A new crowdfunding service from Abundance offers investors the chance to cash in on green energy.
Crowdfunding is all the rage at the moment. The idea is that groups of people get together via the web to provide cash for an organisation or business.
Crowdfunding is growing especially fast in the business world, as it means small investors can cut out the traditional middlemen in the City, and invest in young enterprises at a relatively low cost.
Because the businesses are young, many crowdfunding investments are inevitably very high risk. But there are some lower-risk crowdfunding opportunities, and one good place to find them is on the Abundance website.
Abundance was launched this year and enables ordinary people to invest in green energy projects. You can invest as little as £5 in a project and you should then get a fairly predictable return over a period lasting 20 to 25 years. One of the co-founders, Bruce Davis, helped to found Zopa.
Right now, investors can invest in two green enterprises via Abundance. The first enterprise is a wind turbine in the Forest of Dean, the second is a solar energy project in the South Downs. You'll basically be investing in panels placed on residential homes.
How it works
Investors won’t be buying shares in the companies that operate these projects. Instead they’ll be buying a debenture.
A debenture is like an IOU that the lender can then sell to someone else if he wishes. All being well, the owner of a debenture should get back his initial investment plus a regular income over the term of the investment. Typically, that income will be in the 6 to 8% bracket although that number may change for projects in the future.
A debenture is similar to a Government bond such as a gilt. The difference is that with a debenture, the size of the regular payment may fluctuate. With the projects on Abundance, investors will receive a fixed share of profits generated by each project. If those profits fall, investors will receive a lower payment.
Abundance says that the South Downs solar project should deliver an annual return between 6 and 7.8% over the 20-year term. Abundance can make a fairly accurate prediction for future revenues because the Government has provided guarantees for solar energy prices under its Feed-in tariff scheme. The biggest variable for this project is the weather – if there’s less sun, less energy will be generated.
Moving onto wind, Abundance expects an annual return between 6.75% and 8% for the turbine in the Forest of Dean.
There are two main variables for this wind project. Firstly, the amount of wind at the turbine site, and secondly, electricity prices. Most of the electricity will be sold at a price that is guaranteed for the long-term, but around 20% of the electricity will be sold at the prevailing market price.
So roughly speaking, both projects should give you an annual return around the 7% mark.
If you’re wondering about the costs, Abundance will charge a 1.9% annual fee on the value of the debenture. ‘Early bird’ investors can get a 0.3% discount on that charge. This charge doesn’t affect the income figures I cited earlier – the charge was already deducted when the 7% income figures were calculated.
Risk is the other crucial issue and thankfully it’s fairly low. That’s because the energy prices are mostly fixed, and the equipment is insured. What’s more, Abundance is regulated by the FSA, so you can be confident that this isn’t a scam.
Your risk is also reduced by owning a debenture rather than shares. A few weeks ago I wrote about another crowdfunding site called Seedrs. This site enables you to buy shares in young companies where you could potentially make big profits. But you could also lose all your money.
With Abundance, you won’t make big profits, but the risk of you losing all your money is much, much lower.
That said, Abundance is higher risk than a conventional savings account. That’s because it’s not protected by the Financial Services Compensation Scheme (FSCS.) So if things went disastrously wrong, you wouldn’t get any compensation from an external body.
What’s more, Abundance is a very new business, so there may be problems and potential pitfalls that I haven’t spotted or thought of. I guess you could call this ‘start-up risk.’
Selling your debenture
It’s also worth noting that it may not be that easy to cash in your investment early. Abundance won’t be in the business of redeeming investments before the term expires.
So you’ll probably have to use a bulletin board operated by Abundance on its website. Hopefully, it will be a busy board with plenty of potential purchasers and sales will be quick and simple. But that may not happen. The board might be very quiet and you might have to wait some time to find a buyer. We’ll have to wait and see.
I’m also well aware that wind turbines are controversial. Critics argue that turbines are inefficient as well as being a blot on the landscape. Solar panels aren’t universally loved either.
If that’s your view, I guess it doesn’t make sense to invest in any Abundance project!
But if you’re a fan of green energy, you might enjoy the feel-good factor of supporting a green venture as well as getting an attractive return on your cash.
I think the biggest downside is the lack of clarity about how well the sales bulletin board will operate. You might struggle to sell your debenture when you need the money for something else.
So, for now, I’d say that if you like the sound of Abundance’s model, by all means make a modest investment. But make sure it’s modest.
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