Charity Bank - an ethical bank that takes savings from individuals and institutions, and lends solely to social sector organisations - has built up expertise in lending to community hydroelectricity schemes.

Its first loan such loan was to Heron Corn Mill, occupying the west bank of the River Bela immediately below Beetham waterfalls in Cumbria, an 18th century watermill and one of the few working mills left in the county. Now, five years later and having built up further niche expertise in financing community hydro projects, Charity Bank has not only agreed a further loan for Heron Corn Mill, but it has also added what is now its fifth such scheme to its portfolio.

Why are community hydro schemes increasingly looking to borrow money? “I think we need to go right back to that first scheme for the answer,” says Simon Thorrington, Charity Bank’s regional director responsible for renewable energy. “At Heron Corn Mill the Trustees acknowledged the need to transform the Mill’s finances. Facing the prospect of an inevitable reduction in grant support the trustees needed to identify alternative sources of income. As a consequence, the hydroelectric turbine was installed, the purpose of which was to generate a modest income, but it also enabled the trustees to develop their mission and purpose.

“But the wisdom of this move really gained momentum a year later with the introduction of feed-in tariffs, a government programme to promote the uptake of small-scale renewable energy schemes. As a consequence the Mill has seen its income blossom. The feed-in tariff was a great catalyst for growth in hydro. But since then, there has been another significant factor in why such projects are increasingly looking to borrow money. In 2010, as a result of the declining economy, regulations were tightened and public and private grants shrank, leaving organisations needing to look elsewhere for funding.”

Other hydro schemes that Charity Bank has lent to include ones in Settle and Bainbridge in Yorkshire, and Stockport and Whalley in North West England. River Bain Hydro in North Yorkshire is the first community owned small-scale hydro project in the Yorkshire Dales National Park. The scheme borrowed £150,000, which was the last element of funding and which enabled the project to begin.

Deborah Millward of River Bain Hydro says: “Although Charity Bank’s debt funding was the final piece of the funding jigsaw, Simon and his colleagues had been working with us for some time to help get the rest of pieces in place. With a local community share scheme, the support of a Yorkshire Dales National Park sustainable development fund, and the Bank’s loan, we can generate electricity for around 45 homes. Charity Bank’s support has been great. Not just the loan itself, but all Simon’s hard work over a considerable period to help bring this project to fruition.”

One of the ways communities can fund hydro schemes is by offering local share ownership, often to work in tandem with any borrowing. As a condition of its £400,000 loan to Whalley Community Hydro in Lancashire’s Ribble Valley, the community raised a similar amount through a share offer before the loan would be paid.

Graham Sowter, a founder member of Whalley Community Hydro, says: “We are grateful to Charity Bank for our loan, without which the project could not have started. We can now start work, which will lead to Whalley Community Hydro generating a significant amount of energy for the community in a scheme owned by the community.”

When it is finished, an Archimedean screw turbine will be capable of generating up to 345,000kWh of renewable energy each year. Simon Thorrington says: “We are more than satisfied that the Whalley Community Hydro scheme will not only generate significant amounts of clean energy but will be the catalyst for other sustainable projects in the area. The positive social impact of the scheme will be significant. This is one of the main criteria we look for in deciding whether to offer a loan or not.” Shares in Whalley Community Hydro cost £1 with a minimum investment of £250 – up to a maximum of £20,000. It aims to pay a return of between 3–5% to investors who may also qualify for the government’s Enterprise Investment Scheme (EIS).

Another hydro project that was part funded by a Charity Bank loan and part by a community share offer was Stockport Hydro at Otterspool Weir, Greater Manchester’s first community-owned hydro-electric project.

But despite the popularity of community hydro projects with local residents, traditional banks are often reluctant to lend to them. Simon Thorrington puts this down to a number of factors: “High Street banks just aren’t geared up for this kind of lending generally. Not only does it require local knowledge and the old fashioned kind of relationship banking that banks are increasingly moving away from, it also helps that, coming from the charitable sector as we do, we are in tune with the needs of social purpose organisations.

“And perhaps most important of all, hydro schemes in particular require a lot of patience and time on the part of the bank working alongside the customer offering advice and support at no cost, a long time before a loan can be agreed. Schemes often take several years between the first stage - pre-feasibility - and completion. Heron Corn Mill began in around 2006 and went live in October 2010.”

Charity Bank involvement can later lead to further funding. As a result of the Charity Bank loan to Heron Corn Mill enabling it to generate power, it has become self-sustaining. This enabled it to qualify for a £940k Heritage Lottery Fund grant which it probably would not otherwise have been able to receive.

“Community hydroelectricity schemes have come a long way in a short time, which is another reason that they are becoming more popular,” says Thorrington. “The proportion that lenders put into schemes is also now beginning to increase, partly due to the falling away of grants and partly due to progress. The technology and methodologies are now much more proven, and the sector has had the benefit of a great deal of learning. Charity Bank’s loans accounted for about a third of the original total funding requirement for Heron Corn Mill, Settle, River Bain and Stockport. At Whalley Community Hydro, where we have recently approved the loan, it’s around half and at another that we are close to agreeing it’s about 60%.

“Charity Bank’s loans are becoming more significant. As schemes are able to get bigger, through the benefit of learning and new technology, they can generate more power and so earn more income. As a result, they can service more debt and so the loan can be of a bigger proportion.”

Charity Bank has several more such schemes in the pipeline, including a £1.5m project where the bank could potentially lend as much as up to 70% of the required funds.