The fall in the cost of renewable energy has created new possibilities for citizen investors to fund community energy projects.
However, the majority require some level of price support. In this blog, researchers from The University of Manchester call for policies to support the growth of this sector, such as encouraging the purchase of community-generated energy by public sector bodies.
- Schemes like the Feed-in Tariff provide price stability, de-risking community energy projects for citizen investors and allowing smaller projects to be funded by low-cost citizen finance;
- Without price support, only a minority of current community renewables models are likely to remain viable;
- The best performing projects without price support revenues were those with an on-site customer for their power – typically solar rooftop PV on buildings with high daytime energy demand;
- Therefore, policy could support the growth of the sector by encouraging, or mandating, public sector bodies to purchase community-generated energy on long term contracts;
- Alternatively, a floor price for exported electricity, or support for smaller projects in the UK power auctions scheme (‘Contracts for Difference’), could provide price stability.
(This summary can also be viewed as an infographic.)
Local energy projects delivered by community groups offer an alternative to centralised, large-scale energy provision, with various forms of community energy already found across Europe, North America and elsewhere. A healthy community energy sector could not only contribute significantly to the zero-carbon transition, but also strengthen and empower communities, providing a broad range of co-benefits.
The UK sector has grown due to favourable government policies and the decreasing cost of renewable technologies. However, recently the government has withdrawn most support for small-scale renewables, putting community business models under strain, and resulting in a dramatic slowdown in the growth of the sector.
Exploring which business models and financing mechanisms have worked for community projects across the UK can identify ways forward for the sector. To investigate this little-known area, we conducted a UK-wide survey of the sector. We collected data on 145 projects, from 48 organisations, and conducted analysis to identify groups of similar business models, and to explore issues such as the revenue impact of removing price guarantee schemes, and the cost of finance for community energy.
Renewables dominate the UK community energy sector
Activities addressing ‘demand-side’ issues, such as energy efficiency or fuel poverty, are mostly cross-subsidised from renewables revenue or grant funded.
For renewables, two basic business models exist:
- First, larger projects supplying the grid, like wind or solar farms, are increasingly professionalised and ‘bankable’: they raise commercial loans alongside citizen finance;
- Second, rooftop solar PV projects, supplying an on-site customer as well as the grid, are small enough to be funded primarily through community share issues.
We found that for both models, community shares are a low-cost source of finance. On average, they offer interest rates 2% lower than loans, making them the cheapest form of capital (excluding grants). Our analysis shows that, while it is clear from previous research that community projects can face additional costs and challenges, they may also have some financial advantages. We found that community energy business models typically emphasise environmental and social ‘value propositions’ to investors; and other research (in the UK, Belgium, and Germany) has shown that these value propositions are important to citizen investors.
What this means is that, by offering more than just financial outcomes, community energy has been able to simultaneously lower the cost of finance for small scale renewables, and diversify who invests in them. This is one of the ways in which community energy can reach people and places that large scale commercial renewables might not.
Standalone renewables projects sell their energy to energy companies; but on-site customer renewables projects, as the name implies, sell to a range of customers: other companies, community and third sector organisations, and public sector bodies. Third sector customers pay the least, on average (and in several cases receive energy for free); public sector customers pay the most. Regardless, across all categories of customer, community projects offer customers energy at prices that are well below typical retail rates.
Schemes like the Feed-in Tariff (FITs) have underpinned the sector
However, most of the projects in our data were built in an energy market where revenue was substantially de-risked by price guarantee schemes, such as the FITs. While citizens’ investment motivations may be mixed, the financial security offered by such schemes were likely particularly important for people investing their own money. We further examined how important price guarantee schemes were for project revenues. Although 90% of the projects in our sample made a financial surplus in a single-year snapshot, this falls to 20% after removing scheme income; and just 11% after discounting projects with special circumstances.
Last year, the FITs closed to new projects (existing projects still receive their money). It has been replaced by the Smart Export Guarantee, which is aimed at small scale renewables, but is more complex and offers less security than the FITs. What might happen next?
One possibility is diversification in community business models. Renewable heat, and self-financing demand-side projects, are relatively rare in the UK. Yet successful examples of these models do exist (eg Springbok, BHESCo and Manchester’s Carbon Coop). Continued financial support for renewable heat (the Renewable Heat Incentive), coupled with the reduction in support for renewable electricity, may lead to growth in these activities as community energy groups seek new business models.
Some new renewable projects may still be possible. As stated, 11% of these projects still showed an annual financial surplus without price support. Therefore, some may be viable post-FITs, particularly rooftop solar PV on buildings with high energy demand.
What policy interventions can support renewed growth of community energy?
We propose three policy interventions for expanding the community energy sector, and supporting the delivery of positive social impacts;
- Policy can support diversification of business models in the sector. Continuing the RHI beyond 2021, funding retrofit, and ensuring emerging flexibility markets are accessible to smaller players can all help here.
- Some form of price stabiliser is needed to revive the growth rate in community renewable electricity, beyond those few projects that will be viable without support. One route is through national energy policy. We suggest that the SEG incorporates a floor price for exported electricity; alternatively, the UK’s Contracts for Difference auctions are an option. The government has recently proposed reopening these to onshore wind and ground-mounted solar PV, which could allow more community projects to be developed.
- Another route to price stability is through long-term contracts (“power purchase agreements” or PPAs) with customers. Given community energy’s potential contribution to wider social and local economic objectives, and their existing willingness to pay slightly higher prices, we suggest that policy should encourage, or even mandate, public sector bodies to purchase community-generated energy on a long-term basis.
In the longer term, the transition to a decentralised zero-carbon energy system offers many opportunities for community energy. In a short report published last year, and further academic work in progress, we develop a vision of what a thriving future community energy sector would look like, and suggest policies and pathways to realise this vision.