Tired of watching the value of your shares falling? Looking for an alternative investment that puts money back into your local community and which has tax advantages? And one that promotes renewable energy while at the same time paying a reasonable rate of return?

If this strikes a chord with you, it might be worth investing in one of the growing band of "community interest companies" (CICs) that are now vying with the banks for your money.

CICs are a new-style type of limited company designed for those wishing to operate for the benefit of the community rather than owners or individuals. Their number has boomed in recent years – and if the new coalition government increases capital gains tax, as is widely expected, the sector will get a further shot in the arm as wealthy investors seek new ways to avoid handing over large sums to the Treasury.

Many CICs are tiny outfits not seeking external investors. But others are open to investors from around the country. An interesting example is Water Power Enterprises (h2oPE), which is seeking investors for its ground-breaking renewable hydroelectricity schemes that will provide clean, green electricity for the next 40 years or more.

It has already helped set up two community hydro schemes and has now launched a £1m social share offer to finance a further two. If all goes well, investors will get a return of around 3% per annum after the first two years, rising to 5% per annum in later years.

Minimum investment is just £250 and the maximum is £20,000, and because it comes under the Enterprise Investment Scheme rules, investors can claim back 20% of their initial investment against their income tax. Given how low interest rates are on deposit accounts, it adds up to an attractive package.

The community-hydro company first featured in Guardian Money in September 2008, when it appealed for investors to come up with £100,000 to help build a small-scale hydro scheme in Settle, North Yorkshire.

That scheme was oversubscribed. Construction was completed last year and it started generating its first power last December. Now the organisation has two new schemes on the go – one at Bainbridge, in the heart of the Yorkshire Dales, and another bigger, two-site scheme in Stockport, Manchester.

The concept is relatively simple. In each case the money will be used to purchase and install a generating plant, which uses a modernised version of a 2,000-year-old Greek invention – the Archimedean screw – whereby power is generated by water flowing over and rotating a large metal screw. The green electricity is sold, giving the company an income, which eventually provides a return for investors.

At the Bainbridge site (above), h2oPE has teamed up with River Bain Hydro to build a 45Kw system that will generate enough electricity to power 40 houses, saving 80 tonnes of carbon dioxide a year, or 3,000 tonnes over an expected lifetime of 40 years.

The aim is to raise £250,000 through a share offer to part-fund the scheme. Work is due to start on site in the summer and the scheme will be generating electricity by the end of the year. The rest of the money will be raised through loans from the Charity Bank and in grants. The Yorkshire Dales National Park has donated £50,000, and other donations are in the pipeline.

Meanwhile, Stockport Hydro has been created to develop a number of hydroelectric schemes. Two sites on the River Goyt have been identified for development. Initially, there will be Archimedean screws at Otterspool Weir and one at Stringer, with the possibility of more at a later date.

Investors will be asked to come up with £750,000 to fund this combined 130Kw scheme. The electricity generated is the equivalent to that required to power around 130 homes.

Ideally, the organisers say, investors should be prepared to lock their money away for at least 10 years – and preferably longer. This is not like investing in shares, which can be traded on the stock market at any time. Investors who want to get out at a later date must sell them back to the owning society.

The organisers stress that money raised from the share issue will fund a not-for-profit organisation and investors should perhaps see it as a social rather than financial investment.

If you put your money in, you are unlikely to see any return at all for the first two years. In the third, fourth and fifth years, you can expect a 3% return and around 5% in all future years assuming all goes well. The dividends are taxed in the normal way. Ideally, the organisers hope that the shares will be passed on to children, or relatives. Any excess profits will be used to fund other green projects in the areas concerned.

Steve Welsh, MD of h2oPE, says they are increasingly looking to the ethical investment community to help fund the projects. The Charity Bank, Joseph Rowntree Trust and the Co-op Fund are among its supporters.

"We're looking for people who want a blended return on their investment; people who are serious about ethical investments and are interested in long-term benefits. Shareholders will take an active part in deciding how surplus monies will be spent, so investing in community hydro is a unique way to demonstrate commitment and support for sustainable environmental projects," Welsh says.

H2oPE says the share offers qualify for the Enterprise Investment Scheme, enabling individuals to get tax relief on investments of at least £500. Shares must be held for three years and 20% of the value of the investment can be used as an "income tax reducer" in the year that the shares are purchased.

Before you reach for your cheque book, be aware that investing in such schemes is not without risk, and you could lose your money if the schemes go disastrously wrong. Future returns will largely depend on the price the scheme can get for the electricity – difficult to predict when the project has a 40-year lifespan. It will also depend on water flows. Last summer's washout would have been great for such a scheme, but a lack of rain in the Dales in recent weeks has left the Bainbridge weir too dry to generate electricity, although the organisers have factored in a set number of dry days.

Welsh says the "model" has been developed each time, and those operating the new schemes have benefited from the experience of those who ran the first two.

For information on the schemes and to download a prospectus, visit h2ope.org.uk. The closing date for the share offer is 9 June 2010