Energy and Climate ChangeWritten evidence submitted by Cornwall Energy

Cornwall Energy is an independent advisor and commentator on energy policy, regulation and markets in Great Britain and overseas. Our customers include suppliers, generators, public bodies, service providers, financial institutions and law firms.

We find this inquiry into local energy timely, especially the focus on the support and finance structure in place, with reference to how these can be improved. At Cornwall Energy we have been encouraging the government to undertake a review of the support available for medium-scale projects. A more tailored support structure would see a larger uptake of projects of this size. In turn this would see medium-scale projects contributing a larger proportion to UK climate change targets.

Barriers to medium-scale energy projects that the ECCC has highlighted are real. We have noted there are various issues to market access, and there are limited viable routes to market. Conventional PPAs at present generally provide a poor return on the value of power. In our experience existing generators in the market are looking at alternatives to conventional PPA contracts, but there are many issues that need to be better understood or clarified.

Our responses to the 10 questions raised in the consultation are given below. Please contact me if you wish to discuss our response further.

Cornwall Energy Responses to Inquiry Questions

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

We see medium-sized energy projects as having the potential to make a significant contribution to helping the UK meet the objectives as set out above—providing they are given sufficient support.

The capacity and number of local energy projects that are in development are increasing. Of the total number of projects that are accredited under the Renewables Obligation (RO) 284 projects fall within the parameters of a medium-sized project. This equates to almost 11%.

As onshore wind is the technology with the highest capacity, using the Renewable UK’s wind database1, we have calculated that of the 73 onshore wind projects currently in construction 58 of these projects (79%) fall within the specifications of a medium-sized project. It is important to note that over 50% of onshore capacity that is under construction in the UK fall into the class of medium-sized project. This is approximately 971.3MW.

It is also important to note that we estimate that 35–50% of the delivery of renewables will be from independents by 2020.

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

Ownership models are generally a function of the approach to project financing. Medium-size project ownership models we have experience of that fall outside of the conventional utility-led developments include:

projects developed off the balance sheets of specialist independent renewables developers;

community energy projects that pursue a non-profit community organisation structure, often set up as a company limited by guarantee (CLG) with charitable status;

wholly owned trading subsidiary (for projects developed outside of the traditional utility sector where significant levels of income or involve risk for the community body); and

local authorities (or other public sector entities) that have existing and/or planned generation plant (mainly CHP) within their asset base.

The implemented models are often as a response to the risks and costs associated to a developer.

3. 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?

Four financing models have been identified as being suitable for small to medium-scale projects, these include:

Leasing—the developer leases land/property, but retains ownership of the generation asset. The model allows the land/property owner to purchase locally generated power with some benefit sharing between the developer and consuming entity. This is most often a long-term arrangement linked to the operating life of the asset.

Loan—here the developer lends capital to the land owner (or local community group) to install the generation asset. The lender then receives loan repayments that will arise from subsidy (ie RO) and electricity revenues.

Gift funding—this model is based on money being gifted to the developer (usually a community based group) from an organisation or a private individual. A small amount of existing funding can act as an anchor fund that will increase the chance of attracting the required additional investment.

Equity investment—developments off balance sheets for specialist developers or one adopted by community based cooperatives where investments come from members of the community (not necessarily from the locality), eg “community share” schemes.

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

GB market arrangements are complex, arcane and require specialist knowledge to develop generation assets (and indeed become a retailer) and realise market value for the output. Moreover generation volumes need a route to market that requires a generator taking a position itself in the centrally traded markets, which is only viable for 100MW+ projects, or to enter into commercial arrangements with an offtaker to absorb volumes in their portfolio. The latter is the preferred PPA route adopted by community-owned projects, where we have witnessed deterioration in terms being offered to developers in recent months.

There have been a couple of notable responses to this acknowledged difficulty for community-owned projects to access the market. The most prevalent is the introduction of the fixed feed-in tariff (FiT) regime for sub-5MW installations. While this has eased the process to get projects away we have concerns regarding the value attained by such projects. The scheme has also introduced an arbitrary threshold for support, above which the rules and processes and the same for those developing centrally despatched large-scale plant (eg offshore wind, new nuclear, etc).

The lesser well known initiative is the “licence-lite” regulatory change introduced by Ofgem in 2009 in response to concerns highlighted in the 2007 Energy White Paper. This change lowers the regulatory hurdles for smaller generation projects to gain a supply licence in order to directly retail power to end users. This has the potential benefit of allowing generators to retain more value and gain “buy-in” from consumers in the locality.

To date no “licence-lite” suppliers have entered the market, but we note the Greater London Authority has applied for the first licence of this type.

A further impediment to community-owned projects is that they, in isolation, can only offer the limited offtaker provider market small volumes of (usually intermittent) power. Due to market rules (particularly concerning balancing risks) the offtaker will discount price offered for power. Added to this the government’s intention to phase out the RO will further depress the attractiveness of community-owned renewable developments as the obligation on suppliers to procure renewable power will be removed.

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

No comment.

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

In our experience there is a significant appetite for medium-scale community energy projects within the UK. The clients we have worked with over the last couple of years all have projects in the pipeline at various stages of development—the market and policy framework are often cited as the barriers preventing more projects reaching fruition, rather than local opposition.

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

This 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.

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

In our dealings we see many local authorities looking to invest in their own generation assets (more likely CHP, but some renewables too) in response to local carbon/renewables targets or where they see an opportunity to provide power to themselves (and possibly local residents or other public authorities) more cheaply than through the conventional supply market.

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

The obstacles faced by medium-scale energy project developers are two-fold. The first can be categorised as regulatory. From 2017 contract for difference (CfD) FiTs will replace the RO as the sole support mechanism for new low-carbon projects. In a recent project we completed for Cooperatives UK we concluded that this new support mechanism may be suitable for large-scale utility led investments, but would not be conducive to bring forward medium-scale projects (developed outside of the conventional utility base). This was mainly due to the generator being unable to access prices that the CfD FiT subsidy payments would be made against (the market reference price). There are also concerns to do with the contract letting process (which are currently planned to take place every six months) and no certainty that a contract would be awarded. As mentioned in our response to Question 4 above the complexity of the GB market arrangements make it difficult for non-energy experts with limited knowledge of compliance, policy and regulation to see through projects, without committing significant resource.

The second obstacle is market based. In July 2012 DECC issued a call for evidence on the state of the PPA market2. This was issued as a result of concerns with the terms offered in Power Purchase Agreements (PPAs) to projects (most of which fall within the 5–50MW range). DECC’s response confirmed market sentiment that generators are finding it increasingly difficult to secure PPAs on attractive terms, leading to higher discounts against market rates for power as well as against Roc and Lec values. Terms were generally being offered over 10 year periods instead of 15, and reference prices tended to be set against day-ahead indices, increasing price risk for the generator. This situation, combined with the increasing absence of floor prices in offers, meant that fewer deals offered were now bankable.

Stakeholders identified the gloomy economic outlook but also the Big Six’s ability to meet their demand for Rocs through certificates from their own projects and PPAs already in place as the principal reasons behind the worsening market conditions. There was also widespread concern that the deterioration would continue.

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

There is a desire and commitment from community-based, industrial, public sector and other parties outside of the conventional utility sector to develop generation assets above 5MW. The evidence shows that projects will thrive in an environment where the barriers can be overcome by those without energy specialist knowledge and resource (ie FiTs for sub-5MW projects).

The government’s Electricity Market Reform programme demonstrates the lack of ambition to encourage medium sized projects as the impact assessment deem anything above 5MW to be non-community, local projects—which becomes a self-fulfilling prophecy.

There are a number of approaches that could be adopted to leverage in diverse financing/ownership models that would bring forward new developments. These include:

extending the threshold for small scale FiTs to perhaps 10MW or more;

a market for green power should be established that is open to community energy schemes and other smaller generation projects;

the traded price from the green power market (and not the day-ahead market price) should be used as the reference price in the CfD FiT to mitigate erosion of low-carbon incentive payments;

Ofgem should be encouraged to push through its reforms to boost electricity market liquidity as this will encourage the entry of aggregators and market makers, which can be expected to benefit smaller generators;

the strategy and policy statement to be developed under the Energy Bill could be used to highlight desirable policy outcomes that the regulator should be required to have regard to, including support for community energy;

the government should also adopt a target for build-out of community energy schemes in England and Wales to align with the approach recently adopted in Scotland;

DECC urgently needs to conduct deeper analysis of how its EMR policy proposals are likely to effect community energy projects; and

ensuring retail routes (to allow generators to directly sell output to customers in the locality) are simplified. This includes the “licence-lite” route that has the potential to stimulate medium-sized generation deployment and retail market competition.

April 2013