Energy and Climate ChangeWritten evidence submitted by Co-operatives UK

Summary

There is potential for 3.5GW of community-owned energy, much of which will be at the mid-scale (5–50MW).

We have identified over 40 community-owned schemes at around 5MW, at the feasibility, planning or operational stage, showing that there is appetite for community-owned projects.

The main limiting factor is not the capacity of communities; it is the policy and regulatory frameworks, and difficulties of financing such projects.

As well as renewable energy, the sector helps to raise awareness of climate change, reduce demand and build a more secure energy economy.

The co-operative structure provides a financing model for medium-scale energy projects. However, bank finance is very difficult to find.

In contrast, community projects in Denmark and Germany have access to state-backed finance, a stable policy framework and a consistent planning regime.

Barriers to medium-scale community schemes include: a shifting regulatory environment (such as the changes to FiTs), access to finance, the quantity of administration required to establish a scheme, and planning issues.

The UK policy framework is not currently effective at encouraging medium-scale projects. There is a need for a formal commitment to community energy; a clearly-defined offer, setting out the process by which government and its agencies work with schemes; co-ordinated advice and support services; access to finance through the Green Investment Bank; and consideration of community energy in electricity market reform.

A particular current issue is the Energy Bill proposal for Contracts for Difference, which will impact negatively on smaller power producers. Government should undertake a systematic analysis of how the Energy Bill proposals are likely to affect the mid-scale, and develop a different price support mechanism—either increasing the fixed Feed-in Tariff for community schemes, or providing a guaranteed market through a “purchaser of first option” or green power auction market arrangement.

About Co-operatives UK

1. Co-operatives UK is the national trade body that campaigns for co-operation and works to promote, develop and unite co-operative enterprises. We have a unique role as a trade association for co-operatives. We work to promote the cooperative alternative across many sectors of the economy from high street consumer-owned co-operatives to pubs and renewable energy, healthcare to agriculture, credit unions to community owned shops. Our research with The Cooperative shows that there are now over 40 renewable energy generation cooperatives across the UK, which collectively have raised over £16 million in risk capital for investment. Together the co-operative economy is worth some £33.2 billion, employs 236,000 people and has 12.8 million members. Cooperatives are the largest membership movement in the country.

2. Co-operatives UK works with renewable energy co-operatives, both to support them in establishing and developing schemes, and to improve government policy. Specifically:

In 2011–12 we undertook a research project to assess the state of the community and co-operative energy sector, published in 2012 as Co-operative Renewable Energy in the UK: A guide to this growing sector.

In 2012, jointly with the Co-operative Group and the Community Energy Coalition, we published the Manifesto for a Community Energy Revolution, setting out the policy and legislative changes required if community energy is to become part of the mainstream.

We are working with DECC to shape the Energy Bill and the forthcoming Community Energy Strategy. In 2012 we commissioned technical research from Cornwall Energy assessing the likely impacts of the Electricity Market Reform arrangements on community energy. Since then we have been working with MPs and DECC officials to improve the prospects for community energy in this process.

This submission draws on this research and evidence, as well as our experience from working closely with energy co-operatives and others.

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

3. Community and co-operative energy can play a significant role at the mid-scale. Recent research by Camco and Baker Tilly1 estimates there is potential for over 2GW of community-owned renewables in England, or around ten% of the total capacity for onshore renewable energy. The potential for Scotland is estimated to be 1GW and for Wales 0.4GW. Therefore, UK capacity could be around 3.5GW, the equivalent of three or four conventional power stations.

4. Looking specifically at projects over 5MW, we have identified over 40 potential community energy schemes around this size or larger (see separate list). Not all of these will succeed in gaining planning consent or finance but it shows the potential for the sector.

5. The sector contributes to energy goals as follows:

Carbon reduction: In addition to generating renewable energy, there is evidence to show that community schemes build awareness of climate change and develop “energy literacy”.2

Building demand response and demand reduction: Energy solutions at a local level provide a way of linking energy supply and energy demand. For example, in Denmark, district heating plants are now installing electric boilers, which can be used at times when there are high wind speeds and surplus electricity on the grid. This effectively means that surplus electricity is stored as hot water. Local networks can therefore provide grid balancing services which, in the UK, is currently done through national-level grid interventions.

Energy security: Locally-owned schemes are better at exploiting local resources like biomass, farm wastes, or wind sites which may be overlooked by commercial developers. They bring diversity to the UK’s energy portfolio, building resilience and security.

A new source of investment: Community schemes attract investment from new sources, particularly individual private investors. As the sector matures, and if risks are reduced, there could be significant investment from this source, for example as an alternative to stocks-and-shares private pensions.

6. The contribution of the community sector over 5MW does, however, depend on a supportive policy framework. There are a number of aspects of current policy which make it very difficult to establish such schemes. These are discussed below.

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

7. The co-operative model is well established in England and Wales. Currently, the largest renewable energy co-operative is Westmill Wind, at 6.5MW. Westmill Solar is the largest solar co-operative, at 5MW.

8. Most renewable energy co-operatives in England and Wales establish as an “Industrial and Provident Society” or IPS. Investors become a member of the co-operative through buying shares. For larger schemes, funding from individual investors is supplemented by a bank loan.

9. Joint ventures between co-operatives and commercial developers are becoming more common. Independent commercial developer Falck Renewables has developed a number of wind farms in partnership with co-operatives, including Boyndie Wind Farm, Great Glen Energy Co-operative, Isle of Skye Renewables Co-operative and Kilbraur Wind Energy Co-operative. The Neilston Community Wind Farm currently under construction new Glasgow is a four turbine, 10MW wind farm on former industrial land. 28.3% of the equity is held by the Neilston Development Trust, a local charity and social enterprise.

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?

10. As described above, the co-operative structure provides a financing model for medium-scale energy projects. For MW-scale projects, these will be supplemented by a bank loan or other finance.

11. However, there are currently a very limited number of lenders who have the expertise to lend to mid-scale renewables schemes, particularly community-owned schemes. The Co-operative Bank and Triodos are the main players.

12. There are differences in funding mid-scale schemes, compared to larger schemes:

Banks shoulder more of the risk, as, for a community group, normally a finite amount of money has been raised. If costs increase, due to engineering issues or interest rates, for example, the bank has to increase the loan amount.

Smaller projects, particularly community-owned, don’t have the same access to technical or legal support that a larger project would. This means that the bank is likely to get more involved in providing technical support.

13. Lending to these projects would be simpler and more attractive if there was greater certainty surrounding investment. This can be achieved through a more stable policy framework (see discussion below) and through government guarantees for loans, potentially through the Green Investment Bank.

14. Green Investment Bank funding would act as a stimulus to encourage mainstream banks to invest. A report commissioned by The Co-operative Group looks in detail at how this could work.3 It suggests three potential interventions:

provision of junior debt to leverage investment from the mainstream commercial banks;

using the GIB to establish framework agreements with suppliers to drive down capital costs; and

establishment of a development fund to underwrite a share of pre-development project risks.

15. Recently, there have been developments in crowd-funding models for renewables, such as Abundance Generation. These allow individuals to loan money to renewables schemes, starting from very small amounts, as small as £5. This could open up the market for renewables finance.

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

16. There are a number of reasons why there are more community-owned energy projects in Denmark and Germany:

Commitment to decentralised energy: Denmark’s success in community and decentralised power stems from their “heat law” introduced in the 1980s as a response to the oil crises of the 1980s. The law is very simple: you can’t generate electricity without capturing the heat — ie it has to be combined heat and power. This increases efficiency enormously. It also localises electricity production as heat can’t travel far — so you need to site power stations close to people. Most Danish towns have a CHP plant.

Clear long-term strategy: In Denmark, policy has been consistent and simple since the 1980s. Most recently, the Danish parliament agreed, cross-party, on an eight-year strategy to get 50% of electricity from wind by 2020, and to turn Denmark fossil-free by 2050.

There is a tradition of a mixed economy for energy: Both countries have lots of different types of organisation involved in energy generation, supply & demand management, including municipalities (particularly strong in Denmark), community groups, non-profit companies and private investors.

State-backed finance: There is state-backed finance for community renewables, such as the KFW Bank in Germany.

Predictable planning: Land-use planning is carried out at a more strategic level in both countries, so there is less risk involved to individual projects.

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

17. Two academic studies, in Germany and Scotland, demonstrate that community ownership of wind developments, at the medium scale, makes renewable energy projects more popular amongst local people4.

18. Public opinion research for The Co-operative Group shows that support for renewable energy projects, including onshore wind, increases considerably if they are owned by local communities5.

19. This is recognised by the government
in the UK renewable energy roadmap, which states that “Projects are generally more likely to succeed if they have broad public support and the consent of local communities. This means giving communities both a say and a stake in appropriately-sited renewable energy projects like wind farms”.

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

20. As shown above, there is considerable appetite for community ownership in the UK. There are over 400 projects self-defining as “community” which have registered for Feed-in Tariffs, establishing projects at the smaller scale, such as solar PV co-operatives. As these groups get established, they consider larger projects, supplemented by bank finance, or joint ventures with private developers. Co-operatives UK have been working with a number of co-operatives who are considering schemes at this level, including TRESOC in Totnes, Brixton Energy Co-operative, the Low-Carbon Hub in Oxfordshire, OVESCo in Sussex and others.

21. The main limiting factor is not appetite, or the capacity of communities; it is the policy and regulatory frameworks, and the difficulties of financing these projects.

22. Community energy is also supported by a wide range of organisations and interests, as shown by the newly-formed Community Energy Coalition, a coalition of organisations with 12 million members, including the National Trust, Women’s Institute, Transition Network, Campaign to Protect Rural England and the Church of England.

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

23. An increasing number of private companies are looking at the possibility of joint ventures with community groups and co-operatives, as described above.

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

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

24. Research consistently shows how difficult it is for new entrants to compete alongside established players in the energy market, for whom the market and regulatory context is designed 6 ^.

25. The main barriers encountered by community schemes were detailed in a 2012 report for Co-operatives UK7:

Shifting regulatory environment, such as constant changes to Feed-in Tariffs and the forthcoming removal of the Renewables Obligation.

Access to finance, as described above.

Limitations and restrictions of funding, particularly grant schemes which have strict, time-limited criteria.

Planning and legislative hurdles: The sheer quantity of administration that is required for energy co-operatives is out of proportion to the size of the scheme. Groups need to work with different organisations including the planning authority, the Environment Agency, Distribution Network Operators, funders, and so on, all of whom require different information set out in different ways.

Finding a site can be problematic — groups may be motivated to do a larger scheme, but may not have a site. This can be alleviated through partnerships or joint ventures with commercial developers.

Lastly, many co-operatives rely heavily on local volunteer time, often drawing on what would otherwise have been high cost professional skills. Given the complexity of projects, and the length of time from conception to launch, maintaining momentum and motivation was a challenge for many of the groups.

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

26. The UK policy framework is not currently effective at encouraging local and medium-sized energy projects. The Co-operative Group and Co-operatives UK published a manifesto in 2012, which sets out the changes needed to make the most of the potential for community and co-operative energy8. The Manifesto calls for:

National targets for community energy.

A national campaign for community ownership.

A clearly defined offer—setting out the process by which government and its agencies work with community schemes, through the planning, financing and development process.

Introduction of co-ordinated advice and support services, endorsed and funded by government but run by independent experts.

A financial framework, including a Feed-in Tariff for community schemes, investor tax breaks, access to finance through the Green Investment Bank and consideration of community energy in Electricity Market Reform (see below).

Development of models of co-operation between local authorities and community energy schemes.

Encouraging partnership with commercial energy developers.

27. One particular concern is that the shift to the new system of Contracts for Difference will impact negatively on smaller power producers, including independent generators and community energy schemes. Co-operatives UK commissioned independent research from Cornwall Energy to investigate this issue9. The Research identified four main issues with the new system:

Participating in the system requires a high degree of technical knowledge about the energy market and regulation. This is a significant barrier to entry for smaller generators.

Smaller generators actually receive lower prices for their electricity than larger companies. This is because their output is less certain,
and they are selling smaller amounts.Yet the CfD FiT top-up payment is based on average market prices for all generators, not the amount actually received by an individual generator under a power purchase contract. So larger generators will receive more per unit of power than community energy schemes.

With the end of the Renewables Obligation
in 2017, there will be no requirement for electricity suppliers to source a proportion of their power from renewable sources. Therefore they will have no reason to choose to buy power from smaller renewables generators if other, larger or more reliable sources of power are available. This lack of “demand pull-through” will further depress prices for smaller players.

28. All these factors are likely to make community energy projects more risky, as it will be more difficult to predict prices, which in any event are likely to be depressed further. This in turn will make it more difficult and expensive to secure capital funding. Access to finance is already very difficult for many community schemes. So this will make such schemes more expensive.

29. Put together, these impacts will result in higher development costs and lower returns for community energy, and, indeed, other independent generators. This is likely to mean that far fewer independent companies participate in the electricity market above the 5MW threshold, and there is anecdotal evidence that some have already decided that they will keep below the 5MW limit. So the energy market will be further dominated by the “big six” energy companies, contrary to the government’s ambition for a more diverse mix of players in the energy system.

30. The following changes to the proposals outlined in the Energy Bill would ensure that community energy is not put at a disadvantage:

The Government should undertake a systematic analysis of how the proposals put forward in the Energy Bill are likely to affect community energy projects. It should align these proposals with the forthcoming Community Energy Strategy (due to be published in 2013).

There should be a minimum annual target for new generation capacity from community schemes.

A different price support mechanism is needed for community energy projects above 5MW, in order to avoid the complexities and uncertainties of CfD FiTs. There are two broad options for a mechanism:

A fixed Feed-in Tariff (fixed FiT), similar to the FiTs offered to smaller generators below 5MW, which are termed “fixed FiTs”. This has the advantage of simplicity and certainty, but relies on government setting a price that is neither too high nor too low.

A “purchaser of first option”, providing a guaranteed market for community energy schemes and other smaller generation projects. This could be based on an auction process. It would be topped up by the CfD
FiT payment, which could use the auction prices for calculation of CfD FiT payments. This would mean that smaller generators were not disadvantaged because of their inferior position in the electricity market. This option has the advantage of prices set through a market process, but it may be seen by some community energy developers as too complex compared with the certainty of fixed FiTs.

31. Government should offer information and advice to all small developers during the transitional phase of implementing EMR (2014–17) to help them better understand the options and the processes they need to engage with.

32. Wider measures need to be put in place to encourage a more diverse energy market. This issue, also called “liquidity”, is currently being investigated by energy regulator Ofgem.

April 2013