At the conclusion of detailed design work the Hexham River Hydro team judges the level of financial risk associated with the project to be too great compared with the forecast level of financial return. See the ‘Home’ page for this announcement.
Throughout the life of the project the core team has performed financial modelling. From the end of the detailed feasibility phase financial modelling has been detailed and taken into account a large number of variables, including:
- Capital cost estimates
- Mix of financing
- Different costs of finance
- Providing different levels of return to different investors
Capital cost to build
The estimated cost to construct the scheme is £1.78m, excluding contingency, risk and VAT. Allowing for these additional factors (contingency & risk at 20% and VAT at further 20% on top) the total potential capital cost is £2.56m.
The estimated cost of construction rose above £2m in the final stages of the detailed design phase. Significant factors are: the ground conditions established from ground investigation works; the delicate condition of the foundations of Hexham Bridge; the condition of the riverbed immediately downstream of Hexham Bridge; and full costing of all fish passage works.
For more information on the capital cost see section 13.1 and Appendix 12 of the detailed design report. Appendix 12 shows a detailed breakdown of the estimated costs.
The income is estimated at £156k in the first full year of operation, based on the energy capture of 602MWh, a feed in tariff (“FIT”) of 19.6p (per kWh) and electricity sale of 5p (per kWh). Income is predicted to rise over the period of operation as both sets of prices are forecast to increase. In the case of the hydro FIT the annual increase is linked to RPI.
For more information on the predicted operating income see section 13.2 of the detailed design report.
The annual cost for the facility in the first full year of operation is estimated to be £17,300.
For more information on the estimated annual maintenance costs see section 13.2 of the detailed design report.
The financial risks break down into:
- Risk that the cost of financing the scheme will be too great for the scheme to make any profit
- Risk that the capital cost of construction might increase further
- Risk that the ongoing operating and maintenance costs would be higher than estimated
- Risk that the income from the scheme is not as great as predicted
1. Cost of finance risk
The money to build the scheme would be raised by a mixture of loan, community shares and (minor) grant funding. A number of informed assumptions in the financial modelling were made based on levels of return and repayment periods that would be required by different funders, which in turn was based on research, including detailed conversations with specific funders and review of community share offers for similar schemes. There is a risk that the actual cost of financing the scheme would be higher than anticipated e.g. if insufficient funds were raised from community share issue and the balance shifted to more reliance on a single loan funder with a loan fully repayable over the first 20 years of the scheme.
2. Capital construction cost risk
The estimated capital cost of construction is still only an estimate at the conclusion of the detailed design work, even though it is now a very detailed and comprehensive estimate. If the project were to proceed there would be a need to go out to tender for construction bids. There is a risk that the bids received might all exceed the estimated cost. (There is, of course, also a possibility that the bids would come under the estimated cost at this stage. Such a potential upside has not been considered.)
Depending on the nature of any construction contract entered into, there might also be further risk of capital cost escalation once work starts in-river i.e. if ground or weather conditions encountered during construction were worse than anticipated based on all known information, including the intrusive ground investigation work already undertaken.
3. Ongoing operating and maintenance costs risk
The nature of these schemes is not to ‘build and let it run itself’. The scheme would require active maintenance in terms of parts, debris clearance, monitoring etc. There is a residual risk that the cost of performing operating and maintenance work might exceed the detailed cost estimates compiled to date.
4. Income risk
With a scheme of this nature there is very little opportunity to increase revenue from the scheme once it has been built. Installing one 100kW screw turbine gives an absolute maximum capacity for generating electricity. Predictions of the flow of water through the river and through the turbine are done with sufficient detail that they are unlikely to under-estimate significantly the amount of electricity the turbine will generate. The only realistic way to generate more income from the same installation is to levy a charge on visitors – something that would not necessarily generate a large amount of revenue and as a matter of principle it was decided not to do this.
It has also been noted that some other community hydro schemes have, in their first few years of operation at least, failed to achieve the predicted levels of energy generation and hence income. Whilst each scheme has local factors impacting this, the risk is present for all schemes.
Hexham River Hydro, an energyshare project made possible by British Gas and supported by Carbon Leapfrog, Cooperative Enterprise Hub, Vattenfall and The Naturesave Trust