Update on Donich Hydro Finance from Trust AGM

Mar 28th, 2016

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Update on Donich Hydro Finance from Trust AGM

These notes were taken at the Loch Goil Trust AGM meeting which occurred on 16th March 2016 by an attendee member. We did not publish them until now as they were still subject to contract. We have asked the Trust whether or not the matter is now completely finalized.

“At the recent Lochgoilhead trust AGM we were able to hear details of the proposed community investment in the Donich Hydro scheme from Pete Clarke. At the time of the meeting, the Trust and the company set up to manage the investment (Loch Goil Energy Limited), were waiting for the legal formalities to be completed, with this expected to be finalized by the 24th of March (this was referred to as a “Drop dead date” due to the involvement of the Scottish Government and the upcoming Scottish election “purdah” period). Notes below were taken during the meeting, any corrections welcome as they were transcribed whilst listening 🙂

Pete described the lengthy process which had been undertaken to secure the opportunity to invest for the community. Initially the investment was reviewed by the trust’s financial advisers (Scott Moncrieff) and it was concluded that the rate and risk of the investment made it impossible to complete the loan deal (this was based on a loan of ~£733,000 with a 7.5% interest rate, repayable over a 10 year period, and based on a load factor for the hydro of 29.61% as provided by Hydroplan).

At this point the directors of Loch Goil Energy looked to see if it was possible to negotiate a better deal which would make it possible for the community to invest. Pete noted that the Scottish Government were keen for community investment in renewable schemes to go ahead, and up to this point none of these deals had been completed due to the commercial investments not adding up.

As the result of these negotiations what has been constructed is an “imaginative scheme” whereby the Renewable Energy Investment Fund (REIF) will purchase the 20% share of the Donich Hydro from Broadlands and will then assign these shares to Loch Goil Energy, although they will only be fully owned by the company once the loan has been repaid.

The terms of the loan were improved from the original such that it will now be repayable over the course of 15 years and have an interest rate of 5%. Additionally the forestry commission have agreed to lower their rent on the scheme from 9.5% to 6.5% to also improve the financials of the scheme itself, making the investment more viable.

There are some conditions relating to this investment. Notably the Trust and Loch Goil Energy will have to sign up to a monitoring agreement with the Scottish Government to ensure that the funds from the investment are used for the community’s benefit.

Whilst at this point the final approach for managing the investment income has not been agreed, there is a proposal that a committee should carry out this work, featuring a representative from the Community Council, the Lochgoilhead Community Trust, the Carrick Community Trust, Argyll & Bute Council and someone from either the Forestry Commission or Broadlands Energy. This proposal was based on structures used by other community renewable energy investment schemes.

In terms of the income from the scheme for the community there will be two sources. The community benefit payment, which is payable regardless of whether the loan is completed or not, is £6500/year (index linked) for 40 years.

The income from the investment will depend on the exact load factor of the hydro scheme, but as described at the meeting, the assumption is that it will initially pay in the region of £10,000 to £15,000 per year (for the first 10 years) and this will increase in later years as the loan is repaid. A total figure over 20 years of £847,000 was quoted representing an average of £42,350 per year. These numbers are considerably lower than originally anticipated by the trust (at the 2015 AGM a figure of £100,000 per annum of which £50,000 per annum would be available during the loan repayment period was mentioned and in previous presentations to the Lochgoilhead Community Council a figure of £65,000-£80,000 per year for a 10% share of the scheme was quoted after loan repayment)

There are two key dates in relation to this. The first is, as mentioned before, the 24th of March by which time the loan agreement must be concluded and the second is mid-September 2016 which is the date that the scheme must be producing electricity in order to take advantage of it’s current Feed In Tariff rate. If that date is missed by the developer, the rate will drop substantially and it will render the community investment impractical again. Pete noted that the developer has accelerated its construction work in light of this.

The Cormonachan Hydro scheme was also mentioned as being “on ice” until 2020 when the relevant electricity infrastructure would be in place. However, unless the reduction in Feed In Tariffs is reversed by a future government, it seems unlikely to me that this will become financially viable in the future.”

The only comments I have on this is that:
a) I am glad that the community is going to receive some benefit from this scheme, as the impact to the environment is now irreversible, but that the amounts to be paid even in a best case scenario are very, very far from those presented in earlier meetings.
b) It is a shame that all this could not have been communicated to the community in an open and honest way much earlier in the proceedings.

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