Is debt a dirty word?

Published on December 13, 2013 in Blog, Energy, Finance with 2 Comments
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Very interesting question posed in today’s guest blog from Alex Germanis of Pure Leapfrog….

 

In the subsequent fallout from the war on Wonga, has debt once again become the bad guy? There certainly are unpalatable consequences to bad debt, yet throughout human history we have used debt, whether in barter-based economies or today’s complex financial markets.

 

Debt can be utilised in a variety of ways, enabling social good as much as allowing the criminally bent to prey on innocent victims. For every dodgy sub-prime mortgage, countless others allowed people to own the roof over their heads. So from a community energy perspective, does debt need to be a dirty word?

 

Can debt increase ownership of assets?

Quite understandably community groups want to retain ownership of their project and future income streams. Worried this may be diluted by bringing in “outside” money, many groups shy away from sourcing finance outside their communities.

To some extent this has limited the location and demographic of community energy groups.  Many of the pioneering community energy groups are fortunate enough to have a wealthy constituency with which to raise local equity. These groups tend to focus on renewable energy projects that provide a reasonable return to investors. Some groups have also traded shareholders’ financial returns for greater social returns, instead funding fuel poverty work through various energy efficiency measures.

 

Hospital Solar

 

Low interest debt can increase this surplus fund, while providing a reasonable return to attract investors, thus facilitating increased community benefit and perhaps some revenue to fund future projects.

 

Reaching the parts that shares just can’t

A lack of access to debt finance limits the location and potential of community energy. Leaving less privileged areas to large developers, the will of Local Authorities and ever changing government incentives around responsible energy could distance investors. Low interest debt could therefore be used to increase local economic benefit.

Andrew Clarke of the Resilience Centre argues that rather than maximising everyone’s return on investment, it is more beneficial to increase the percentage of Gross Revenues retained within the community. Those concerned that outside debt may reduce community net benefits argue that local equity ensures investment transparency. But is this a false economy, and is the concern that the global economy is inextricably linked to resource extraction a valid one?

 

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Can we subvert this system to create the necessary scale for a fundamentally different energy economy, and is it too purist to worry about this capital ‘food-chain’? Masdar’s funding of the London Array offshore wind project had a heavy dose of UK Green Investment Bank funding behind it. In another context, Pure Leapfrog to date uses a credit facility from Big Society Capital to offer low cost financing to community energy projects. Bath & West Community Energy also leveraged SSE funding for its solar PV project.

 

Rethinking the approach

If we are to bring a community-owned decentralised sustainable energy system into existence we must rethink the finance. Because the financially disadvantaged currently cannot invest in community energy at scale, debt will have to play a part of that future. Not everyone has £20,000 or even £250 to invest upfront and we need to mobilise billions!

How does a loan really play a supporting role? From a community group’s perspective, why put hundreds of volunteer hours into a project when its profits ultimately end up in the hands of wealthy shareholders because of a funding gap? This is where the right debt can play an important role to overcome existing limits of scalability. Far from hurting a project, low interest debt can boost financial returns and help strengthen its social and economic benefit to the community.

 

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Debt can be used to expand an existing asset base without diluting ownership. For example, look at New Sandfields Aberavon Afan in Wales, a community based regeneration organisation that provides a range of support to unemployed people. The refinancing of their existing installations allowed the group to install 35kW on a community employment academy building. This will reduce the running costs of the centre and any income surplus will be used to fund the centre’s support services.

 

Scalability

In the long term mainstream finance will help the sector to achieve the scale required, but the development process needs to be stabilised by standardising documents and providing support to new groups. To have any chance of meeting our carbon reduction targets and making a dent on fuel poverty, we must use debt to scale up. Undoubtedly we need to rethink how we can mobilise the necessary funding

 

Credits: All images courtesy of Pure Leapfrog

 

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  1. Low interest debt can be very useful, for sure. But “barter-based economies” never actually existed according to David Graeber’s ‘Debt: The First 5,000 Years’. And you don’t need £250 to invest in renewable energy, you can invest via Abundance for as little as £5 :)

  2. Tom Danby says:

    The interest charged, whether low or not, is not the issue. It is the source of the reserves behind the loan. Banks and other financial institutions can legally lend far more than they hold in reserves ( up to 90% more in some countries ), and this debt is a claim on the real world’s ability to generate wealth in the future.

    In other words, the loan offered by a bank is a phantom until you take it up, and then it becomes your real future potential wealth – but owned by the bank.

    Debt to fund community projects should come from real reserves, actual savings of cash, already earned superannuation funds, or at worst, government issued bonds, but never from banks unless from 100% declared cash reserves.

    The real debt building up in the environment – the degraded soil and water, the chemical residues in the food chain – is quite enough to reduce our future wealth and standard of living, without giving away more to the imaginary debt of a “standard” bank loan.

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