This article was first published in the print edition of Utility Week.
There is a quiet revolution taking place throughout the United Kingdom, a power revolution. The Anaerobic Digestion revolution.
The benefits from AD are clear, at least that's if you're in the industry, but what if you're an outsider? What will the development of an AD plant mean for your life, for your community? What if the development of a new AD plant was driven by your community, designed and built to serve the community, its people, its enterprises? Never has this been more relevant than in the light of the Government's delay to a decision on Hinkley Point C. Local communities may want to consider the benefits of taking energy planning and security into their own hands. To turn this vision into a reality, planning and preparation is the key. This article explores the benefits of AD for local communities and some of the key legal considerations that must go into your AD business plan.
Selling the benefits of AD
For local communities, AD has a great story to tell, bringing investment to the local economy in terms of jobs, revenue, power supply, as a means of waste disposal and ecologically, by providing fertilizer to be used in local farm land. There are, as with any commercial development, drawbacks and environmental issues, many of which can be negated by careful planning. Where unavoidable, much can be done to prepare and engage communities with timely and honest information.
One approach is to establish a Community Interest Company ("CIC"), a type of limited company. CICs are designed for social enterprises that want to use their profits and assets for community benefits. CICs must have an 'asset lock' to ensure the company's assets are not used to benefit private shareholders, giving the community peace of mind that they will receive the benefits of the project over the long term.
Writing your AD business plan
If there is one key word, it's "certainty". Your business plan must deliver a clear, well-reasoned and achievable vision for your project. Not everything will go to plan, but the more work that's done in the initial stages, the more likely you are to succeed.
Your business plan should consider five core elements: structure, options, viability, contracts and the financial model.
- Structure: this is your chance to set out your vision, who will be involved, who will “own” the plant and how you intend to operate the plant. If you've already identified a contractor, ask them how to best exploit the advantages of their technology.
- Options: If you're going out to the market, you need to consider how you want the plant to be funded, how you will reward your investors and how they will be protected. Many plants are funded by a mix of debt and equity finance, but the rise in micro-financing should not be overlooked. Small scale plants, those with less than a 100kW output will be far less capital intensive and lower risk. You must demonstrate to any investor(s) that you understand the strengths and weaknesses of the project and what can be done to mitigate any risks (which should include the impact of governmental reviews on tariff availability).
- Viability: A viable project needs, as a minimum, a grid connection agreement, planning permission, environmental permit, 'option for lease' and a long term, stable and affordable supply of feedstock. Planning permission and environmental permits often come with restrictions and conditions, such as permitted vehicle movements, that will change the way the plant operates and how profitable it will be. It's important to demonstrate you have taken any restrictions or conditions into account in your financial model.
- Contracts: The design, construction, operation and feedstock agreements you enter into will determine how the plant develops and how much risk the project will be exposed to. The more you can understand these agreements and what impact that will have on the financial model, the better. You may not be entering into any agreement before submitting your business plan, but you should have agreed and signed 'heads of terms' with the significant contractors. These heads of terms will be the foundation of your contracts (and financial projections), so it's important you can work within those terms and the cost. Changing your mind later may not be possible or attractive.
- Financial Model: The financial model needs to set out not only your projected earnings (including the tariffs available which will vary depending on size and configuration of the installation) and expenses, but a thorough 'stress-test' against variable economic factors, such as a rise in feedstock prices. An investor will need to know how safe their investment is, and how the plant would stand up to a change in conditions. This is the time to ask some tough questions and give some very honest answers.
AD can be an attractive and affordable way to bring investment, engagement and energy security to local economies. AD plants are not everyone's cup of tea, but if you do your homework and provide honest and timely information you may yet win round the most vocal of critics.