Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Co-operatives UK

Summary

There is huge potential for community and co-operatively-owned energy in the UK—up to 3.5GW.

A dramatic scale-up of community and co-operative energy would deliver local economic and social benefits, as well as contributing to renewables capacity, carbon targets and energy security.

The government has made strong statements of support for community energy. Yet the current energy system does not work well for mid-sized community schemes, who are too big for FITs but too small to operate successfully in an energy market designed for larger, commercial-scale generators.

There is a danger that this will be made worse, rather than better, with the proposals in the Energy Bill, particularly Electricity Market Reform (EMR):

The complexity and uncertainty of the Contracts for Difference (CfD) system will cause significant problems for smaller generators.

In addition, smaller generators risk being paid less for their output than commercial generators, because of the use of a market-average “reference price” which does not reflect the true price received by smaller generators.

So the CfD system may well result in large commercial players being paid more for their power than small independent or community-owned generators, in direct contrast to government’s stated aims.

Co-operatives UK would be pleased to discuss these issues further with the Energy and Climate Change Select Committee, and offer oral evidence to the Committee.

1. About Co-operatives UK

Co-operatives UK is the national trade body that campaigns for co-operation and works to promote, develop and unite co-operative enterprises. We have a unique role as a trade association for co-operatives. We work to promote the cooperative alternative across many sectors of the economy from high street consumer-owned co-operatives to pubs and renewable energy, healthcare to agriculture, credit unions to community owned shops. Our research with The Cooperative shows that there are now over 40 renewable energy generation cooperatives across the UK, which collectively have raised over £16 million in risk capital for investment. Together the co-operative economy is worth some £33.2 billion, employs 236,000 people and has 12.8 million members. Cooperatives are the largest membership movement in the country.

2. The potential for community energy

Community and co-operative energy is a vibrant and growing sector in the UK. Recent research by Camco and Baker Tilly ⁱ estimates there is potential for over 2GW of community-owned renewables in England, or around 10 % of the total capacity for onshore renewable energy. The potential for Scotland is estimated to be 1GW and for Wales 0.4GW. Therefore, UK capacity could be around 3.5GW, the equivalent of three or four conventional power stations. Community and co-operative energy can be at all scales, from a few solar panels on the roof of a village hall to large scale wind energy developments.

A dramatic scale up of community and co-operative energy would deliver local economic and social benefits and help the UK to meet its stated energy goals and other ambitions, particularly the vision of a strengthened civil society with greater citizen involvement.

3. Government commitment to community energy

The UK and devolved governments have made strong statements in support of co-operative and community energy. The May 2010 coalition agreement states “we will encourage community-owned renewable energy schemes where local people benefit from the power produced.” The new National Planning Policy Framework for England also asks planning authorities to “support community-led initiatives for renewable and low-carbon energy”.ⁱⁱ

Positive ministerial statements have also been forthcoming, for example the Minister of State for Energy and Climate Change, Greg Barker, made the case in parliament for a specific FIT to reward and encourage community-owned energy:

“Because of the way in which the system was constructed, there is no way of rewarding community schemes. There is no tariff for communities. There is no way of distinguishing between a City hedge fund manager and a village hall because of the way in which the system was constructed by the last government. We will try to change that so that we can specifically recognise community schemes, and we will consult on that work.”

4. The difficulties faced by community energy projects

Community and co-operative energy is still the exception rather than the rule in the UK. This is because, at present, it does not “fit”. In policy terms, the UK lacks a comprehensive and integrated framework of support for community and co-operative energy schemes. Mainstream commercial scale energy is backed by the existing regulatory structures. Research consistently shows how difficult it is for new entrants to compete alongside the established players for whom the market and regulatory context is designed.ⁱⁱⁱ

In recent years, government has understood the need to encourage other types of energy generation, and has put incentives in place for small scale schemes, primarily through FITs, the Renewable Heat Incentive and, potentially, the new Green Deal. However, community and co-operative energy schemes are currently losing out, possibly because they are a hybrid. They exhibit a combination of commercial and social characteristics. They are profit-making, but are motivated by social and environmental benefit. They can’t be treated like the big commercial energy companies, but neither do they fit into the individual householder category. Many community and co-operative energy projects are mid-size in generation capacity: from 50KW to 10MW. It is inappropriate to apply the regulation and policy measures designed for much larger, commercial scale generators.

5. The issues with Electricity Market Reform

Given this policy context, we foresee specific problems with the new proposals envisaged as part of the Electricity Market Reform package, and specifically, the proposed Contracts for Difference (CfD) mechanism which will replace the Renewables Obligation.

At present, it is envisaged that all schemes above 5MW will have to enter the CfD process. Larger community-owned schemes will therefore be obliged to participate. They will encounter two main problems:

Complexity and uncertainty: Smaller producers will find it much harder to participate in the market. Given its complexity, the transaction costs are high, and proportionally much higher for smaller generators than larger ones. Whereas larger generators will be able to trade directly, smaller ones will need to work through aggregators, which bites further into revenues. In addition, because of the link to the “reference price” (as below), revenues from electricity generation are far harder to predict than under the ROC system, which causes uncertainty and increases costs and risks. This is a big problem for community schemes, who struggle to raise investment from banks.

The Reference Price: Under the EMR proposals, generators will receive a top-up payment, which represents the difference between the “reference price” and the “strike price”. However, the “reference price” is based on market averages, not the actual amount that the generator receives. For small renewable generators, the actual price they receive will in reality be considerably lower than the reference price. This is because they produce smaller amounts, and because output is less certain. They do not have the buying clout of major producers. So this will cause a perverse outcome in which large commercial players actually get paid more altogether for their power than small community generators.

6. Potential solutions

Co-operatives UK will be commissioning work to analyse the possible effects of the Energy Bill on community energy, and propose solutions. There are a number of possible solutions:

Leave community schemes in the CfD process, but allow a higher “reference price” in recognition of their higher costs, and their contribution to a diverse energy mix

Exempt community schemes from the CfD process, and increase the threshold for Feed-in Tariffs (which currently is set at 5MW)

Create a new FIT system within EMR, for community and possibly other small independent generators.

These and other options will be explored by Co-operatives UK and others.

We would be pleased to work with the Energy and Climate Change Committee in scrutinising the draft Energy Bill to ensure that the Bill works to promote, rather than hinder, community generation.

June 2012

References

i The potential for the Green Investment Bank to support community renewables, Camco and Baker Tilly for The Co-operative Group, December 2011 pp 3-4

ii National Planning Policy Framework, Department for Communities and Local Government, March 2012

iii Community energy in the UK: a review of the research literature, Sabine Hielscher, Community Innovation for Sustainable Energy, University of Sussex, www.grassrootsinnovations.org