of subsidies the main area of our concern as a platform seeking to enable investors to invest positively is the exclusion of the sector from Social Investment Tax Relief (SITR). Historically we consistently saw a high take-up for offers that qualified for Enterprise Investment Scheme (EIS) tax reliefs, such as the £2.5m Chelwood Community Energy offer in 2015, which filled in three months with average investment levels higher than for other non-EIS eligible investments. 

Reasons given for the removal of tax reliefs

Venture capital tax reliefs for community energy organisations were removed in 2015 with the Treasury voicing concern about the potential misuse of tax breaks by private energy providers who may not have a strong commitment to the community. Another arguments was that community energy was in effect receiving a ‘double subsidy’ from the energy generation subsidy regime and the tax reliefs on investment, and that the removal of community energy from EIS and its exemption from SITR stopped this.

Community energy and the argument for SITR inclusion

With the impending removal of the FiT subsidies in March 2019 this double subsidy argument no longer holds true. Ethex believes that given the positive social and environmental impact delivered by these organisations the UK Government should look at the strong case for the reinstatement of community energy projects into the SITR regime.

In addition, key eligibility criteria can be put in place to ensure that private energy providers that don’t have a strong community focus cannot benefit. These could include:  

  • Legal form: Must have a social regulator (therefore be a Charity, BenCom or CIC)
  • Ownership: Minimum levels of local and/or individual ownership; and
  • Governance: Majority control of the board in the hands of locals.

Community energy has done a fantastic job of empowering local communities to take control of their energy future and are at the forefront of developing innovative approaches that will further help the transition to an energy system that is not dependent upon fossil fuels. However, there are currently big challenges facing these organisations as we move into a subsidy free environment. By making community energy organisations eligible for SITR the government could reduce the cost of capital for these organisations, thus helping them to develop business models that are sustainable and continue to deliver the benefits of community ownership and increased renewable energy capacity, something that is in all of our interests. 

Investing into community energy projects is a great way for individuals to take positive action to try and limit global temperature rises to 1.5°C and thus avoid the worst case scenarios described in the IPCC report. At Ethex we have a long track record of providing opportunities to invest into these projects. If you sign up to our newsletter we will keep you informed of when these types of offer come onto the Ethex platform.

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