Investing in a Welsh Wind Turbine
I want to own a share in a Wind Turbine in South Wales, but I can’t get the figures to add up?
It was such great news to get in my inbox that Ripple Energy would be offering retail customers the opportunity to be shareholders in a renewable energy project in Wales. The agreement is simple you pay to become a shareholder in the co-operative (the proportion of shares you get are based on your electricity consumption), then the returns are from savings you get in your electricity bill from the wind turbine generating.
This is a great idea for two reasons:
- Gives retail customers a tangible investment in renewables, over say switching to a provider that is 100% renewables.
- There is an opportunity for those unable to get solar panels to invest directly in renewable projects.
What are the potential returns?
I read through the prospectus and the project seems to be a good one in South Wales with planning permission ready. The financial returns for “investors” look okay on the face of it (see the 20 Year Return table from section 11: The Shares below). The Central P75 estimate from the 20 year returns table is 3.2% (there is no discount for cost of capital).
Are these returns evidenced in the rest of the prospectus? What is the Return on Investment (ROI)?
To check the estimate returns I am using one of the three tables indicating potential savings from different ownership scenarios (part of section 13. Financial Information). To qualify these there are a couple of direct quotes from the prospectus below.
The following tables indicate the potential savings for members buying different numbers of watts (shares equivalent), all based on P75 and UK Gov Central electricity price forecast scenario and costs include the arrangement fee.
It is the intention that each year, 5% of the members’ shares will be withdrawn automatically and capital repaid as part of the savings.
My interpretation of this is that you only get the savings back as a payment, and the capital re-payment is within this. However, the table below contradicts this and seems to indicate you get both the Capital Repayment and Saving cumulatively.
The Central P75 estimate from the 20 year returns table is 3.2% (there is no discount for cost of capital). I put the table above into excel and I can’t get an annualised Return on Investment (ROI) to be 3.2%. Either via taking the mean of the total return percentage or rooting the overall return to find the compound growth rate (to compare to other investments).
I have used three formulas:
- Total Return on Investment (ROI) (%)= (Final Value of Investment — Initial Value of Investment) / Cost of Investment * 100%
- Annualized Return on Investment = [(1 + ROI)^(1/n) — 1] * 100%
- Average Annual Return = ROI / Number of Investment Periods (i.e. Years)
Maybe they were describing the Internal Rate of Return (IRR).
With this failure I wondered whether the prospectus meant Internal Rate of Return (IRR). Essentially, IRR will work out what discount rate would make your Net Present Value (NPV) equal to zero. So if IRR is greater than you cost of capital then you are getting a return on your investment. The IRR I returned for this scenario was 3.55%, which does not match the rate of return Ripple have indicated either.
Not matching their rates of return is hugely frustrating!
Overall, I am frustrated about why I am unable to get my figures to match those of Ripple Energy. I have reached out to them to see if they can explain them to me, but no one has got back to me yet.
My conclusions:
- It hard to repeat the calculations of others, without fully understanding their underlying assumptions and methods of calculation.
- Investing in something where the figures are ambigous should be avoided no matter how cool, or interesting, you think the investment is.
