Energy and Climate ChangeWritten evidence submitted by Communities for Renewables CIC

Communities for Renewables CIC (CfR) is a social enterprise set up by Regen SW (www.regensw.co.uk) and Green Trust CIC (www.greentrustwind.co.uk) that provides investment, expertise and management capacity to help local energy cooperatives develop renewable electricity and heat generation projects in their locality under business models that enable local ownership, local income generation and where possible local energy supply arrangements. CfR is currently advising six community energy groups across the South West. CfR also provides advisory services to community energy co-operatives, public sector bodies and commercial companies to help them develop and implement community energy strategies. See www.cfrcic.co.uk

CfR believes it is one of the first CIC’s to take advantage of the SEIS investment mechanism and has also obtained matched funding from Esmee Fairburn Foundation, a leading social investor.

The directors of CfR have extensive experience of community based renewables: Stephen Frankel (non-exec Director) and Jake Burnyeat (Managing Director) are founders of the WREN co-operative, Jonathan Johns (non-exec Chair) advised the UK’s first commercial wind farm and the UK’s first community wind farm, whilst Philip Wolfe is a director of the Westmill Solar Coop which has made a separate submission. Through Climatechangematters limited Jonathan Johns has written a number of reports and articles on the sector including “The Big society and Renewables” published December 2011.1

Introduction

CfR welcomes the Energy and Climate Change Committee’s enquiry into local energy. The Government has made some positive policy decisions recently that have begun to deliver impacts. These and some suggestions for further improvements are set out in our response below. Jake Burnyeat and Jonathan Johns would be pleased to answer questions in person.

1. Response to Questions Raised by the Committee

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

With the exception of the offshore wind pipeline, and large mostly utility-owned onshore wind projects already built or in development, the majority of future renewable energy generation capacity is likely to come from projects of 5–50MW (or less) in scale.

The potential for small and medium scale projects using technologies that are already proven is huge. Every south facing roof has potential for solar PV or thermal. Most rural communities have suitable sites for small to medium scale wind and solar projects (if planning, grid and local opposition barriers are overcome). The UK biomass and A.D. industries are still in their early stages, and well behind countries such as Denmark and Germany. The ability of such schemes to achieve a virtuous circle of using local feedstocks and organic waste to generate power and heat for local use is largely underdeveloped in the UK.

The contribution that small to medium scale projects can make to the UK’s climate change, energy security and affordability objectives is not just a question of MWs deployed, it is a question of the business model under which they are deployed. Commercial energy projects do provide sound long-term investments for institutional investors (which is important for the UK economy) and over time will help to stabilise the cost of generation in the UK. However, with some notable exceptions, the renewable energy deployed in the UK to date has not delivered the local economic impact it could have done had been deployed through community based business models.

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

In the early years of the development of the UK renewable energy industry it was relatively common for landowners and community groups to have significant ownership stakes in renewable energy generation projects. Early examples included the Baywind co-operatively funded wind projects. However, since the UK industry took off after the introduction of the Renewables Obligation in 2002 ownership has been dominated by utilities, specialist renewable companies and investment funds.

Whilst commercial ownership models have delivered substantial amounts of capacity in the UK, projects can seem remote to the host communities with financial benefits leaving the host community. In Germany and Denmark local ownership is much more common leading to greater acceptance of renewable projects. In some states in Germany nearly 40% of renewable energy generation is owned by individuals and municipalities. In the UK it is less than 1%.

The last few years has seen an emergence of interest in community-based business models and a number of pioneering community energy co-operatives have demonstrated that:

1.Co-operative based funding models can deliver MW-scale generation projects (eg Westmill Wind, Westmill Solar, and Energy4All supported projects);

2.Local energy programmes can provide a local low carbon economic development model that addresses the challenges of the current energy economy (including rising costs, economic drain, fuel poverty and climate change). Notable examples include the WREN and Low Carbon Ladock co-operatives in Cornwall and Bath and West Community Energy.

With appropriate financial and policy support, community-based business models could develop local energy economies at parish, town and city scale. Potential benefits include:

Ownership by local people, businesses and public sector bodies, retaining the investment returns within the local economy;

Generation of surplus income to re-invest in the community (eg funding further community energy generation and energy efficiency schemes, addressing fuel poverty and supporting community facilities and services);

Local energy supply arrangements that help protect against future price rises;

Reduction and localisation of energy spend so that energy becomes a benefit to rather than a drain on the local economy;

Increased engagement in energy, with resulting knock on behavioural change benefits;

Local low carbon jobs and industry development.

C. 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 projects CfR helps to deliver typically have the following business model, which is applicable for kW-scale to 20MW+ projects, and optimal for maximizing local benefits:

Each project is set up and run as a community enterprise, typically a Community Benefit Society; a form of co-operative whose primary purpose is benefit the community rather than members;

Collective ownership through a co-operative share offer that provides a fair rate of return to investors, supplemented by project finance debt or local authority investment;

Any surplus profit generated once host payments, operating costs and investors have been paid will be transferred to a local community organisation and used to re-invest in further community energy generation locally, and to provide grant funding for local community initiatives;

Where possible, business models that enable local homes and businesses to purchase the energy generated through local supply arrangements that reduce bills and/or provide protection against future price rises.

Alternative financing models for small to medium scale community energy projects include:

Partnerships with a commercial developer (eg a co-operative share offer and/or community fund contribution from a commercial project);

Public sector ownership models, with the income and costs saving benefits supporting public services.

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

Reasons why these types of energy project are less prevalent in the UK include:

Stable support mechanisms: Community projects need a simple and stable support mechanism. The feed in tariffs in Germany provided the necessary stability over a decade or more. By contrast the Renewables Obligation which supported the establishment of the UK renewable energy industry was challenging for MW-scale community projects and did not provide sufficient support for kW-scale projects. The UK FiT has encouraged growth in small to medium scale projects (including community projects) but tariff uncertainty has undermined confidence in the sector and made it difficult for community projects with long development timeframes. The current CfD proposals for large scale FiTs will also make obtaining PPAs difficult.

Grid connection: The EU Renewable Energy Directive requires member states to give renewables “priority access” to the grid. Some Countries have afforded renewable generators priority both in connecting to the grid and in despatching their output, when available, reducing risks for community schemes.

Planning: Germany has limited the adverse time and cost implications of obtaining planning consent in part by resolving certain planning issues at the national level, so that the local consenting process deals only with the genuinely local issues. Local ownership has also facilitated planning success.

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

Renewable energy projects, like any infrastructure development, will almost always attract some local opposition. Community schemes can substantially increase local support for a renewable energy development compared to a commercial scheme. Involvement of local people from the very early stages in determining the scale, type and location of renewable energy to be developed in their locality can help to reduce the impacts and opposition. This is supported by a number of recent surveys and studies, as well as the success rate of community projects in planning compared to commercial projects.

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

Whilst three years ago there was very little community energy activity in the UK, there are now local energy co-operatives being set up across the country. CfR is aware of over 50 active community energy groups in the South West alone. Over 200 community energy groups received funding from the DECC LEAF fund, and the applications list will show substantially higher levels of interest.

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

Many small and medium sized businesses would welcome the opportunity to participate in community schemes as hosts, investors or if they could source green power and heat. Local businesses are as much part of a community as households. Initiatives such as the WREN co-operative have had success in involving and benefiting local businesses in community energy schemes.

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

CfR is aware of a number of local authorities in the South West that are interested in supporting community energy in their area through policy and investment, and on their own estate. Examples include: Cornwall Council, South Gloucester Council, and Bristol City Council and the Exeter and East Devon low carbon task force which promotes low carbon district heating community heating solutions.

Lancashire County Council Pension Fund’s investment in the Westmill Solar Cooperative demonstrates the potential for local authorities to both support and benefit from community energy projects. Cornwall Council has set up a £1 million fund to provide construction stage investments in community energy projects in Cornwall.

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

The key barriers to small to medium-scale community energy projects in the UK are:

Availability of suitable sites, and competition with commercial developers;

Grid connection cost, uncertainty and the timeframe taken to provide offers;

Planning costs, timeframes and uncertainty;

Access to risk investment;

Tariff uncertainty;

Opposition to renewables on the basis of mis-information, which has in some cases been endorsed or not sufficiently addressed by both Government and the media.

Additional challenges faced by community projects (which CfR’s business model is designed to counter by taking development risk) include:

A community will not have the benefit of portfolio risk management that a commercial developer has, and has access to sites only in their area;

A community is likely only to have funding for a single project (and that may be limited) so needs certainty over planning costs at the outset and may be unable to fund unexpected time delays and increased requirements from planners and consultees;

J. How effective are current Government policies in encouraging local and medium-sized energy projects?

The Government has made some positive policy decisions recently that have begun to deliver impacts. Key policies that have been welcomed and should be maintained include:

Safeguarding Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) eligibility for FiT supported businesses which are social enterprises (co-operatives or community interest companies), which supports community and social investment in genuine community energy projects and companies;

Enabling projects to register for FiT prior to operation, which provides certainty during the construction finance raising period;

The DECC LEAF fund released in early 2012, which provided grants to help community energy co-operatives set up and develop their business plans;

The Defra Rural Community Energy Fund to be released later this year helps address a key barrier for community energy projects of access to risk investment;

Setting up the community energy contact group.

2. Could Government Policies be Improved in any way? Recommendations

A. Definition of a community renewable energy generation project

Should be one owned by a social enterprise (a co-operative, community benefit society or community interest company), as defined in the exemption for EIS relief.

B. Support mechanism

The CfD’s under the EMR are inherently complex making it difficult for larger community projects to obtain PPAs given their longer timetable. Due to its simplicity, the small scale FIT is inherently better suited to community projects.

Specific recommendations for community schemes include:

Increasing the upper limit for FiTs above 5MW;

Slower FiT degressions for community projects;

Incorporating FiTs, RO, and eventually the CfD’s into a simple pre-registration system under which community projects could be accredited for the applicable tariff level at receipt of planning permission, guaranteed if the project takes some time to reach completion;

Simplifying the accreditation process for FITs, the RO, RHI and CfD for community energy projects;

Facilitating community schemes to participate in any green power auction mechanism designed to mitigate the adverse consequences of the CfD mechanism;

Supporting the development of local energy supply arrangements to reduce the dependence of community energy projects on revenue support in the medium to long-term.

C. Grid connection

Specific recommendations include:

Requiring DNOs to publish real time maps showing where there is existing connection capacity for projects without the need for substantial infrastructure upgrades;

Encouraging DNOs to reduce the 90 day+ timeframe to consider grid connection applications for community projects;

Ensure conventional and smart grid upgrade programmes incorporate the potential for small to medium scale projects, as well as larger scale projects;

Encouraging smart grid systems to provide the infrastructure for local energy supply arrangements (eg through storage and generation/demand balancing solutions, remote net metering and reducing transmission costs).

Allowing remote net metering or community projects.

D. Planning

Recommendations include:

Energy should be a key consideration for local plan development at all levels. An approach to considering energy could include:

Establish a baseline picture of the local energy economy (eg cost of and income from energy, fuel poverty, current levels of renewable energy and ownership).

Identify local renewable energy resource potential.

Assess delivery models and develop policy which supports those which maximise the benefits sought.

Encourage local authorities to provide priority support for community energy projects, eg through planning performance agreements;

Consider developing and maintaining national level planning guidance (and/or encouraging local adoption of such guidance) on key technical issues for renewable energy developments.

E. Funding

The key areas for support are:

Grant funding to help local energy co-operatives set up, develop their business plans and cover running costs until they can be self sustaining;

Risk investment to cover the project development costs (ie obtaining planning and grid permits, and preparing for construction stage financing);

Underwriting support for co-operative share offers to ensure projects are delivered.

As mentioned above, the Government has begun to address these funding needs through the LEAF and Defra Rural Community Energy revolving loan fund.

Specific recommendations include:

Regular rounds of LEAF-type grant funding, with realistic timeframes to ensure funding is spent effectively;

Implementing the Defra Rural Community Energy revolving loan fund with eligibility for urban community energy schemes;

Encouraging local authorities to place high renewable energy requirements on new developments, hypothecating allowable solutions off-site contributions into supporting local community energy initiatives, supplemented by business rates from renewable energy projects (enabled by an existing policy which has so far not been widely implemented);

Facilitate the investment of LA pension funds into local community energy projects;

Selective underwriting of a proportion of community share issues (eg with Green Investment Bank);

Widening the exemptions for financial promotion legislation and removing other regulatory barriers to facilitate fund raising for CIC and coop schemes: at present CICS seeking funds are effectively limited to seeking monies from high net worth or sophisticated investors;

Encouraging banks to provide more localised provision of debt finance to community schemes, perhaps by way of support through Green investment Bank guarantees or participation in a revolving fund.

F. Local energy supply arrangements

Whilst technical, legislative and market barriers currently make it difficult, the potential exists for renewable energy to be supplied directly to local consumers through arrangements which reduce bills and/or provide protection against future price rises. The potential benefits arise through:

Most renewable energy technologies generate energy at a largely fixed cost, so it should be possible to pass this through to consumers;

Small to medium scale renewable electricity projects supply energy mostly into the local distribution network (11kV and 33kV), and so it should be possible to pass savings in transmission charges to local generators and consumers;

Smart grid technologies could help manage local energy supply and demand, and therefore reduce balancing costs and pass this benefit through to local generators and consumers.

Specific recommendations include:

Carry out a review of the legislative, technical and market barriers to local energy supply arrangements and consider ways of addressing them;2

Consider ways of supporting smart grid programmes which provide the infrastructure for local energy supply arrangements (the Smart Cornwall Programme managed by Cornwall Council/Cornwall Development Company is beginning to look at this);

Consider supporting a number of pilot projects to demonstrate the potential for local energy supply models.

We would be delighted to discuss how an integrated suite of existing policies supplemented by those outlined above could, with the help of organisations such as CfR, deliver local energy economies to the benefit of the wider economy.

April 2013