Managing community funds

Joint ventures

Many community groups are developing projects in partnership with private and commercial organisations. When using the term ‘joint ventures’ in relation to community renewables projects we describe a development which pools the resources of a community group and a business. The majority of examples of community joint ventures are between community groups and landowners or commercial wind developers. JVs usually come about when a developer or landowner approaches the community offering them buy-in to a potential wind or hydro project.

With growing numbers of wind farms and hydro schemes being planned, communities are beginning to receive revenues generated by developments and looking to secure more for their local community in return for supporting the project. Community groups are more likely to be able to secure a greater return and influence on a project through JVs than would normally be available under community benefit payments alone. However, they should also expect a smaller return and much less control than from a wholly-owned community project.

The CARES Loan fund, introduced by the Scottish Government in 2011, expressly encourages JVs and provides development funding to assist in development of these models. This funding has given communities the opportunity to contribute to the pre-development costs of the project and therefore take on a proportion of the risk and ownership of the project. Pre-planning input (effort and finance) in the project by the community group is invaluable and can increase its stakeholding.

A JV may be worth considering if your community group does not have the capacity to take forward a renewable energy project on its own, but wishes to engage in a project’s development and have an influence on its development, and entitlement to a worthwhile portion of its revenue. The other party may bring in finance, skills and experience that may not exist or be available in your community. JV partners may also source the risk funding for the pre-development stages and capital finance, thereby reducing the financial requirement from the community.

JVs may provide the community with some control in determining the location and type of development and gain detailed project development knowledge which is likely to be of use for further projects. Community groups typically are the minority partner in a JV and therefore have less control over the project than the private partner.

Current examples of community renewable energy JVs in Scotland usually take the form of one of the three following models:

Joint venture company

Most commonly with JVs, the community and its partner set up a new company limited by shares to take forward the renewables project. The wind farm itself is owned and run by the new company and usually takes the form of a Limited Liability Partnership (LLP).

Community groups are typically the minority partner with this model of JV and therefore have less control over the project than the private partner. This is commonly the case as a commercial partner has often already begun the project before involving the community, and sees this as the least complex model for involving the ommunity while retaining control of the project.

The level of shareholding is down to negotiation and evaluating what each partner can bring to the table. The degree of involvement and control the community has varies with the partner involved. There is more likely to be an equal relationship with smaller projects (e.g. with a local farmer) than with the larger commercial companies who will expect a controlling share.

In setting up a new company, standard agreements will have to be made on what input each will have to the project, e.g. who will undertake certain tasks relating to development work, the amount of money each will put into the project, how the income from the project will be split and the consequences if the project fails. Profits are distributed to the shareholders after operating costs have been paid. Some examples have more than two shareholders.

Careful thought must be given to the legal status of the community group and whether it has the powers to enter into agreements and to purchase shares. Groups typically establish trading subsidiaries for this purpose, to isolate the main parent group from risk. This type of arrangement will be essential if your community group is a charity. 

Collaboration agreement

With collaboration agreements, the community and JV partner will own separate wind farms, usually with separate land leases and finance, but will share the costs, risk and work involved in developing the wind farm to gain mutual benefit from economies of scale. The parties involved in the development stay as separate legal entities but agree to work together for the purposes of the development and operation of the installation.

These partnerships are, in effect, time-limited JVs, allowing risk-sharing but ultimately separate ownership. The community has shared control of the project during pre-development with eventual complete control of their own wind turbines. However, there may be some benefits in terms of risk sharing and cost saving by retaining the JV through into the operating phase.

Contractual arrangement

A contract is signed between developer and community which details the revenue the community will receive from the wind farm profits (e.g. this could be the profit share of one turbine). With this approach the community does not own a physical asset but receives an income equivalent to owning their own wind turbine(s).

For example, a production sharing agreement is drawn up between an operating company and the community group. In this agreement both the financial arrangement and the responsibilities of both parties are set out. The wind farm operator agrees to allocate a percentage of the gross income from one turbine to the community, minus the financing and operating costs for a single turbine. The community group therefore does not have ownership of a physical asset, but receives an income equivalent to that from a turbine or turbines. The legal agreement commits the operators of the wind farm to delivering the actual revenues generated by the turbine to the local trust for the lifetime of the wind farm.

To set this sort of arrangement up the community group will either need to source money to invest in the project or, if possible, borrow from their JV partner.

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