Low Carbon Hub Consolidation Proposal Frequently Asked Questions
We’ve put together some frequently asked questions on the IPS and CIC consolidation.
What is prompting this change?
The Low Carbon Hub CIC and IPS were set up in 2011 and 2012 respectively, working to a common set of Objects as set out in the IPS Rules and the CIC Articles. The split business has worked very well for the overall mission of Low Carbon Hub in its first 10 years, where the IPS was the junior partner focused on developing a portfolio of renewable energy projects and the CIC was focused on delivering community benefit programmes, mainly funded by a series of large grants.
Since 2011/12 a few things have changed:
- Project LEO has allowed the IPS to grow its portfolio of renewable energy assets significantly to £25m, with a whole group financial model that looks likely to provide £15,500,000 of community benefit over the next 40 years.
- The learning acquired through the Project LEO and OxFutures grant programmes, and through setting up the Cosy Homes Oxfordshire and Energy Solutions Oxfordshire (ESOx) retrofitting services has put Low Carbon Hub as a whole into a leading position within the County, and within community energy businesses nationally, to develop products and services that could have a significant impact in enabling the transition to a zero carbon energy system in the UK.
- The FCA (the regulator of the IPS) has raised questions that mean we have changed the way in which the dual structure works.
- The increased complexity of the relationships between the CIC has created a heavy administrative load that diverts resources from outward-facing activities.
What was the issue with the Financial Conduct Authority (FCA)?
The IPS is regulated by the Financial Conduct Authority (FCA). The 2014 Co-ops and Community Benefit Societies Act requires the IPS to be a ‘bona fide’ co-operative, exist for the benefit of the community, or convert to a company.
The Low Carbon Hub IPS exists for the benefit of the community. The 2014 Act requires a registered society for the benefit of the community ‘carry on a business, industry or trade’ that is ‘being, or intended to be, conducted for the benefit of the community’. During 2021 and 2022, the FCA conducted an investigation into the business practices of the IPS because it was concerned that its guidance in the 2014 Co-ops and Community Benefit Societies Act was not being followed in two key respects:
- The IPS was not conducting a trade but acting purely as an investment vehicle;
- The IPS existed purely to make money that would benefit another organisation, ie the Low Carbon Hub CIC.
The FCA has decided that the consequent evidence we supplied answers the questions raised and it is taking no further action. In order to make our case, however, we started paying community grant funding directly from the IPS to beneficiaries, rather than via the CIC. We were also careful not to pay any other monies from the IPS to the CIC beyond those services covered by the inter-company Resource Sharing Agreement. The Resource Sharing Agreement covers payments for services, such as the development of new renewable energy projects and managing the IPS’s generation assets. It does not cover CIC activities associated with community benefit and Low Carbon Hub’s wider mission. Restricting IPS payments to the CIC to purely operational issues was possible in the short term because of the Project LEO grant funding, but this ceases on 31st March 2023.
So what is the rationale for the changes?
The major reason for proposing that the CIC ceases trading on 31 March 2023 is that due to the impact of the 2014 Co-ops and Community Benefit Societies Act on the IPS, the IPS can no longer donate funds regularly to the CIC to support its
innovation work community benefit work. Much of our community benefit activity, especially the aspects focusing on innovation has been sustained by grant funding until now, including Project LEO, but Project LEO funding ceases on 31 March 2023 and other funding is becoming hard to come by. We will however continue to seek external funding opportunities to support this work.
Under the 2014 act, IPS is not allowed to exist to benefit another organisation. This means that we can no longer maintain the status quo where all the assets are held in the IPS, and all of the staff and overheads in the CIC; we lose the joint model developed in 2012. If the CIC is to continue to exist, it has to trade beyond the Resource Sharing Agreement, and so needs a separate mission and business plan.
The third reason, flowing from the first two, is that trying to maintain the joint structure was proving challenging as the IPS grew anyway, and the CIC continued to rely on grant funding with no ability to make a profit and thereby create reserves. The lack of resilience in this model is a risk to both enterprises, as well as to the joint one. As is the increasingly complicated set of transactional relationships between the two organisations.
The fourth reason is that, by bringing asset management in-house, the IPS takes direct control over key activities that keep shareholder returns and community benefit profits safe. The addition of Ray Valley Solar to the portfolio means that we now have £25m invested, and so this is a good time to strengthen in-house capacity.
What is the Low Carbon Hub’s current structure?
You can find a diagram and description of the different tasks that fall under each organisation in the ‘Understanding our Organisation’ section on this web page: www.lowcarbonhub.org/about.
Why consolidate all activities in the IPS and not the CIC?
The Hub intends to continue to grow its portfolio of generation assets and to do this it needs to be able to raise money from investors. The IPS is a registered society under the Co-operative and Community Benefit Societies Act 2014 which enables it to issue withdrawable shares to the public, without needing to comply with the restrictions on financial promotions created by the Financial Services and Market Act 2000 (such restrictions make public share offers very expensive). The CIC does not have these exemptions.
What are the upsides?
The IPS will increase its control over the impact delivered using its funds, and it also makes it easier for us to use all the assets at our disposal (such as the renewable assets) for the benefit of the community, e.g. through participation in trials.
Eliminating the dual structure will significantly reduce administrative complexity, and so release more energy and resource to be directed outwards to sustain Low Carbon Hub’s mission.
All of the Hub’s staff, directors, and officers will have a single set of common objectives.
Will we still be run for the benefit of the community?
What happens to investments held by the IPS investor members?
Your investment in community-owned renewables remains the same. All the investment made by members is currently held as shares in the Low Carbon Hub IPS, with funds then passed through to the two subsidiaries – Ray Valley Solar and Sandford Hydro Ltd as intercompany loans. This will remain exactly the same under the proposed changes.
There are no changes to the rights and interests of investors in the IPS. There is no impact on early investments in the Low Carbon Hub that qualified for EIS and SEIS.
What will happen to the community group shareholders?
Our commitment to delivering community-led action on climate change remains the same, and our desire to support the incredible work of low carbon community groups across Oxfordshire remains undiminished.
We are consulting with the community groups on the details, but the intention is that:
- Each community group will buy a £1.00 share in the Low Carbon Hub IPS so they can vote at AGMs.
- Each community group elect a Communities Director to represent them. The Communities Director will be co-opted onto the Board and the appointment confirmed (or otherwise) by an open vote at the AGM.
- We want to take this opportunity to look carefully at how we can involve the community groups more actively in the mission of the Hub.
Will there be a risk to IPS member returns?
The Low Carbon Hub IPS Board is overseeing a due diligence process, with advice from Bates Wells Braithwaite lawyers, to ensure that the transfer of assets does not materially change the existing risk profile of the IPS.
The Hub staff will be transferred from the CIC to the IPS, so the IPS will become directly responsible for paying them. Those staff members concerned with managing the assets of the IPS and developing new generation projects are in any case a natural cost of the IPS, and are carrying out their tasks more cost-effectively than subcontracting to a third party. Similarly, the IPS exists to create community benefit, and so staff costs associated with this are also a natural cost of the IPS. Whether all of the innovation activity is classed as a “community benefit” depends on one’s definition of community, but all is aligned with the objectives of Low Carbon Hub as set out in each of the share offers. Perhaps more importantly, under current forecasts, the staff budget is affordable by the IPS without impacting member interest payments, and advance provision has been made for one full year’s salary costs. The Board has instigated a formal budget review process every six months moving forward.
What happens to the current staff?
Under the proposal, all staff with be transferred to the IPS from the CIC by a TUPE process, with all staff retaining the same rights and conditions. There are no job losses, changes in FTE or voluntary redundancies as a result of the process. Our team are one of our most valuable assets and will be doing everything that we can to retain them. We hope that the proposed changes and the simplification in our structures and processes that they bring will make working for the Low Carbon Hub a more rewarding experience for us all.
What does TUPE mean?
The Hub staff are being transferred from the CIC to the IPS. TUPE is a process whereby all of their employment rights are transferred intact.