Energy and Climate ChangeWritten evidence submitted by the Department of Energy and Climate Change

1. The Government recognises that there is a potential role for communities in maintaining energy security and tackling climate change—not just through generating electricity but also for generating heat and saving energy.

2. Ministers and officials have seen at first hand several good examples of successful community-driven projects, but while there is plenty of anecdotal evidence on community energy, we do not yet have a comprehensive and robust assessment of the evidence on the benefits of and barriers to community energy projects.

3. This is why have already started an evidence gathering exercise, including workshops, formal academic research, and publishing a formal Call for Evidence in May. This will provide us with evidence we need to publish a detailed Community Energy Strategy later in the year.

4. The responses below therefore reflect only a partial picture of the evidence that exists, and we will update the committee later in the year once new evidence has become available.

5. In response to the specific points raised by the committee:

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

At present, 4.5 GW of renewable electricity generation capacity comes from 306 projects between 5–50MW. There is a further 6.3GW (416 projects) with planning consent, and 4.6 GW (276 projects) in the planning system. Not all projects will receive planning permission, and not all that is consented will be built.1

Renewable energy is an important part of a diverse, low carbon and secure energy mix. Alongside gas and low-carbon transport fuels, nuclear power and carbon capture and storage (CCS), renewable energy brings energy security, decarbonisation of our economy and green growth. Indigenous renewable energy generation can also help to insulate our energy supply from global events that we cannot control. The Arab Spring, tensions in Iran, and variations in production from oil and gas producing countries have all resulted in volatility in fuel prices. The roll out of renewables will reduce our dependence on these fuel sources and limit our exposure to such price shocks in the future.

The costs of renewable energy are often overstated and need to be set against the benefits in business growth and job creation of being a world leader in this sector. Between 1 April 2011 and 31 July 2012, DECC has collated information on renewable industry investments totalling around £12.7 billion confirmed and planned investments, with the potential support of around 22,800 jobs. By 2020, it is estimated that renewables could support over 400,000 jobs. The reforms contained within the Energy Bill will create a new energy market that promotes investor confidence, bringing further jobs and growth in the UKs green economy.

Heat networks offer a way to supply heat directly to homes and businesses through a network of pipes, rather than supplying the fuel for people to generate heat on-site. Under some circumstances, heat networks can be the most effective way of supplying low carbon heat to buildings, and can offer greater convenience and reliability to consumers. Heat networks also offer flexibility over time, as a number of different heat sources can supply the same network.

Last month, the Government published The Future of Heating: Meeting the challenge2 on the next steps to ensure that affordable, secure, low carbon heating, plays an important role in the nation’s energy mix, now and in the years to come. A chapter on heat networks gives more detail on the potential and role for heat networks in the UK going forward.

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

There are several different ownership models, including:

Community Share Schemes (such as that launched by the Co-op and Locality with support from CLG).

Co-operatives, including Industrial and Provident Societies (IPS) and Beneficial Communities (BenComs).

Community Interest Companies (CIC).

We hope to get more information on the different ownership models and data on their prevalence through the Community Energy Call for Evidence.

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?

Local energy projects will need different types of finance at different stages in their life cycle. Community energy groups have told us one of the main finance barriers they face is at the start of projects (pre-planning approval). Projects are higher risks at this stage because any money invested is unsecured, ie if the project does not go forward all the money is lost. This phase encompasses feasibility studies, planning applications, and environment impact assessments along with any surveys that may be required as a result (for example, surveys to safeguard local wildlife such as bats and birds may take several months). Projects may also need financial support to build their capacity during this phase, for example to fund legal costs, training, pre-feasibility studies, business planning or peer mentoring. It is not clear how this varies with the size of the project.

Once these projects have planning permission and any required environmental permits, along with access to the grid, access to private sector finance becomes easier (post-planning approval). However, community groups tell us the ease of access does depend on the level of finance. In particular, we have been told that finance for smaller projects (of the order of tens of thousands of pounds) and larger projects (larger than around £3 million pounds) is easier to access, while there is a gap in the middle where many community energy projects struggle to get finance.

We hope to gather more evidence about different types of finance model and the barriers to accessing these (at various project stages and for different sizes of project) through the Community Energy Call for Evidence.

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

There are varying views on this. One common view is that Denmark moved strategically to system of decentralized energy supply after 1970 Opec Oil crisis, and hence community energy structures have steadily developed over the last 30 years. We have heard that the key to community energy’s success in Scandinavia has been partnerships with local government and businesses, and the right policy and regulatory framework (eg Denmark’s 1979 Heat Supply Act) that gave incentives and mobilised investment for local heat grids and distributed energy system.

Conversely, the North Sea Oil gas boom in 80s pushed the UK in the opposite direction, towards a more centralised energy system. There are also important cultural and institutional differences between the countries. For example, the co-operative and alternative energy movement in Germany has always been stronger than in the UK.

In 2004 a Co-operatives UK and DTI report identified four key factors for the success of energy co-ops in Denmark and Sweden. These were support to communities from technical advisers and practitioners; commitment of central and local government to community involvement and ownership models; public education and information to promote familiarity with co-operative structures and energy services; and developing a public consensus that prices should not be the only driver of energy policy.3

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

We have heard anecdotal evidence that greater community involvement in and/or ownership of energy projects can lead to greater acceptance of energy infrastructure by local people. We hope to get more robust evidence on this through the Community Energy Call for Evidence. We are not aware of any evidence on whether the size of energy projects makes a difference to communities’ acceptance of them.

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

It is likely that there is some unmet demand for medium-scale community-owned energy projects. However, it is currently hard to say what level this is, as current policies (such as Feed-in-Tariffs) do not focus on medium-scale (greater than 5MW) generation.

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

We do not have any evidence on this, but hope to get more information through the Community Energy Call for Evidence.

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

This depends on the type of energy project and the local authority concerned.

For renewable electricity projects, the appetite among UK local authorities to invest in their own medium scale (5MW-50MW) projects varies substantially between each authority. A variety of factors affect deployment, including: availability of land, local communities support for renewable installations and access to local renewable energy sources.

Broadly speaking we have noted an appetite for solar PV and onshore wind energy among some UK local authorities that are predominately rural. For example, Peterborough City Council announced in July 2012 its intention to build three Renewable Energy Parks, consisting of solar PV panels (with a combined generating capacity of 83MW) and nine large wind turbines (potentially generating 24MWs), on Council owned farmland in the Morris Fen (Thorney), America Farm and Newborough areas.

In local authorities in urban areas we have seen a greater focus on bioenergy schemes, which in part reflects greater restrictions on the availability of land in urban centres. For example, Stoke-On-Trent City Council and Staffordshire County Council have developed proposals to develop biomass and waste heat opportunities to power local ceramics, metal and polymer industries.

For heat networks, local authorities across the UK have shown significant interest in developing heat networks (also known as district heating), including many medium scale projects. This is in addition to at least 50 medium-scale heat networks that are already place across the country, owned and operated by a mix of private companies, local authorities and other public sector organisations.

DECC is working closely with six of the eight core cities in England to support them in developing heat network projects. The local authorities involved see heat network projects as important strategic investments that can help boost inward investment, reduce carbon, reduce costs and alleviate fuel poverty. Later this year the Department will be establishing a Heat Networks Delivery Unit to support more cities with both expert advice and funding for project development costs. Altogether, this involves investment of around £10 million over a two-year period.

The GLA is working with London boroughs to develop strategic heat network projects (also at medium scale) as part of its work on decentralised energy. Scotland has established an Expert Commission on District Heating and is providing £2.5 million of funding to support development of networks in its cities.

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

Some of the known barriers for different types of energy generation projects (heat networks, renewable electricity generation and combined heat and power) are outlined below. These are not specific to medium-scale energy projects—we do not have evidence on the specific barriers faced by energy projects at this scale.

A key aim of the Community Energy Call for Evidence is to develop a more detailed understanding of the barriers faced by different types of community energy projects (including electricity and heat generation, as well as projects focused on saving energy, collective switching and collective purchasing). Through this, we hope to develop a more detailed picture of the barriers faced by different projects.

Renewable Electricity

There are cross-cutting barriers to deployment of renewable electricity technologies as well as barriers that apply to specific technologies, all of which need to be addressed when considering the deployment of renewable electricity projects in the UK.

The UK Renewables Roadmap 2011 set out how we will tackle the non-financial barriers to renewables deployment, enabling the market to grow in line with our goals for 2020 and beyond. In summary these barriers include:

Facilitating access to the grid.

Ensuring long term investment certainty.

Tackling pre-and post-consent delays.

Ensuring sustainable bioenergy feedstock supply.

Facilitating the development of renewables supply chains.

Encouraging innovation.

Of course, technology costs, innovation breakthroughs and barriers to deployment will change over time. Government will closely monitor deployment and the development of the market. We will update the Roadmap on an annual basis so that we know how we are doing and whether other technologies can make a bigger or cheaper contribution than is assumed here.

Heat Networks

DECC commissioned research to understand the full range of barriers at each stage in the development of a heat network project and the report, `Research into barriers to deployment of district heating networks’,4 was published in March 2013 by BRE. This highlighted the most difficult barriers to overcome, and how they differ between schemes commissioned by local authorities and those led by private sector developers. Local authorities and private developers face challenges around the generation and supply of heat, its transmission through networks, and its delivery to final customers.

Commercial considerations are a key barrier identified through this research and stakeholder engagement. Difficulties include being able to secure capital funding and related challenges such as projects’ payback periods and uncertainty of return. All of these are due to uncertainties with the availability and longevity of the heat loads, the prices obtainable for the heat and electricity produced and the cost of the fuel supply. Market novelty and industry uncertainty about regulation in the area also increase investment risk. Development costs such as heat mapping and master planning are also barriers to local authorities, as project pre-feasibility risk profiles are unattractive to private sector developers, who rarely meet these costs.

Other barriers to heat networks include:

Lack of standardised commercial models.

Consumer challenges.

Issues faced by local authorities.

Issues around the development of the networks—lack of common technical standards.

Difficulty selling electricity produced by CHP.

Lack of statutory access to land.

Difficulties joining up heat networks.

Future low carbon heat sources—Difficulties in planning for future requirements.

Combined Heat & Power

Combined Heat & Power schemes cover the range of scales: domestic-scale micro-CHP; schemes of a few hundred kilowatts supplying heat and power to public and commercial buildings; schemes of up to a few tens of megawatts supplying heat networks; and industrial plant ranging from a few megawatts to over a gigawatt.

Strong growth in renewable CHP capacity is projected. Some growth in natural gas fired CHP is also projected, but this is primarily small (<2MW) schemes. The Government’s recent publication The Future of Heating: Meeting the challenge identified the following barriers to growth in natural gas fired industrial CHP and CHP supplying heat networks:

Securing finance: CHP has high capital costs compared to installing boilers and importing electricity from the grid. Projects face high hurdle rates in comparison with power-only projects due to high opportunity costs for industrial developers and perceived risk of loss of heat customers for third party developers.

Access the electricity market wholesale price: For CHP schemes which export a substantial proportion of their power to the grid their ability to realise close to the wholesale value for exported electricity is a significant issue.

DECC is supporting implementation of Ofgem’s Licence Lite proposals to enable smaller electricity generators to gain better access to the electricity supply market. The Government has also proposed power in the Energy Bill that would enable the Secretary of State to amend electricity licence conditions to ease participation in the wholesale market if required. The Future of Heating publication also indicates that DECC will work on developing a bespoke policy to support new natural gas CHP capacity.

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

DECC has a range of past and current policies which provide support for community energy schemes of various kinds and sizes—including those focused on energy generation, as well as on other types of community energy such as energy saving, demand management, collective switching and collective purchasing.

Several successful community energy schemes have already emerged with the support of these policies. However we recognise that there may be the potential to do more in this area. The Community Energy Strategy, due to be published in the autumn, will consider in more detail what support is needed by community energy projects and how Government policies could work more effectively for these projects.

Examples of past and current support are listed below. Note that this list is not specific to medium-sized energy projects or to those focused on energy generation.

Financial Support

£10 million funding to 236 communities in England and Wales as part of the Local Energy Assessment Fund (LEAF), which ran from December 2011 to January 2012. The funding aimed to help communities assess energy efficiency potential, undertake feasibility studies and in some cases submit planning applications for community renewable electricity projects.

£10 million in grants to help 22 communities across England, Wales and NI to explore pioneering approaches to becoming a low carbon community, through the Low Carbon Community Challenge (LCCC), which ran from 2009 to 2011.

38 communities have been supported to deliver domestic renewable heating systems through the £3.1 million Renewable Heat Premium Payment (RHPP) Communities Scheme.

The £5 million Cheaper Energy Together fund in October 2012 aimed to support local authorities and third sector organisations in England, Scotland and Wales to develop collective purchasing and switching schemes.

In autumn 2011 we announced a joint Defra/DECC £15 million Rural Communities Renewable Energy Fund (RCREF) to help communities to raise the upfront cost of developing renewable energy projects. This will be officially launched shortly.

Non-financial Support

DECC has funded PlanLocal training events on community energy for a number of communities, attended by local authorities and community group leaders.

Gov.uk provides advice and guidance to communities interested in setting up energy projects, including links to video training, how to set up legal structures, information about funding and National Heat Map (see www.gov.uk/community-energy).

DECC’s Local Authority Fund included £10 million to support Green Deal Pioneer Places. This is supporting 39 projects across England.

DECC’s Low Carbon Pioneer Cities programme worked with local authorities to trial early elements of Green Deal across seven major cities in Great Britain

DECC has funded the Centre for Sustainable Energy to produce an interactive Green Deal pack for communities as well as support for its delivery. The pack can be found at: www.planlocal.org.uk/pages/energy-efficiency-and-the-green-deal/identifying-opportunities-in-your-community

April 2013