House of Commons - Local Energy - Energy and Climate Change

Local Energy - Energy and Climate Change Contents

2 Local energy in the UK

8. In this section we explore: the role of local energy in the UK's energy mix and the different models of ownership of local projects, such as community, local authority, private and joint ventures. We look at current examples of projects in these categories and the potential for further developments.

The potential for local energy in the UK's energy mix

9. Local energy could provide a significant proportion of the UK's energy capacity, although it seems likely that larger scale, centralised projects will continue to provide the majority of our energy supply in future. In 2011, the UK had a total of 89GW of electricity generation capacity.[12] The Combined Heat and Power Association (CHPA) said that decentralised energy already made up 8.2% of UK electricity capacity (although this included projects that were larger than 50MW in size).[13] Utilyx Asset Management suggested that decentralised energy (consisting of anerobic digestion, CHP, solar PV, trigeneration[14], waste-to-energy, and wind) could provide 17GW of capacity by 2030.[15]

10. DECC told us that at present, 4.5GW of renewable electricity generation comes from medium-sized projects and there is a further 10.9GW that has either received consent or is going through the planning system.[16] In terms of the total potential, the UK Energy Research Centre (UKERC) noted that there "is a lack of detailed analysis of the potential for energy generation at this medium 5-50MW scale".[17] Renewable Energy Systems (RES) pointed out that most onshore wind farms fell within the 5-50MW scale and that the Government's estimate for onshore wind capacity in 2020 was 10-13GW.[18]

Ownership

COMMUNITY-OWNED

11. Communities undertake local energy projects for a range of different reasons. According to the UK Community Energy Survey, most projects are motivated by a desire to save money on energy bills (reported by 83% of projects) and to reduce carbon emissions (80% of projects).[19] Other reasons include improving local energy independence, community empowerment and generating income for the community. A number of projects also wanted to reinvest any surplus in energy efficiency or fuel poverty measures.[20]

12. Many community energy schemes are co-operatives; that is, businesses that are owned and run by and for their members.[21] These can be further sub-divided into "share issue" based co-ops, "community interest" co-ops (such as the National Trust), "crowdfunding" initiatives (e.g. Abundance[22]) and "locality based" co-ops (where membership is restricted to people living within a particular geographical area).[23] An alternative model is the "community ownership" approach, where projects are owned on behalf of all members of a local community.[24] Share issues are a common method of financing community projects. Many projects also rely on grant funding or loans.[25]

13. At the moment, there are only three community-owned energy projects that fall within the 5-50MW size range: Lochcarnan Community Windfarm, Westmill Solar Co-operative and Westmill Wind Co-operative.[26] Several witnesses cited a piece of research by Camco and Baker Tilly, which estimated that there is the potential for 3.5GW of community-owned energy (although the figure includes projects that are smaller than 5MW).[27]

LOCAL AUTHORITY-OWNED PROJECTS

14. The motivations for local authorities to undertake energy projects range from addressing fuel poverty to supporting community regeneration and reducing carbon emissions. Reducing the authority's own energy bill is another important driver. Some, such as the London Borough of Sutton, intend to make a profit from their ventures, which will then be ploughed back into growing the scheme.[28] Ownership models include wholly-owned projects (such as London Borough of Sutton's energy recovery plant), setting up arm's length companies (such as Aberdeen Heat and Power), and undertaking joint ventures, once planning permission has been awarded. Finance for projects can come from a range of sources, including grants, self-finance and prudential borrowing (for example from the Public Works Loan Board).[29]

15. The appetite and capacity of local authorities to invest in local energy projects is variable.[30] Some examples of authorities taking the lead in this area are:

London Borough of Sutton has committed with its partners to deliver a decentralised energy network in the Hackbridge Sustainable Suburb with a pilot by 2015 and a full network by 2020. This network will be able to supply energy to businesses, community facilities and homes.
Lewes District Council has installed solar PV on council buildings and the local leisure centre.
Cornwall Council has constructed a 4.9MW solar park near Newquay Airport, which is expected to generate an income of around £70,000.
Woking Borough Council set up an Energy Services Company (ESCO), which runs a number of schemes, including a combined heat and power district energy system.
Aberdeen Heat and Power was set up by Aberdeen City Council as an arm's length not-for-profit company to supply energy to public housing, public buildings and leisure facilities .
Orkney Islands Council has a shareholding in Hammer's Hill 4.5MW wind turbine project.
Bristol City Council will install two 2.5MW wind turbines later this year, which will produce approximately 20% of the Council's current annual electricity use.
Isle of Wight Council is investing £1m in testing facilities for tidal energy as part of a joint venture with a private sector partner. The Island Strategic Partnership has launched an "Eco Island" vision to be self-sufficient in renewable electricity by 2020.
Warwick Council has installed 5MW of solar panels on social housing properties.[31]

However, there are a number of structural difficulties with local authority ownership models. Whilst a number of barriers to local authority ownership of projects have been removed in recent years, witnesses told us that considerable difficulties in financing projects through local authority funds remain.[32]

16. District heating or "community heating" schemes based on combined heat and power (CHP) plants, such as those managed by Aberdeen Heat and Power and Woking Borough Council's Energy Services Company, have the potential to make significant efficiency savings. CHP schemes generate electricity while capturing the heat which is a by-product of this process, thereby minimising energy loss.[33] Community heating schemes supply heat from a central source to multiple buildings through a network of heat mains. Such schemes are often found in relatively dense areas of housing, and are much more common in countries such as Finland and Denmark where they provide over half of domestic heating. By contrast, in the UK community heating forms only 1% of the domestic heating market.[34]

Privately-owned projects

17. There are a number of different models for medium-sized energy projects that are owned by private companies, which have varying motivations. They include:

independent generators looking to sell the electricity they generate for a profit (this includes utilities and independent developers, as well as farmers and landowners);[35]
companies investing in on-site assets for their own use, in order to manage energy price risk, to insulate themselves from rising energy costs and/or to meet environmental commitments;[36]
companies investing in off-site assets (for the same reasons as above),[37] and
joint ventures with local authorities and community groups.[38]

Cornwall Energy believed there was potential for energy intensive companies to benefit from investing in energy projects:

This [privately-owned medium-sized projects] is a limited but important subset of the market where generally large, well-capitalised, well informed energy intensive companies will invest in generation assets, primarily for on-site use. Our analysis suggests that in the current environment significant benefits can be realised by those consumers that do invest in assets for on-site use. These projects enable the customer to avoid network charges and the subsidy elements attached to imported power.[39]

18. Privately-owned energy projects may be client, developer or investor owned:

Client ownership is where the client effectively owns the asset through a finance lease. The asset transfers to the client upon expiry of the contract.
Developer ownership is where a developer owns the asset and has sourced project finance through debt and/or equity. Energy is then sold via a Power Purchase Agreement (PPA). This is the most common form of ownership.
Where projects are investor-owned, the investor will fund and own the asset via debt/equity having entered into a pre-agreed Energy Services Agreement with the client to sell an agreed volume of energy at an agreed price for an agreed term.[40]

19. Internal funding, or balance sheet financing, is generally used for smaller industrial and commercial scale projects where renewable energy is not the core business. Debt financing is the method often used by independent generators. However, banks and investors have "made it clear to independent generators that they are not prepared to invest unless the generators have already signed a viable long-term contract (15 years typically) with a large BBB+ credit rated company[41] that will deliver the power into the electricity market on the independent generator's behalf."[42]In other words, generators will require a Power Purchase Agreement (PPA) in order to obtain the necessary investment (see paragraph 47).

JOINTLY-OWNED

20. There are an increasing number of joint-ownership projects, primarily between local communities and commercial developers:

In the UK, the total community and local equity in medium-sized projects is split between joint ventures with developers (53%) and wholly-owned (47%).[43]

However, joint ventures also occur between other bodies. For example, the Isle of Wight Council has recently entered a tidal energy joint venture with a private sector partner.[44] Joint ventures can help community groups address many barriers:

Partnerships between commercial developers and communities can provide a good mix of knowledge, skills, access to finance and local contacts to enable developments to go ahead. Part ownership enables greater community involvement and benefit than a community fund allows.[45]

Joint ventures have benefits for developers, for example they can help secure development sites.[46] The Isle of Wight Council will re-invest any return from the joint venture project into subsidising wider business opportunities, and encouraging entrepreneurial and youth engagement activities. The joint venture itself will also be used to provide educational and job opportunities.[47]

21. Given the potential benefits, DECC should do more to promote joint ventures between community groups, private and public sectors. We recommend that the option for a local ownership share in new energy projects should be added to the industry's Community Benefit Protocol.

22. As we noted in the introduction, there are a range of different ownership models for projects at the medium scale, including private landowners, farmers, local authorities, other public sector organisations and commercial organisations, as well as those owned by community groups. However, there is a lack of research showing what the combined contribution of these different types of projects could be. We recommend that DECC carries out an assessment of the potential that 5-50MW projects of all types could play in the UK's energy mix.

12 DECC, Digest of United Kingdom Energy Statistics 2012, 2012 Back

13 Ev 80 (CHPA) Back

14 Trigeneration or combined cooling, heat and power (CCHP) refers to the simultaneous generation of electricity and useful heating and cooling from the combustion of a fuel. Back

15 Ev 33 (Utilyx) Back

16 Ev w43 (DECC) Back

17 Ev 54 (UKERC) Back

18 Ev w24 (RES) Back

19 Ev w1 (Seyfang and Smith) Back

20 Ev w1 (Seyfang and Smith), Ev 48 (Regen SW), Ev 54 (UKERC), Ev 37 (ETI) Back

21 Ev 75 (Co-op Group) Back

22 https://www.abundancegeneration.com/ Back

23 Ev w54 (Simpson) Back