The incumbent energy system is built on vertically integrated structures and limited competition, particularly in networks, with saturated customer coverage between the retailers. Power generators remain heavily reliant on conventional fossil fuels that require sophisticated infrastructure to travel from the coal valleys of the source to the millions of homes connected across the National Energy Market.
So what happens when we re-imagine what this system could look like? What if it were more localised, agile, dynamic and accessible? What if we could fit the right type of energy supply to the climatic conditions of a town and the needs of local industry? And what if we could “purpose fit” our business models and capital raising mechanisms to the needs, values and ethics of community members?
RE-IMAGINING ENERGY FOR THE PEOPLE
With the costs of renewables becoming increasingly accessible, a growing number of communities across Australia are seizing the opportunity for renewable energy development “in their own backyard”. In the face of a challenging regulatory environment and the complicated political landscape overshadowing the industry, these communities are leading the way for our renewables future — and reaping the economic and environmental benefits along the way.
Hepburn Wind Farm (pictured above), Australia’s first community-owned wind farm, in Daylesford Victoria, grew from a community meeting in 2004 to the first community-owned wind turbines spinning by 2011.
This is just one example of people working to bring clean energy to their community. At least 16 groups across Australia are generating community-owned solar and wind energy, with more than 60 groups pursuing projects and 70 members of the Coalition for Clean Energy all focused on expanding and developing the sector. Community-driven renewable energy takes time to develop and implement but as success stories and business models are shared, an accessible, active and robust sector can evolve. The cumulative impact of dozens of such stories will transform Australian regions and re-invigorate local economies.
Community renewable energy is the local, human face of energy disruption. It is not just empowering communities but challenging the way we do business, our business models and the way we structure our energy sector as we transition to a decarbonised and distributed energy future.
ADAPTING BUSINESS MODELS TO COMMUNITY NEEDS
At the Clean Energy Summit in July 2016, Norton Rose Fulbright hosted the Community Corner to showcase the diverse array of community-driven and designed projects challenging the energy status quo. Like all local initiatives, there is no one-size-fits-all approach and energy creates an opportunity for groups to experiment with finding the right structure. State governments and local councils have offered a series of grants, such as the NSW Government’s Growing Community Energy grants and the City of Sydney’s Innovation Grants to support groups in their start-up phase. Once models are developed they can be scaled and shared.
Different community groups across Australia have tested three common corporate structures to suit their unique projects and community needs.
Unlisted public company limited by shares
An unlisted public company limited by shares is registered under the Corporations Act 2001 (Cth) (Corporations Act) and incorporated with the Australian Securities and Investments Commission (ASIC). It can have unlimited shareholders and can offer shares to the public. However, in contrast to a listed public company, its shares will not be listed on a stock exchange. This type of company must have at least three directors (two of whom must reside in Australia), and at least one company secretary.
This is a common legal structure for businesses in Australia which want accessibility to the public to become shareholders with limited shareholder liability. They are formed on the principle that the liability of members is limited to the amount (if any) unpaid on shares held. This can suit communities seeking an inclusive approach because share offerings can be made to an unlimited number of shareholders, allowing growth as new projects enter the company’s asset pool.
Sydney Power Renewable Company (SPRC) has one of the highest-profile community energy projects in Australia. In June 2016, 520kW of solar was installed on the newly developed International Convention Centre in Sydney’s Darling Harbour (pictured) and first generation is anticipated at the end of this year. SPRC is currently an unlisted public company limited by shares and is planning a public share offering for capital raising later this year.
Private companies (proprietary limited) are also common for small businesses and can be adapted for community renewable groups, though conversion to public company status may be necessary to support major capital raisings, particularly if there might be more than 50 shareholders. Private companies are simple to establish and have clear governance structures, with a board, managing director or general manager, and secretary.
Private companies, like unlisted public companies, are closely regulated by ASIC and are governed by a combination of common law, statute (mainly the Corporations Act) as well as the terms of the company’s constitution. A private company must have a minimum of one shareholder and can have up to 50 non-employee shareholders, but cannot invite the public to subscribe for shares. However, once above 50 shareholders, the company may be forced to become a public company. This type of company must have at least one director (of whom at least one must reside in Australia).
REPower Shoalhaven is a private company that uses special purpose vehicles to house each investment. Shares are offered for each investment round with a maximum of 20 sophisticated investor shareholders and shares priced according to the amount of funds sought. Since 2014, REPower has connected four projects on the South Coast of NSW, including a dairy farm, a bowling club and various churches.
Benefits of unlisted public companies and private companies include the ease of issuing shares to investors and the limited liability of these shareholders. Directors are responsible under the Corporations Act for stewardship of shareholders’ investments.
Co-operatives are one of the oldest community engaging business models and have their origins in worker-owned industries such as agriculture and textiles. They were established to meet the needs of their members by providing services. All co-operatives are governed by the Co-operatives National Law, which has been adopted by all states besides Queensland and Western Australia. The Co-operatives National Law is enabled by state legislation, creating a competitive disadvantage for groups wanting to work nationally (including share ownership) and requires working state by state with the co-operatives registrar, usually housed in the Department of Fair Trading (or equivalent).
Hepburn Wind, Pingala and Stucco are all trading co-operatives running community renewable energy projects. Hepburn Wind is a co-operative with more than 2,000 members and a Certified B-Corporation. Hepburn raised $9 million in 2011 from its first share offering to members and applicants. Additional project finance was raised through government grants, loans and a debt guarantee from Embark. Through partnering with Red Energy it also now offers Large-scale Generation Certificates (LGCs) to individuals, businesses and organisations as carbon offsets.
Pingala is an incorporated association that created a co-operative as an investment vehicle in May 2016. The co-operative has a board of directors and members join the co-operative by purchasing shares in renewable energy projects. In August 2016 the first Pingala project raised $18,000 for capital in 10 minutes through a raffle process for the 30kW system on Young Henry’s brewery site in Newtown, NSW.
Stucco was first a co-operative and then a community renewable energy project. A student co-operative housing site since 1991, in 2015 a group of students decided to combine solar and storage on a converted warehouse to manage their total energy consumption through an embedded network. The co-operative members are the residents and have played an active role in key decision-making around the design and functionality of the 30kW solar system with a 43.2kWh battery storage system. Capital will be raised through crowd-funding and the project is set to connect in December 2016.
A benefit of co-operatives is the ability to align the objectives of the community to the objectives of the organisation. Unlike a publicly listed company, directors can take into account more than just commercial outcomes. Each shareholder has equal voting rights, despite the size of their share-holding and co-operative members are required to be “active” members. Co-operatives also create the ability to have various classes of shares, based on factors like profit rate, social benefit or location of projects. In this way, projects can be pooled or separated, depending on the needs of the organisation. Renewable energy co-operatives are usually “trading” organisations because energy is sold onto third parties and profit can be distributed amongst members.
Incorporated associations are commonly used for community groups such as sporting or non-profit organisations. They have members and are useful as a functioning body for delivering services, such as running community energy projects. Incorporated associations are governed by state or territory law (for example, the Associations Incorporation Act 2009 (NSW)) and are also managed by the Department of Fair Trading (or equivalent) (unlike unlisted public companies and private companies which are administered by the Australian Securities and Investments Commission).
Pingala is also an incorporated association. The co-operative has a services agreement with the incorporated association to deliver all the work for the operational side of the organisation. This includes finding host sites, attracting grants, managing finances and running communications and promotions.
Incorporated associations are less attractive as an investment vehicle, because the law does not permit them to distribute profits to members. This can be an advantage for attracting public grants, but creates a limitation for capital raising. Some groups can choose to run the organisational functions through an incorporated association and capital raising for investment through a special purpose vehicle.
The use of a special purpose vehicle also provides an avenue for collaboration on large projects with developers where special purpose vehicles are commonly used in large-scale project financing for renewable projects.
These are merely some of the main investment approaches that can be taken. There is a range of other alternatives such as partnerships, unincorporated joint ventures, trusts and the “collective investment vehicle” structure which will be introduced in Australia from July 1, 2017. The appropriateness of each of these vehicles depends heavily on the ability to raise capital, ease of governance and tax planning.
LEGALLY SOUND AND FINANCIALLY HEALTHY
Community renewable energy groups have a range of legal and finance factors to consider before starting a project and considering their role in the development of the project. These will differ depending on the type of structure that is established.
Community renewable energy groups can play multiple roles as project developer, energy services provider, fund-raiser and retailer. However, delivering a project cannot be pursued in isolation. Contracts will need to be developed with relevant companies such as the local network provider for grid connection, renewables installers and suppliers to fix the system to the site and any relevant landholders, for example if the host site is rented.
Different energy supply arrangements will also need consideration (such as, lease or a power purchase agreement (PPA)). PPAs are a common finance tool because they provide long-term fixed pricing for the host site and a guaranteed rate of return for investors. Sydney Power Renewable Company has entered into a long-term PPA with the International Convention Centre.
Depending on the size of the system and location, a range of approvals or consents may be required from state or local government. For wind farms, these include environmental impact assessments and potentially biodiversity offsetting. For solar, this may mean heritage impact assessments if solar panels need to be installed on heritage buildings.
At the time of capital raising, share offer and disclosure documents may need to be provided to prospective investors to create transparency around risks and investment particulars. Examples of disclosure documents are available through ASIC (for public and private companies) and the Department of Fair Trading (for co-operatives). However these documents need to be purpose-fit to include the details of your project and business model to assist investors to make the right business decisions.
Legal services professionals can lead the way in demystifying complex legal documents to create standard structures and tools that are accessible to community energy organisations. A legal toolkit that is custom built for community renewable energy and publicly available can assist groups to navigate the legal framework and limit cost barriers. Professional advice may possibly be sought at pro bono rates.
Having a financially sustainable business model is essential for community renewable energy projects. This requires a guaranteed flow of income and managing a good balance sheet.
Income can be generated through lease or PPA fees paid from the customer to the community energy group, membership fees and other services the group may offer. Profit from this revenue can be distributed among shareholders or re-invested back into the company, based on the business model. Common rates of return for the community renewable energy sector are between 4-7% per annum.
Maintaining transparent accounting principles, reporting regularly to governance bodies and complying with the legal rules of the corporate structure are necessary to uphold a high standard for the sector. As a minimum, most boards meet quarterly and expect reports from the project managers on the status and progress of projects.
Getting financial and accounting advice early on can assist groups to learn the skills to manage their own accounts and seek financial services where required. Some professional services companies can provide training for groups to learn simple accounting processes, like Xero. Accountants that specialise in social enterprises or co-operatives can also be useful at the start-up phase.
As more innovative and specialist models are introduced, these key legal and financial factors will have to be nuanced to the project needs. This creates challenges and opportunities for legal and finance professionals to co-ordinate and work together when solving the problems of creative community renewable energy groups, leading to transformation of our energy system over time.
POWERED UP, SHARING AND SCALING
The movement of renewable solutions at a community level is no longer an idea or theory – it is an exciting sector as new models and initiatives are entering the market and big business to mum and dad investors are playing active roles in the shift. With the right legal structure, partnerships and financing, projects can be shared and scaled across Australia to play a crucial role in the inevitable transformation of our energy system. The rapid rate of change and constantly evolving technology means communities that stand still will be left behind.
The more groups mobilise and work together, the more innovative, effective and cheaper the solutions will become. Embedded network models are emerging for residential apartments in Western Australia and NSW. Last year Australia’s first community-owned retailer, Enova, was launched in Northern NSW through crowd-funding. The University of Technology Sydney has a solar power purchase agreement direct with a 200kW solar farm in the Hunter, NSW, for 12% of a building’s annual energy use. UTS is also investigating peer-to-peer trading through local energy networks and councils. Towns like Tyalgum and Uralla in NSW have strategies to get to 100% renewable energy and projects like Huntlee are using the opportunity of greenfields developments to construct completely off-grid communities.
Such ideas and models are just the beginning of a re-imagined economy resilient to environmental, technological and social challenges. As legal professionals, we are seeing an increasing appetite to work with current and emerging community renewable energy groups as they seek to bring new ideas to market and work through partnerships for projects of all sizes in local communities. In this time of great energy change, communities led by people are perfectly placed to lead the charge towards decarbonisation.
Jacqueline Fetchet is a lawyer at Norton Rose Fulbright working in project finance for renewable energy projects. Previously she worked in environmental law and climate change policy for the NSW Government. Jacqui won a Global Voices Scholarship to attend the UNFCCC COP21 climate change conference in Paris in 2015 and is on the Board of Pingala, Sydney’s community energy co-operative.