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What measures up as the ‘new solar’ in the EIS world?

Tailored to fit

Aside from the thunderbolt of pension flexibility, this year’s Budget also signalled the end for new enterprise investment schemes and venture capital trusts to invest in solar projects.

The Government felt that companies already benefiting from Renewable Obligations Certificates or Renewable Heat Incentive subsidies should not also be eligible for the tax reliefs that come with EISs and VCTs. The combination of government subsidies and these tax reliefs had seen solar schemes become extremely popular among investors, attracting vast sums of money.

Eventually, however, solar became difficult to square with the spirit of the EIS and VCT, particularly when big solar farms, which attracted criticism for ruining the countryside, were benefiting from the subsidies. The Government solved the problem through the Finance Act 2014, leaving a solar-shaped gap for low-risk options in what is generally a high-risk area of investment.

Can other renewable energy sources fill this void or would investors looking for a relatively low-risk EIS or VCT be better off elsewhere?

Anaerobic digestion and hydroelectricity are the main alternatives to solar in the renewable energy sector. Anaerobic digestion is the recycling of organic waste to produce renewable energy and biofertiliser. Organic waste is broken down naturally by bacteria in a sealed, heated environment where there is little to no oxygen. The end result is a combination of methane and carbon dioxide, called biogas, which can be used to generate electricity or heat, or to power vehicles.

Hydroelectricity generates electricity from moving water such as rivers and streams. The force of flowing or falling water, which is often held at a dam, is used to turn turbines linked to generators that convert the mechanical energy into electricity.

Many EIS providers that were active in the solar market see these renewable energy sources as the ‘new solar’ because they produce power that can also be sold to the UK National Grid.

Oxford Capital private clients manager Simon Ruthers says that, while solar power was the preferred investment for the group’s Infrastructure EIS, other renewable energy sources produced by different technologies share the same investment characteristics.

“They are asset-backed; they deliver a predictable income stream and income is index-linked, which preserves the value going forward,” he says.

Octopus business line manager for EIS John Thorpe sees parallels between anaerobic digestion now and solar back in 2010/11. Critics of anaerobic digestion question whether small-scale operations are economically viable and point out that the bigger the plant, the more land it will need. But Thorpe feels that talk about anaerobic digestion being expensive is a red herring.

“It is more expensive than solar but in terms of the cost line, not the revenue line. What typically happens in these markets is that government incentives drive growth in the sector and when that sector is of scale costs come down. We looked at hydroelectricity but we don’t feel it is as scalable as something like anaerobic digestion,” he says.

Hydroelectricity has problems such as limited reservoirs for hydroelectric power plants and the environmental impact, with dam building affecting fish and wildlife. However, Ruthers says it is supported by proven technology where there is a demand in the marketplace.

Prydis Wealth director James Priday believes that any successor of solar power needs to be asset-backed and qualify for some sort of government feed-in tariff.

“Hydroelectricity doesn’t benefit from Renewable Obligations Certificates but it still benefits form a feed-in,” he says.

Priday has a negative bias towards anaerobic digestion: “People can argue against me but its relatively unproven. There are too many things that can go wrong, which is not the case with solar,” he says.

Elsewhere, film and television has captured the imagination of some investors. The film sector can be viewed as high risk and advisers may be wary because it has been plagued by scams and partnership schemes deemed by HMRC as aggressive tax avoidance schemes.

But Nyman Libson Paul partner and managing director of the Goldfinch Picture EISs Kirsty Bell says film EISs can produce reliable low-risk returns. They do, however, need to be well structured, with key risks mitigated through various means, such as pre-sales agreements with distributors, insurance to cover a proportion of the film’s pre-sales, working only with experienced and trusted third parties and focusing only on projects which have commercial appealed and controlled costs.

“When speaking to IFAs and individuals, many saw the negative press and film became a dirty word. But the underlying structure of the investment is the most important thing. There is a myth that the investor is last in the recovery waterfall but the sales advance is the last money in and the first out,” says Bell.

“If we get it completely wrong, investors’ capital is covered by an insurance policy paying out 70p in the pound and 30 per cent EIS tax relief.”

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  1. Warrick@Rockpool Investments 4th December 2014 at 5:27 pm

    Worth checking out the Chancellors Autumn statement. Renewable energy generation using anaerobic digestion and hydro will no longer be a fit for EIS investments made after 5 April 2015. However there was some good news in the Autumn statement for EIS investors – see changes to Entrepreneurs Relief and quicker tax claims: http://www.rockpool.uk.com/autumn-statement-helps-eis-investors/.

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