The government reduced the incentives for investments into renewable energy in the previous Budget when it excluded solar and wind power from Enterprise Investment Schemes (EISs).
Advisers and their clients, however, still have the option of investing through an EIS in hydroelectric and anaerobic digestion (AD). The former relates to the generation of power through flowing water, while the latter harnesses organic waste to produce renewable power, biofertiliser and water.
In spite of the curbed incentives, investors can still benefit from the government-backed Feed-In Tariffs (Fits) that guarantee unit prices for renewable energy produced for the next 20 years on an RPI-linked basis.
Given the continued availability of these incentives, what are the pros and cons for advisers and their clients to invest through EISs and help the government meet its target of generating 20 per cent of the country’s energy demand from renewable sources by 2020?
The Scottish referendum on independence did pose a political threat to investing in hydro through an EIS. Many of the viable hydro sites are north of the border, so a ‘Yes’ vote would have rendered these as foreign investments virtually overnight, with no clarity on the future of the Fit subsidies. The ‘No’ majority vote now means such issues are irrelevant.
So given the tax benefits and government-backed subsidies, should advisers take a closer look at hydro and AD as EIS investments for their clients?
Advisers are likely to be better informed about the investment attractions offered by wind and solar energy. There is a tendency to lump all renewables together and assume they all come with similar levels of risks, but there are several advantages and downsides to each type.
Hydroelectricity
Small hydro facilities offer good levels of return, are less contentious with local planners and the technology used is reliable and proven. Rainfall is predictable using data going back decades. Ongoing operating costs are low but construction of hydro facilities is a lengthy and expensive process.
Proximity to the local electricity grid is an issue to some degree for all renewable energy projects, but for hydro this is more acute given the limited availability of viable rivers in the UK.
Anaerobic digestion can offer high levels of return and the ability to construct larger value facilities. Whereas wind, solar and hydro have a fixed cost base, AD is hampered by a proportionally higher degree of variable input costs because of the need to employ staff to operate the plant and the expense of purchasing the feed stock, which is often a cultivated crop, the availability of which may be affected by weather conditions or disease.
When it comes to solar energy, ground-mounted and rooftop solar power units benefit from being relatively quick and easy to build. They are also scalable and the sources of energy on which they rely is largely predictable, leading to a reliable energy output. But wind turbines are often contentious with planners, which limits the available sites.
How do hydro and AD compare with other investments that qualify for EIS? They are both asset-backed investments, with predictable cashflows, of which the majority will come from government-backed, inflation-linked subsidies. Generalist EIS investments will be made into third-party businesses that have a variety of different business models.
The returns on hydro and AD investments tend to be more conservative than those available from other underlying investments in generalist schemes, but are also quite reliable.
The exit strategy remains the same for renewables as with other investments, namely a trade sale of the assets or company to a yield-seeking investor or fund, three to four years after the EIS has been trading.
The political support is likely to continue for all forms of renewables until government targets are met. Whether new hydro and AD continue to be EIS-qualifying investments will depend on the rate of development of new assets.
There has, however, been a steadily growing market for EISs as the tax breaks are generous. Advisers just need to properly assess the underlying investments and make sure they match their clients’ appetites for risks.
Stephen Daniels is head of tax products at Time Investments
