Energy and Climate ChangeWritten evidence submitted by Solway Energy Gateway Limited

Terms of Reference

The Committee invites responses addressing some or all of the following questions:

What contribution could medium-sized energy projects (5–50MW) make to the UK’s climate change, energy security and energy affordability objectives?

The 5–50MW power stations layer is missing from the current stack of energy provision. Power provision comes from mega stations or from micro generation. Where are the medium sized power projects and why are they underrepresented? Despite the fact that they are more affordable, provide security and are under local control by a company or community who might use that energy. Look back 100 years and almost all of the power generation was locally owned medium sized, for example, there were 18 mills powered by the Rover Ehen (now there are none).

The two main reasons why this layer of energy project is under-represented in energy production is due to—firstly—the inability of those who own embedded generation to sell surplus power for a similar profit as those with mega-power stations, and to—secondly—the lack of risk-appetite for financing medium sized power projects by banks and investors, as such operations would be “non-core” to most businesses.

But these human-scale and community-scale projects could make a very significant contribution. Owned locally, providing power locally, and being accountable locally for selling, pollution, customer service, whilst encouraging entrepreneurs and local skills.

For example, in my borough of Copeland, power is imported not made. Even though Copeland has very substantial woodlands, coal, other hydrocarbons, sun, wind, run of river, high and low head hydro, tides (some of the largest in England) and waves. And yet power and district heating could easily be created here, allowing local entrepreneurs an opportunity to get involved in a market which at present is heavily loaded in favour of established very large MNCs, who, by the way, do not invest locally, and who demand very high rental from the central Government and from households and businesses for energy provision.

District heating schemes are seriously under-represented in the UK, and provides a great opportunity—they are very low carbon and would increase local resilience against major disruption to infrastructure or energy supplies.

Medium sized energy projects would have two main impacts: Firstly—they would help to establish an engineering and skill base in communities which might then utilise their own natural resources more effectively, with less centralise grid costs and with lower environmental damage. Secondly, they could create a real competition for the oligopoly of energy companies, and provide a benchmark for electricity production cost.

What different models of ownership exist for medium-sized energy projects and how prevalent are they in the UK?

1. Leased. I have worked in companies that have owned or rented their own medium sized generators, primarily for backup purposes. These were diesel generators or gas CHP. I consider that it would be possible for local generation to be owned and leased in the same way that for example, locomotives are. That is, that a combination of manufacturer and banking partner own the generation asset and it is leased to the production company.

2. Community owned. Medium sized generation can be community owned, which is common elsewhere in the world. However, in the UK, operations are not commonly community owned. School, roads, property and enterprises in the UK are owned privately or by the state, and instances of community ownership is rare. It can be done, but it is unfamiliar territory here. Elsewhere, community ownership is more prevalent in other areas, such as ownership of health clinics, transportation hubs, and ownership of common production, such as wineries. In order for community ownership to flourish in the UK, substantial effort will be required to educate, encourage and facilitate.

3. Privately owned. The most likely outcome if privately owned, where an entrepreneur, possibly a farmer, invests in operations to harvest the natural resources. The point being that in order to produce power, the natural resource needs to be available and accessible, and for the most part, the resource occurs in land held by existing property owners, or in the case of the energy in a river system, access is controlled by those who own the river banks.

This presents a very significant barrier to community power companies, who have the disadvantage of having to pay a good rental or land price for access to the natural resource.

4. Municipal/council owned. This is very common in other parts of the world, for example, Stadtewerke in Germany, and in other Nordic countries. The council in effect acts on behalf of its residents and invests in power generation to take whatever natural competitive advantage exists. In the UK, councils are not however run along business lines and often lack the level of commercial skills required. But if there was a continuing practice of Local Authorities/Local Communities owning a stake in a local energy project (see my comment above) they would quickly become competent enough to be a “knowledgeable customer” to energy project developer-partners.

5. Combination. The key thing that will help to reduce the barriers to local energy schemes, be they wind turbines or Energy from Waste, would be that the local community has a significant stake in the performance of the energy project, such as owning at least 10% of any project. Arguably, this could be the quid pro quo for granting planning consent—like Section 106 funding, but instead of wasting this one-off money on which ever project the more voluble local residents gets up the list, the income from the project is used for community investment as directed by the locally elected representatives.

What types of financing model are most suitable for small- and medium- scale projects? Do these differ from the financing models used for larger-scale projects?

The financing of the mega schemes looks seriously flawed at the current time. The incumbent dominant generators in the UK do not appear to have strong enough balance sheets, partly as a result of gearing, and partly as a result of financial pressure in their non UK operations. As a result, they are unable to invest in new power stations, or in gas and power infrastructure and have not done so, even though they are extracting a substantial rental from households and businesses for energy provision. They are seeking guarantees from Government in order to invest—in which case—their returns should be significantly reduced.

Governments seek outcomes which may be policy orientated rather than economically orientated and that can make them difficult financing partners.

Small micro-generation projects can be financed by householders and businesses, and solar and wind and energy efficiency schemes already demonstrate that capital can be found provided that there is consistency of policy. However, the solar tariff was exploited ruthlessly by large capital funds, and this created a series of policy lurches, which did not encourage householders or small businesses to invest. A flood of foreign imports and foreign investment companies with profiting from future tax revenues was the result of a well-intended policy, undefended against exploitation.

Medium sized projects rely on a combination of finance, to support the 1. acquisition of access to the natural resource, 2. The construction and installation of the power generation plant, and 3. the operations to produce and deliver the power and provide customer service etc. Each of these 3 stages has very different financing requirements, and a very different risk profile, and the likely outcome is that three forms of financing will be required for each medium sized power project. There may be an analogy with financing a bus or airline company—the buses tend to be leased from the manufacturer, the stations, airport terminals and permanent installations tend to be owned by separate entities, and the operations owned by an operating company in order for the risks to be parcelled up neatly for financiers.

Why are community-owned energy projects more prevalent in countries like Germany and Denmark than they are in the UK?

I have worked on energy projects in Norway, Germany and Finland. These countries are much more decentralised than the UK, with regional banking and very independent regional government, together with councils and boroughs that contain significant commercial operations. In addition, land ownership is much more diffuse. A good example is the Kobbelv Dam in Norway, which is owned by the local borough, who retain a “golden” share, even though the operations are managed and optimised by an MNC. In the UK, only the metropolitan authorities now have the capability to finance, build and operate complex commercial operations. Manchester Airport for example.

Compared to nordic countries, ordinary people in the UK do not have financial or political power, and most importantly, do not own the land which has the natural resources or access to them. They are used to state provision of utilities and services, paid for via taxes and rates. Therefore, for community owned schemes to take shape, a great deal of facilitation is required. Community ownership would require a balanced focus of individual investment with reasonable returns for collective benefit.

SEGL can speak from experience here, having attempted to encourage a 1MW system to be attached to the new bridges built over the River Derwent following the Cumbrian Floods of 2010. The scheme would provide power and light for social housing, schools and the town centre. But the obstructions would be insurmountable for any normal organisation, only a very wealthy organisation with very long term horizons could be expected to take such a scheme through the planning, environmental and other regulatory challenges. The economics of incorporating a medium sized energy system into a new bridge are very clear, and it is common practise elsewhere, but not in the UK, where attaching energy generation to bridges is novel, contentious and frankly cannot happen unless the policy environment is tuned into medium sized projects.

Is there any evidence that medium-scale energy projects are more likely to be accepted by local communities?

It may be too early to say, however, the situation may be analogous to locally sourced foods and beers which have seen widespread growth. Small breweries for example have been taken up with delight by communities. However, the larger trend has been for communities to abandon locally produced in favour of mass produced, motivated by price and quality. Community energy companies will only work if they can provide power at lower cost, or with less harm to the environment than the present market. They work best when they have a ready and willing clientele for the power—that is—they can sell the power.

Local ownership also increases energy awareness that makes it easier to change energy behaviours.

What appetite is there for community-owned medium-scale energy projects in the UK?

In seeking to promote a local bridge mounted generation system SEGL was delighted to find that there was very strong support from local politicians, business leaders and almost everyone we met with. The idea of a “bridge that could pay for itself” was warmly received. The exceptions were the County Council officers who were under pressure to get the bridge tendered and built without complication, and from some officers of the Environment Agency, who required years of research into the impact on sediments as a preliminary to applying for an abstraction licence for the energy in the water flow. SEGL managed to persuade one contractor to include energy generation as a non-compliant alternative bid, and they could see the potential to incorporate simple run of river energy generation into their bridges.

What appetite is there among private sector organisations in the UK to invest in their own medium-scale energy projects?

The appetite is very strong, as there is a very clear gap in the market—supply is short and getting shorter, and profits are exceptional amongst energy companies. Power appears to be recession proof, and if barriers to entry were reduced by policy changes then capital would be instantly available. The recent example of how easily capital can be mobilised for energy projects is well demonstrate by the recent solar PV boom.

I think a great deal of encouragement is required to encourage entrepreneurs to enter the market and become small energy entrepreneurs. To succeed, they need to be able to market and sell the power or heat generated.

What appetite is there among UK local authorities to invest in their own medium-scale energy projects?

Except for the Metropolitan Authorities, they do not have the competence, or a ready-made customer for the energy produced. A better candidate group may be local housing associations.

What are the barriers to medium-scale energy projects in the UK?

The main barriers are the inability to realise the retail market value of the power. Those companies with embedded generation are unable to sell their power at economic rates. If the policy in this area were altered, then there would be surge of CHP plant in the UK. For example, the owner of a PV or wind system is forced to sell their excess power to one of the big six for around 4.5ppkWh, and the big six sell that power for around 15ppkWh! This is a huge margin inaccessible to small and medium sized generators. What is required is a means to allow them to retail their energy, or at least realise a fair wholesale price for it. The fact is that anyone owning generation equipment will have a mismatched load, with periods where they have excess power, or a power deficit. This may improve with load balancing technologies, but until a technical solution is found, there is considerable economic advantage to the incumbents. CHP was invented in the UK—in Manchester in fact—however, CHP is very widely used elsewhere in the world, but not here, as it does not fit with the oligopoly.

The second barrier relates to access to natural resources other than gas, where access requires new thinking about the rights of river and landowners and their incentives and responsibilities to ensure that natural energy resources they possess are made available to those who would produce power from them.

The third barrier is regulation. The regulatory burden needs to add value to society, not prevent value form being created. The 18 water mills that used to operate on the River Ehen would be unthinkable in today’s regulatory climate, but then local entrepreneurs created weirs and created a habitat now used by important and protected river dwellers. I know several local entrepreneurs struggling to use energy resources in local rivers, and indeed, my own experiences in tidal estuaries, where accessible, plentiful energy exists.

How effective are current Government policies in encouraging local and medium-sized energy projects? Could they be improved in any way?

So far they have been effective in micro generation as shown by the solar PV, which enabled ordinary people to own their own power generation system.

However, for medium generation government needs to seriously consider adopting a long term policy environment which entrepreneurs and financiers can work in. I believe that there have been twenty energy minsters since the post was created, and the constant changes in direction and lack of long-term planning have created an unstable and uncompetitive environment which has been exploited by the incumbent power companies. The best antidote to the lack of competition is to encourage new entrants to the market—this should not be through expensive subsidies, but by promotion of free markets and competition.

The first step would be to find ways to assist the CHP market, where the UK can be a global centre of manufacturing, and to mobilise companies to use their capital to invest in local power production. This would increase energy security, and CHP are extremely energy efficient.

The next step would be to try and encourage an MNC with a stronger balance sheet than the incumbents to enter the UK energy market. It may be that policy demands that energy companies provide an infrastructure plan, and commit to a level of capital investment commensurate with secure, reliable energy provision. There are Korean conglomerates that have string balance sheets that could provide additional mega-generation infrastructure, however, they would require long term energy planning form the Department if they were in invest in the UK.

Regional energy planning could be extremely valuable, in creating more local ownership and empowerment, but also, in creating regional energy operations which could enable better regulation through benchmarking. An obvious example is Scotland, which could be regulated separately and have its own energy policies, and then process, profitability and customer service could be a benchmark for English and Welsh regions.

Government could provide facilitation for community energy entrepreneurs, through a series of regional programmes.

Housing Associations might be targeted as a kernel for community energy projects, as not only do they have strong competencies, but they have an energy efficiency agenda, and in addition, operating with Housing Associations would have the greatest impact on those who currently get the worst deal from the extant energy market—the socially disadvantaged.

April 2013