Abundance: A £4 Million Lesson In The Risks Of Green-Energy Loans
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The collapse of a green-energy project that was crowdfunded to the tune of £3.9 million gives valuable lessons to individuals funding new and complicated infrastructure products through peer-to-peer lending sites.
Here's what happened followed by 10 lessons for lenders in future.
What was the loan for?
The project was for a new business to borrow money from lenders through P2P lending site Abundance to buy and install the machinery needed to turn renewable wood chips into heat and electricity.
This energy would mostly be sold to other businesses on the same business estate.
The borrowers said the project was viable due to several generous government subsidies for renewable energy that would have made up one-third of the borrower's income.
Individuals using Abundance funded the project through a £3.9 million debenture (which in this case works exactly like many). The loan paid an interest rate of 12% for one year till January 2018.
After the installation was up-and-running, the borrower was going to repay this debenture by taking out a new debenture through Abundance lasting 17-19 years and paying 8% – a lower rate to reflect the lower risks at that stage of the project.
Lenders received £468,000 back from the borrower in the first 12 months, which was the 12% interest they were owed. But their actual loans are still outstanding and no further interest has been received since January 2018.
A source tells us that the average amount lent was £4,348. As little as £5 can be lent through Abundance, but we know some lenders have lent more than they should have in this debenture.
What has gone wrong?
Six months after the debenture should have been repaid, and after 18 months of deliberations, energy regulator Ofgem has turned the project down for one of the key subsidies. The subsidy is called the Renewable Heat Incentive (RHI) scheme.
The rejection completely busts the viability of the whole project.
Ofgem officially rejected the application because it thinks the project has been set up primarily to increase subsidy payments, which is a view rejected by Abundance and the borrower.
Ofgem has so far provided almost no details as to why it has reached that conclusion and the borrower's lawyer is challenging the level of detail as insufficient under public law.
The borrower points out that Ofgem's attitude shifted markedly towards the end of the application process, after the regulator came under intense pressure from the National Audit Office and others for expensive subsidy schemes that offer poor value-for-money to the taxpayer.
The borrower goes on to argue what seems to be a strong case that Ofgem has completely overstepped its authority in rejecting the application. However, only once the subsidy decision is overturned, or after Ofgem reveals its full side of the story, will we be able to get a stronger picture of where blame lies.
What now for Abundance lenders?
Without the subsidy, the project is currently dead in the water and the borrower is not able to operate.
Cash is low for fighting a legal battle potentially on multiple fronts, unless the borrower can persuade lenders that the business can be resurrected if they fork out additional cash.
If the borrower is unable to revive itself and is forced to sell what it possesses to reimburse lenders, it is just the energy installations that might have any value.
The units initially cost lenders over £2.5 million of their £3.9 million, but if a new buyer makes the significant expense of de-installing and moving the units, the new owner will not then be allowed to claim any major subsidies on those second-hand units.
The units are therefore very unattractive for many other businesses to buy, which will lower the price.
I hope that readers of 4thWay already know that the Financial Services Compensation Scheme will not help you if your investments (including P2P loans) turn out badly.
Lenders should be prepared for the possibility that they lose all or most of their money on this £3.9 million loan. And hope for a better outcome.
Could Abundance or the borrower have foreseen this?
With the information available, both the borrower and Abundance (and without a doubt the lenders) appear to deserve our sympathy.
It must have been a real shock to the borrowers when they received the rejection letter after their prior experience in installations, after consulting experts, and after all the hard work they put in to get the conditions right for approval to be granted.
There is a lot that could have made it difficult for the borrower to know what the final outcome of its subsidy application would be, most notably:
- Ofgem simply makes the wrong decision. As a department offering taxpayer-funded subsidies, it is obvious it could at any time come under intense pressure to limit the subsidies in a way that is contrary to its guidelines and to regulations. Or it might simply just make a mistake.
- Ofgem's guidance, forms and regulations for getting the subsidies are extremely complicated, often ambiguous, and very lengthy, totalling over 500 pages.
- The borrower is in a patchwork of intertwined companies and local businesses with different relationships that, I speculate, could have impacted Ofgem's decision.
All that said, I wonder whether it really should take hindsight for a business going through the subsidy process to know that the above three points are significant risks.
Could lenders have been told about these risks in advance?
Reading the risk section of the borrower's offer document, which outlined the case for people to lend in this debenture, I personally don't think that those three risks were stated specifically and forcefully enough.
You have to wade through 10,000 words, or 26 pages, before you get to any meaningful mention of any of the risks, while being told that one of the project founders is “well versed” in the intricacies of government subsidies.
Throughout the document, reassuring statements are made about why the borrower will get the RHI subsidy, with no ifs or buts:
“The heat output from our CHP units is generated using biogas, which allows us to claim the biogas RHI.”
“The full time operation also gives predictable subsidy income which comes from the RHI and ROCs.”
“The heat generated by our boilers will earn money through the medium commercial biomass RHI.”
“All producers and suppliers will be required to be a member of the Biomass Suppliers List which is a list of registered suppliers of biomass wood fuel that meet the eligibility requirements of the RHI. It allows RHI participants to easily demonstrate to Ofgem that the fuel they are using in their biomass boilers meets the RHI sustainability criteria required to claim their RHI payments.”
“The heat must be used for an eligible purpose meaning heating water, heating a space or ‘carrying out a process’. The use of heat to dry woodchip qualifies as an eligible purpose.”
“Our biomass boilers will run on wood chip, which fulfils the necessary criteria.”
“The units come complete with all the required RHI and ROC metering pre-installed as standard.”
“B&B Biofuels will apply to become registered with the Biomass Suppliers List (BSL) which is a list of wood fuel suppliers that have proven their fuel meets the eligibility requirements for the Renewable Heat Incentive (RHI) scheme. It allows RHI participants to easily demonstrate to Ofgem that the fuel they are using in their biomass boilers meets the RHI sustainability criteria required to claim their RHI payments.”
10 lessons for lenders in green energy loans
There's a reason why projects of this kind pay high interest rates: the risks are not low.
Yet, when you're talking about lovely green projects supported by responsible local businesses and heavily subsidised by the government, it can be easy for lenders to lose sight of that.
Here are the key lessons for lenders in future:
- Green-energy projects sometimes involve funding a whole new business from scratch. This is very different to lending to an established, profitable business. You might want to select loans to established projects that are already producing and selling energy.
- Although the loans are apparently secured on valuable units that can be resold to recover losses, the resale value might be closer to zero than the initial purchase price. Lenders can still lose all or most of their money.
- Complicated projects like these could go wrong from a wide variety of potential weak spots: from the people running it, to the business plan, to carrying out the plan, to fights with regulators. So lend less money in each loan.
- Getting subsidies can go wrong even when the borrower believes it's an open-and-shut case. Factor that into your estimates when judging what interest rate is appropriate.
- If subsidy risk bothers you, you can massively reduce that risk by only lending against energy projects where the subsidies have already been approved.
- Long offer documents are primarily for educational purposes. It would take the average reader thousands of hours to read enough Abundance offer documents of this size to select individual loans properly. But by going through a selection of them, you can better understand the sorts of loans offered by the P2P lending site and find simple criteria for selecting loans (such as pre-existing approval for subsidies).
- Watch how the P2P lending site respond to loans that go wrong. Abundance has gone above-and-beyond in terms of communicating to lenders in this loan (some of whom we have to thank for sending us the information in this article). Abundance has learned from this project and, for the time being, it has decided not to allow debentures based on subsidies, unless approval has already been granted.
- The Financial Services Compensation Scheme will not help you for failed investments (including loans).
- Borrowers, P2P lending sites and lenders sometimes make mistakes; learn to be comfortable with those hits to your overall lending results.
- You take responsibility for your overall lending portfolio. It is ultimately down to us individual lenders to contain our risks and we cannot expect that all borrowers, the P2P lending sites, or others such as Ofgem, make no mistakes.
To learn how to lower your risks and increase your rewards, read our unique lending guides.
Abundance has not provided 4thWay with the huge amount of information necessary to assess the risks or to populate our detailed comparison tables with its information.
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