Energy and Climate ChangeWritten evidence submitted by UK Energy Research Centre

THE UK ENERGY RESEARCH CENTRE

The UK Energy Research Centre carries out world-class research into sustainable future energy systems.

It is the hub of UK energy research and the gateway between the UK and the international energy research communities. Our interdisciplinary, whole systems research informs UK policy development and research strategy.

Introduction and General Approach

This document sets out the response of the UK Energy Research Centre (UKERC) to Committee’s call for evidence on local energy. It is based on the research and experience of the contributing UKERC authors. In particular, it draws on the results of two UKERC-funded research projects on local and community energy (UNLOC and EnGAGE Scotland) that were carried out between 2010 and 2012.1 It also includes some insights from the Community Innovation in Sustainable Energy (CISE) project that is being conducted by the Universities of Sussex and East Anglia, and the Challenging Lock-in through Urban Energy Systems (CLUES) project led by UCL2. The response addresses several of the specific questions in the Committee’s terms of reference for the inquiry.

Q1: What contribution could medium-sized energy projects (5–50MW) make to the UK’s climate change, energy security and energy affordability objectives?

Q2: What different models of ownership exist for medium-sized energy projects and how prevalent are they in the UK?

There is a lack of detailed analysis of the potential for energy generation at this medium 5–50MW scale. Whilst there are now a large number of energy scenarios that explore how policy goals (particularly for climate change mitigation) can be achieved,3 few of these distinguish in detail between the different scales of energy generation. One exception is the CLUES research project led by University College London.4 In its final report, the project outlines two potential future scenarios for the UK energy system. One of these, Stretching the Energy Spectrum, foresees a growth in “on site” power generation from the current low level to 150TWh in 2050. This represents 25% of total electricity generation at that time. However, this report does not include details about the scales included in this on site generation category. It is likely to include generation that is both larger and smaller than the 5–50MW range that is the focus of this inquiry.

In addition to the CLUES project, we are aware of research that is currently underway for DECC and Consumer Focus on community energy. This research is planning to include some analysis of the potential for the scaling up of community energy over the period to 2020.5 Clearly, this will therefore only analyse one of the potential routes for medium scale energy generation –– and is unlikely to assess the potential for local authority or private sector led projects.

The CLUES project has also analysed the different types of urban energy projects, based on a survey of 182 urban energy initiatives. The majority involved energy generation, sometimes in combination with demand management.6 Within this population of initiatives, considerable diversity was revealed. 51 distinct “pathways” were identified –– each of which involve a different combination of economic, social, technical and governance characteristics. With respect to leadership, 2% of these distinct pathways are private sector led whilst roughly a third of them are each led by local authorities, third sector organisations or partnerships. With respect to the financing of these initiatives, most of the distinctive pathways involved some form of public funding for the energy project concerned (eg from the European Commission, local authority budgets, central government or utilities due to public policy obligations). Other pathways relied on feed-in tariffs. Only 7% of the pathways identified did not involve public funding or subsidies.

As the CLUES scenario analysis suggests, the current scale of most local generation projects is small. Projects to date by Local Authorities have tended to have capacities of 1MW or less. There are few projects at the larger 5–50MW scale, suggesting that there has been a limited appetite (or a limited ability) among local authorities for investment in larger schemes. For example, one of the most prominent local authority investors (Aberdeen Heat and Power) has two energy centres that have capacities of less than 0.5MW and a third that has a capacity of 2MW. As noted in a forthcoming paper from UKERC’s UNLOC project: “no local authority (probably realistically) has the ambition to supplant the entire existing infrastructure”.7 Even Woking Borough Council, which was a pioneer in developing local energy infrastructure, has not replaced the incumbent centralised energy system in Woking. Rather it has developed infrastructure for particular end users in the town centre, and integrated this with existing energy infrastructures. It is therefore important to consider whether –– and under what conditions –– local authorities (and other organisations such as community groups) could develop more energy projects in the 5–50MW range.

Community energy projects also tend to be small. This includes Scotland, where the largest projects tend to be at the lower end of the 5–50MW range. For example, the largest project to date in Scotland is the Loch Carnan Community Windfarm, a 6.9MW windfarm (three 2.3MW turbines) in South Uist. This project is on community-owned land and was identified in the course of the community land buy-out as one of the key projects for development, central to the regeneration activities in that locality. Also on the Western Isles, the Point & Sandwick Development Trust are spear-heading a project to deliver a 9MW windfarm. This would be wholly owned by the trust, and sits on community-owned land (though this land is overseen by another trust).

Co-operative models for community energy may be more likely to fall within the medium-range scale, especially when they are part of larger commercial developments in which the community co-op has a stake. There are four such models in Scotland, all in partnership with Falck Renewables. For these, there is a minimum stake of £250 for membership of a co-operative. As revealed in interviews for the UKERC EnGAGE Scotland project, this can be prohibitive, and has the potential to generate division within the community. For these reasons, this approach has not been used for some projects. Joint ventures outside of the co-operative framework have also been evident in Scotland. Two prominent examples are the Fintry Development Trust’s purchase of a one-fifteenth share in a 15 turbine commercial development (by Falck Renewables) on privately-owned land close to the community, and a 10 MW windfarm in which Neilston Development Trust has a 49% share in partnership with Carbon Free Developments Ltd.

Q3: 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?

As suggested by our response to the previous question, there are a range of financing models being used for local, urban energy projects in the UK. Most of these involve some form of public funding—either directly or indirectly via feed in tariffs. An analysis of 190 community energy projects by the CISE research project showed that there is significant diversity in their structure.8 The most common structures included charitable incorporate organisations (23%), independent informal groups (20%), charitable social enterprises (18%) and limited companies with a social purpose (16%). With respect to sources of income, 69% of projects were in receipt of grant funding (or were planning to apply for it) and 34% received income from energy generation. Other sources of funding included donations (23% of projects), loans (19% of projects), income from events and sales (15%) and share offers (14%). Clearly, not all of these sources of income or organisational models would be suitable for larger medium scale projects in the 5–50MW range. As noted earlier, the majority of these community and other projects are at a small scale. However, some evidence from Scotland suggests that medium scale projects can include some elements of community ownership and involvement (see for example the Fintry project discussed above).

Q4: Why are community-owned energy projects more prevalent in countries like Germany and Denmark than they are in the UK?

We have not carried out in depth comparative research that would allow us to answer this question fully. There a clearly a number of factors for the difference between the UK and other European countries such as Germany and Denmark. These include differences in market structure, energy system governance, culture and the historical development of the energy system. In particular, there has continued to be a much stronger role for local government and local utilities in these countries (and many others) than there has in the UK over the past few decades.

The role of community energy in both Denmark and Germany is recognised as being much more important in these countries. For example, new policy instruments have been designed to promote co-ownership in Denmark. Most notably, a cross-party agreement and subsequent legislation designed to promote renewable energy, passed in 2008, included an obligation to offer at least 20% ownership to individuals and communities living within the vicinity of new windfarms. There is an onus on the developer to provide information on the scope and financial details of the project. There is no equivalent incentive in the UK, except for the obligation for developments on Forestry Commission Land to offer up to 49% stake to communities. In the UK, community groups who have embarked on joint ventures have often been required to demonstrate the feasibility of the project at all stages.

Q5: Is there any evidence that medium-scale energy projects are more likely to be accepted by local communities?

There is some limited evidence from the UK and elsewhere to suggest that community ownership, or a genuine community stake, increases acceptability. In a survey that was conducted alongside UKERC’s EnGAGE Scotland project, it was found that community-led initiatives received overwhelming support from their communities, with two thirds of projects reporting no objections at all.9 Clearly, this survey does not allow more general conclusions to be drawn about the acceptability of projects led by other organisations. Furthermore, the average capacity of projects that were surveyed was well below the 5MW threshold.

Evidence from the CLUES project adds an important dimension to the discussion of acceptability. Case studies of 9 decentralised energy projects in urban locations showed that each included a wide array of organisations.10 Whilst many of these organisations were from the local area, many were from other parts of the UK –– or even from abroad in some cases. Community and local authority led projects tended to be more locally embedded (with more local organisations involved) than private sector led projects. However, further research would be required to see whether the differences in the “local content” of these projects has affected their relative acceptability.

Q6: What appetite is there for community-owned medium-scale energy projects in the UK?

Community capacity to develop energy projects and institutions has been increasing rapidly in recent years. Whilst the majority of projects are small, this may demonstrate at least the potential for developing projects at the medium 5–50MW scale. As noted earlier, the CISE research project conducted a recent survey of 190 community energy projects –– and showed that the number of new projects has increased rapidly since the mid 2000s.11 The motivations for these projects vary significantly and do not only stem from a desire by communities to reduce emissions or to generate their own energy. Whilst the majority of projects (over 80%) were motivated by energy saving and/or reducing emissions, there are often strong social drivers for these projects too. For example the survey found that 57% of projects aimed to increased community empowerment.

A recent report for Co-operatives UK focused on one particular model for community energy—and showed that there were over 30 new registrations of renewable energy co-operatives in the UK in the four years to 2012.12 However, network analysis of community energy groups in Oxfordshire and Somerset, carried out as part of the UKERC funded “UNLOC” project, demonstrated that the majority of such groups were operating very small scale projects. Only a small number had accessed significant amounts of funding, and even these were developing schemes at a scale smaller than 5MW.13 This point was reinforced in interviews for the EnGAGE Scotland project. They show that it is increasingly difficult for communities to embark upon their own projects at this scale (or any scale), given the lack of start-up funds and the difficulty of securing affordable debt finance. The Co-operative Bank and Triodos have been prominent in providing loans to community groups, though the interviews suggest such loans may now be less readily available. Interest payments on loans provided by government or social investors can appear high to communities with few resources.

The UNLOC project and other research on community energy14 have highlighted the importance of intermediary organisations. These organisations can offer support and advice to community energy groups and, in some cases, can help to aggregate smaller energy schemes into a more area-wide approach. They can play important roles in developing the capacity of, and sharing learning between, small-scale community energy projects. They can also help community groups to access the legal, energy and financial expertise (such as suitable financing models) needed to make community-owned energy projects a reality.

Q8: What appetite is there among UK local authorities to invest in their own medium-scale energy projects?

At present there is no statutory driver for local authority action on energy. Local Area Agreements (LAAs) have, in the past, provided a driver for local authority action on sustainable energy. Two thirds of LAAs in England have included the reduction of carbon emissions as a local priority. This did appear to lead to increased awareness of the potential for locally-led action, and some commitment to taking this action, but local authorities were concerned that they did not understand the local situation well enough to be confident about what action they should take. The use of LAAs ceased before they could drive significant changes in local authority action on energy.

There is a relatively small but significant group of local authorities in the UK that have gone beyond what is required by the policy framework and made fuller use of opportunities to act in the sustainable energy arena.15 These authorities have increased the use of small scale renewable energy systems in their local area and in some cases have become owners and operators of distributed energy systems. The cases of Woking and Aberdeen have already been mentioned. However, there is as yet insufficient drive, support and capacity building to close the gap between these very active authorities and the remainder.16

A major barrier to increased local authority involvement in medium scale energy projects is the availability of finance. Local authorities are facing enormous financial pressures, and even though renewables projects could prove income-generating in the longer term, the pressure for investment is on front-line services in education, housing and social care, leaving little scope for investing in energy projects. Furthermore, most sources of local authority finance are subject to a greater degree of central Government control than in many other European countries. For example, in Denmark, Germany and a number of other countries with similar total tax levels, local or state taxes represent over 20% of total tax revenue, whilst in the UK they represent less than 5%.17 This has in the past restricted local authorities’ freedom to deliver locally agreed service and investment priorities.

In addition, overall capital expenditure by local authorities is at present about 10% of their total spending; a very low level in comparison with the situation in the 1960s, when capital expenditure represented over half of all local authority spending. Annual capital funding for local authorities is now being cut by almost half over a period of five years. Prudential borrowing could in theory offer an alternative source of capital, and the Public Works Loan Board (PWLB) does have spare capital that it could loan to local authorities. There has been a long-term drive in national policy to persuade local authorities to become debt free. This may have resulted in many local authorities viewing all debt as bad rather than distinguishing between different types of debt. Entrepreneurial debt, funding investment that is intended to deliver financial returns (including that required to finance investment in local energy assets) may be considered a positive thing but it may also be difficult to explain to an electorate and hence be seen as politically risky.18 Hence many authorities may be reluctant to borrow the capital required for investment in medium-scale energy projects.

Q9: What are the barriers to medium-scale energy projects in the UK?

We have discussed barriers to the development of community-led and local authority-led projects in our answers to questions 6 and 8 respectively.

Q10: How effective are current Government policies in encouraging local and medium-sized energy projects? Could they be improved in any way?

Given the economic, financial and other barriers to the development of local energy projects, many have required support from government policies. Grants and feed in tariffs have been particularly important for small scale projects (with capacities of less than 5MW). For example, some of the most successful community energy groups have been adept at accessing different incentives as opportunities arise and policies change. However, a general problem that has been highlighted by our research is the lack of certainty and stability of policy frameworks. Our interviews reveal significant anxieties and uncertainties created by what is perceived to be shifting of goal posts in the midst of project development. Changes to feed-in tariff levels that were previously unexpected is a particularly good example of this. Community projects take years to get off the ground, and changes to the policy framework and incentive scheme can create considerable barriers. Another important issue is that the current level of feed-in tariff does not necessarily provide sufficient revenue to enable development funding for a community energy group (ie to pay for a part time staff member to devote sufficient time to the realisation of the project). This continues to rely on voluntary input.

As the Committee note in their terms of reference, medium scale projects cannot access the feed in tariff. In addition they are potential disadvantaged in their ability to access support that is designed for much larger projects. Medium scale electricity generation projects are effectively caught between two policy approaches. One, which includes incentives like grants, feed-in tariffs and the Renewable Heat Incentive, addresses small scale projects. The other, which is the focus of the Electricity Market Reform (EMR) package of policies, addresses large utility-scale investments. Given that there is some appetite to develop projects at this medium scale –– and that the potential for such projects is significant –– it is important that the implementation of EMR takes this into account. So far, government has recognised that there may be particular issues for generators at this medium scale, but concrete proposals to address these issues have yet to be agreed.

As noted in a recent report by Cornwall Energy, medium scale projects are likely to be at a significant disadvantage with respect to the Contracts for Difference (CfD) that are being implemented under EMR.19 Many of the organisations developing these projects are likely to have a limited capacity to participate in CfD auctions –– or to engage with the range of other requirements they will need to meet. In particular, there is a concern that they will be unable to achieve the market price for power they sell since large utilities will often purchase this at a discount. If this is the case, this means that they would not be able to achieve the CfD strike prices that are available to larger projects. It is therefore welcome that discussions are underway to identify an alternative market price to use as a reference for CfDs for medium scale projects. A resolution to this issue is now urgent, especially if it requires modifications to the Energy Bill. As the Cornwall report notes, it is also important to explore whether a partial solution may be to increase in the maximum capacity of projects eligible for feed-in tariffs.

April 2013