In October, I had a meeting with representatives of a leading U.K. charitable foundation that was interested in supporting renewables and local communities. I briefly explained Pure Leapfrog's work in providing low-cost loans and pro bono professional services support to community energy groups and our plans for scaling up. The response I got was unexpected.
Although the foundation liked the work we were doing, shared our values and agreed that our strategy was sensible, they were not likely to provide funding. They believed that energy policy was so unsupportive of community energy — and that the odds were stacked so heavily against our success — that however well we executed our strategy, we were still likely to fail.
Recent U.K. government announcements have turned this situation on its head, with energy policy shifting to redress the policy and financial disadvantages faced by community energy.
Community vs. commercial energy
Of course, community energy does not need an entirely different business model. After all, the solar panels or the wind turbines do not generate any less energy because they are owned by a community.
However, community energy does face significant challenges and the economics of renewable energy still favors commercial developers. Lack of working capital in advance of a community share issue is a real problem. It limits access to professional advisors, reduces negotiating power with site owners and makes it hard to fund project construction.
The smaller scale on which community energy projects often work also means relatively high transaction costs, reducing returns. Finally, the financial sector's lack of familiarity with the corporate structures used by community groups, such as cooperatives or Community Interest Companies, hinders access to conventional capital channels.
Recent policy announcements indicate that the government is now redressing these imbalances and tilting the economics of renewable energy in favor of community energy. Various initiatives are related to the Feed-in Tariff, such as the ability of community energy groups to "pre-book" a FIT rate, the potential raising of the ceiling for community energy projects from 5MW to 10MW and the emergence of a separate community FIT rate.
Potentially far more significant than this, at least in the short term, was the treasury's recent announcement of favorable tax treatment for all community energy projects, which would still have access to EIS relief which has been withdrawn for most categories of commercial project. It took just 12 hours from the time of this announcement for the first query to reach our office from a commercial project financier as to how their investors could contribute to financing the expansion of community energy.
Making community energy more profitable
Another exciting development is the government's commitment to "shared ownership," which would place a requirement on new-shore renewable energy projects to offer local communities the right to buy-in to the projects and share in the financial benefit. While the government expects shared ownership become the norm on a voluntary basis, it is taking the legislative steps to mandate it if the voluntary approach is not successful. We expect the voluntary code currently being drafted by the renewables industry and the community energy sector to be finalized by September.
The real game-changer, however, would be "direct supply," the ability of community energy companies to sell electricity directly to their members. This would enable community energy companies to capture some of the margin between the wholesale and retail price of power which can be 60 to 80 percent of the price paid by retail consumers. This would tilt the economics of project development decisively in favor of communities and reduce reliance on government subsidies.
The main block to direct supply is not necessarily the physical constraints of the power distribution system as much as the rules that prevent community energy groups from selling the power from their solar panels to their immediate neighbors. Even if you want to use the local power grid to sell your power to people just 3 miles away, the current rules governing grid access treat you as if you want to ship your power from one end of the country to another. At a recent government seminar, an official from Ofgem suggested that we need a new licensing regime, "License Local," to enable direct supply for community energy groups.
Put all the pieces of the emerging jigsaw of government policy together, and you get a commitment to changing the model of renewable energy, and indeed of energy markets altogether. As the government stated in its consultation on support for community energy, the government's goal is not to expand the amount of generating capacity above what is currently targeted. The focus instead is on shifting "the ownership model … from commercial developers to communities (at the large scale) and from individual household-level generation to community."
How other trends affect community energy
Of course, these policy developments are not happening in isolation from broader trends in energy and financial markets. Technology is allowing us to envisage the shift of our power system from a centralized, top-down network to a decentralized, low carbon "internet of energy" which intelligently balances supply and demand in real-time from tens of millions of users and generators of power.
The rise of renewables is also having a major impact. Across Europe, large-scale power utilities are under what The Economist described as an "existential threat." Their business model is under ever greater pressure, increasing their cost of capital and weakening their balance sheets. This trend is almost certain to continue as the market gets a better understanding of the carbon bubble and the consequences for utilities' stranded assets.
Crowdfunding is also allowing us to envisage the day when individual investors can put their money to work without having to route it through the centralised financial system, which currently strips out far too much value as capital is transferred from investors to investments and back again. This is all taking place just at the time when banks are seeking to reduce their exposure to expensive long-term debt in order to strengthen their balance sheets to meet enhanced regulatory requirements.
The direction is clear: a decentralized, more democratic and transparent energy system that enables individuals to have a direct stake in sustainable energy generation and use. Government policy and incentives are making that path clearer every day. The main challenges now are for the community energy sector to seize the moment and to scale-up to achieve its dreams and for investors to figure out which way the wind is blowing in order to secure a slice of the growing community energy pie.
Top image of Big Ben and streetlamps by CristinaMuraca via Shutterstock.