What are the risks?
As with any kind of investing or lending, there are risks associated with putting your money into renewable energy projects.
How risky a project is will depend on the type of product you choose.
Peer-to-peer loans, equity stakes in renewable energy developers, debentures, bonds, funds and community share raises all carry different risks. Risks can also vary based on the type of asset, ie. whether it is solar, wind, hydro or something else; how the returns are generated and the stage of construction. The below are general risks. You should always read the offer document for specific risks before investing.
Risk 1: You might not get back all of your original capital
The company you are investing in could go bust, or the investment the developer planned to make might not perform as well as expected and investors might not receive some or any of their capital back, let alone make a profit. This is the biggest risk and is the reason you should not invest more than you can afford to lose. Diversification is the best way to manage risk – this means splitting your investment across more than one project and risk profile.
The majority of loans or investments listed on Trillion Fund are not covered by the Financial Services Compensation Scheme, and every offer is different – so you should read each individual offer document in full and not assume one product is like another.
Risk 2: Liquidity
Check the length of the term of the product you want to invest in and check whether it is tradeable.
Some investments will pay back your profit in the form of a quarterly or half-yearly dividend or interest and may also pay back some of your capital over the term, reducing the risk that you will not get it back at the end.
If you are taking part in a peer-to-peer loan or crowdfund, it is unlikely that you will be able to get out of the investment before the end of the term, unless you can find a buyer. There may be a secondary market for loans, but you should be prepared to accept that you might not find a buyer. Ensure that you can afford to have the amount of money you plan to invest tied up for the term, whether that is three or 20 years.
If you are buying shares in a listed vehicle, liquidity is not likely to be a problem as these shares are traded on the stock market. However, it may be harder to sell shares in a community fund raise, even if the product restrictions allow you to do so, because there is unlikely to be a big secondary market for the shares. You may therefore have to find your own buyer.
Retail bonds are generally not tradeable and must be held until the end of the term. Terms for retail bonds are typically three or four years. With these company bonds, the risk is a corporate risk and the performance of the investment depends on the company meeting its overall revenue targets, not necessarily just the targets for the projects.
Risk 3: Returns might not meet target
Returns are not guaranteed. Always check whether the interest or dividend you receive is fixed or variable. Returns are predicted based upon the amount of revenue the developer has calculated it will receive from the energy generated by the project, or from the company’s other activities, if returns are not linked just to project revenue, but to overall performance. Both electricity prices and subsidies are variable. Both tend to go up, but this is not a given – subsidies are inflation-linked, so would fall if inflation did. Fixed interest products usually have a cash buffer so that the rate can be fixed despite revenue and cost variability.
Risk 4: Construction risk
Check whether you are investing in a project/ projects that are pre or post-construction. Pre-construction raises are more risky because things could go wrong with the installation that make the technology less efficient than predicted, or the forecast for energy generation based on wind speed or solar radiation, for example, could prove to be inaccurate. If a project doesn’t yet have planning, there is a risk that it will not receive approval. The project might simply incur unforeseen costs which knock returns off course. It might not be installed in time to meet the deadline for the subsidy threshold it was hoping to attract.
Community fund raises tend to be pre-construction as the whole point of these is to get a project off the ground. However, the returns usually reflect the higher risk profile involved with a pre-construction raise.
Risk 5: Policy risk
The Government is broadly supportive of the growth of renewable energy and the UK is seen as a relatively stable policy environment by developers.
This is important because part of the returns from renewable energy projects come from the subsidy that developers receive in payment for generating clean energy instead of dirty (the rest of the revenue comes from electricity prices). If the Government changes the rate of subsidy it pays for future installations, this should not affect the project you are investing in as long as the project was installed before the deadline. There is a slight risk that the Government could make retrospective changes to the subsidy regime that reduce the subsidy payments projects are already receiving or have been promised, however this is considered a minor risk, partly because in 2012, the High Court ruled that retrospective cuts to the feed-in tariff are unlawful. It would be very difficult for the Government to renege on policies such as the decarbonisation target, as these are backed by EU law.
A note on community share offers:
Where a project is listed as a community share offer, this means it is a Registered Society (previously known as Industrial Provident Society). As such it is more than just an investment offer. By joining, you are becoming part of a community that has a broader objective than just maximising returns for investors.
We will only list these societies where they have registered with the Financial Conduct Authority and because they are exempt from Financial Promotion rules participants should understand that they cannot rely on Trillion Fund or any other authorised firm having carried out any due diligence on the risks or returns stated in the offer.