And cutting out the middlemen…
Late last year Ecotricity launched a new initiative and, as it turns out, a new product. We dubbed it Ecobonds and it was a runaway success.
We set out to raise £10 million and we actually received some £15 million in applications with another £3 million that didn’t make it in on time. It was a huge success.
We’d been considering launching a bond issue for a year or two. We had two main purposes in mind.
The first was to fill a funding gap that we knew would arrive one day. Our model at Ecotricity is to use customer energy bills to build new sources of Green Energy – something we describe as “turning Bills into Mills” and it’s a model that works very well. When we build a new Green Energy project we use a mixture of debt and equity, typically 80% debt and 20% equity. We fund the 20% equity from our own resources, from the money we make. And we’ve always known the day would come when our project pipeline, those consented and ready to build, would outstrip our ability to self fund the equity part. Creating the Funding Gap.
And this is where the Ecobond idea came in, as a potential way to raise that equity proportion as debt – I think that’s known as Mezzanine Debt – and it comes with a hefty interest rate, typically 13 to 15%. Which would kill most of our projects. We looked at it but couldn’t make it work.
Our second main purpose was to give something back to our customers, many of whom over the years had asked how they might be able to get involved in our work, financially. And we also wanted to give people a way to get involved in the Green Energy revolution (financially) – without having to install stuff on their roof tops. Not everybody wants to do that and not everybody can.
Anyway, that’s the background.
In the summer of 2010 we could see our Funding Gap coming for 2011 and we started to flesh out the idea.
We reached out to customers and non customers via our web site, to get feedback on the concept and its main terms. The clear message we got from that was that five years was too long and £1,000 too big a minimum. So two of the eventual key terms of our Ecobond came out of that – a four year term and £500 minimum. The idea was to make this bond issue as accessible to all as we could. Our customers helped us do that.
At the same time – we were also aware that bank rates for savers were at historical lows; despite the fact that banks were asking very high rates from businesses that they were prepared to lend to. It seems like the incredibly low base lending rate (0.5%) is only relevant to savers (what the banks pay) and not to borrowers, strange that. There are probably something like five percentage points difference, between what a bank pays savers and what it charges borrowers like us. We thought that was a bit of a rip off.
And so our Ecobond became a way to ‘cut out the middlemen’ the banks who, post the credit crunch were paying savers very little, while lending to business for much more. We thought Ecobonds could introduce a little fairness into the financial sector.
And funnily enough, that’s exactly how Ecotricity got started. It was back in 1995, I was trying to get a fair price for a new kind of electricity (the green kind), from windmills – and the big electricity companies just laughed at the idea and refused to pay anything like a fair price; without which building more windmills was looking impossible. But since the electricity market had just been liberalised and anyone could set up an electricity company, the monopoly they had been comfortable with was no longer in place.
Ecotricity was set up to ‘cut out the middlemen’ and go direct to the end user of electricity, to get a fair price.
Ecobonds is a very interesting parallel, 15 years later, it’s a way to cut out the middlemen – a way for savers to lend their money directly to us.
That’s our Ecobond then – a power to the people kind of initiative, a novel way to raise finance, for green progress – and to engage with people and get things done between us. It’s innovative, pragmatic, populist and commercial all at the same time….. 🙂
We launched it as a four year bond, with £500 minimum and a quite generous 7% interest rate – which we boosted to 7.5% for customers.
And it went down a storm.
With £15 million of applications we had a good and bad situation – we had raised the £10 million we needed, but would have to disappoint some people – and give £5 million back (How awful…. 🙂 ).
We spent a week modelling outcomes, to try and strike a balance between prioritising customers (for their years of support to us) and at the same time not massively disappointing all those people who were not customers, but clearly willing to support our work.
We ended up allocating about 70% to customers and 30% to others.
In making that choice we also willingly chose to pay more interest than we needed to (customers getting half a percent more). We were chuffed to do that.
We’ve put the money raised straight to work. First project to be funded this way is our windmill powering a solar panel factory in Wales – nice bit of ‘perpetual motion’ there…. 🙂
And we’ve started work on the UK’s first grid scale Sun Farm – which we gained consent for in December last year. We break ground in a couple of weeks and should be up and running by March.
In total we’ve got 20MW of Wind and Sun projects planned for construction in 2010 – a 40% increase in our capacity – all funded (the gap part anyway) by Ecobonds.
Oh – and I’m off to Number 10 next week to present the Ecobond concept – no really I am… 🙂
It seems that we’ve created a way to speed up the rate at which we can build green energy projects (that the UK so badly needs). Good job too since we have about 150MW in the planning system now and another 100MW goes in this year.
It’s a very exciting outcome and opens the way to a big increase in our work.
Ecobonds are set to become a permanent part of what we do – we now have a financial product to offer with a very Eco outcome, alongside energy.
Ecobond Two is in planning and expected launch end of this summer in readiness to fund our build plans for 2012.
Viva the Financial Revolution……. 🙂