This blog, written by Dr Matthew Hannon and Ian Cairns for UKERC, reflects on four UK community energy cases studies and how these organisations have sought to finance their projects against a backdrop of diminishing government support for grassroots sustainable development.
Google the words ‘community energy’ and you will likely find countless images of people holding hands and cheering enthusiastically around a wind turbine or set of solar panels. It is a heart-warming image, if not a little contrived.
Even so, the message behind the cheerful image is serious one – satisfying our energy needs is something we can take part in and have control over, rather than a process that is simply ‘done to us’. Energy could be fundamentally more decentralised and democratic than at present. Communities could choose how they satisfy their energy needs; prioritising projects that deliver environmental and social value over straightforward financial returns.
This mind-set encapsulates many of the same principles of the ‘just transition’ movement, where the aim is to create both a more socially equitable and zero carbon economy. This approach is fast gaining traction as part of a wider dialogue around the shape of a post-COVID19 economic stimulus and how we can ‘build back better’.
Financing projects against a backdrop of diminishing government support
Today, the UK is home to hundreds of such community energy organisations, the vast majority of these engaged in small-scale renewable power generation (CEE 2020). Initially these projects were funded through government grants but over time these programmes have steadily disappeared or been scaled back. In turn, this has left most communities for the past decade asking one big question “how can we cover the upfront costs of our energy project?”
To solve this problem most communities have had to turn to repayable finance to fund their projects. Sourced from a combination of state, commercial and citizen lenders, finance has normally taken the form of shares, loans and bonds.
This blog reflects on four UK community energy cases studies and how these organisations have sought to finance their projects against a backdrop of diminishing government support for grassroots sustainable development.
Key learnings from the case studies
We now consider the key lessons and trends that emerged from these case studies, which have informed a set of policy recommendations due to be outlined in a forthcoming publication.
Government subsidy is the cornerstone of both citizen and commercial finance
Until very recently, many communities were able to secure project finance for one key reason: the existence of price guarantee schemes for decentralised renewables, like the Feed-in Tariff (FiT) and other price guarantees (e.g. Renewables Obligation, Renewable Heat Incentive). These de-risked community projects, by providing a long-term guaranteed revenue stream and helping to attract both citizen and commercial finance.
The issue is that over the past few years, these schemes have been diluted or discontinued. Most notable was the stepping down of the FiT during the 2010s, prior to its closure in 2019. Without them, the risk profile of communities’ projects grows. Early indications suggest that many investors will no longer be willing to invest, channelling their funds elsewhere. Communities now face significant challenges in securing finance to cover capital costs; an acute problem considering the scarcity of government grants schemes to support community energy. This has seriously stunted the growth of community energy, which has all but ceased over the past couple of years (CEE 2020).
Business model experimentation triggered by withdrawal of subsidies
The withdrawal of price guarantees has made the traditional community energy business models – centred around small-scale renewable generation – riskier and barely viable. Communities have thus had to respond, experimenting with unfamiliar and more complex business models in a bid to capture new revenue streams and remain profitable.
A common theme however is that this experimentation has to some extent been enabled by the legacy of revenue from price guarantees (e.g. FiT). Questions therefore remain about how viable these models are for new-entrants, who do not have receipt of these subsidies through existing projects.
The emerging trend has been a diversification away from ‘pure’ power generation models, along two lines. The first is a migration further down the energy supply chain, to deliver more complex service-oriented offerings beyond the customer’s meter, such as ‘pay as you save’, electrical storage and load shifting. The second is a migration into alternative energy vectors besides power, such as heat from biomass.
Whilst our case studies indicate that communities are only at the beginning of this journey, we do find a significant untapped potential for communities to combine these new capabilities to focus on the provision of alternative energy services.
Community ‘beyond the meter’ and heating business models show promise
Some organisations have had success in adopting these new business models. Brighton and Hove Energy Services Company (BHESCo) for example has employed a ‘Pay As You Save’ model, that sees revenue generated through savings on energy bills. However, we find the model is limited in its ability to assist the fuel poor, who cannot be expected to share any cost savings generated because they already struggle to pay their energy bills. It is also problematic for tenants of rented properties, where landlords are uninterested in investing in energy savings they will not directly benefit from.
Gwent Energy has also delivered electric vehicle charging, battery storage and smart heating (e.g. Solar iBoost) projects. It has however struggled to expand its heating side of its business, not least because of a reduction in the RHI tariff for non-commercial biomass.
These novel and typically more complex business models do however carry a greater risk in the eyes of some investors. This is partly because these models are less common and thus less familiar to them but also because communities have little track record of successfully operating these more complex, service-oriented models.
Even so, they are less reliant on any single revenue stream and thus are less susceptible to negative externalities. This could help ensure communities become more resilient to the ‘winds of change’ associated with unexpected policy changes or commodity price fluctuations.
Communities offer important test beds for innovation
Some community groups have also been at the forefront of smart energy experimentation, enabling companies to test the value of these energy innovations in a real-world setting (see Green Energy Mull and the ACCESS project). Naturally, to balance the reward of enjoying the benefits these innovations provide (e.g. reduced energy bills); communities must bear some of the project risk associated with playing host to these novel solutions.
The issue is that communities can cease to directly benefit once the project concludes. It is therefore essential that the balance of risk versus reward for the community, over a variety of timescales (i.e. short, medium and long term), be considered when funding is awarded. To ensure these communities continue to offer a home for experimentation, it is essential these pilots leave in place a positive legacy and deliver long-term community benefit.
Local partnerships provide critical support and resources
Partnerships are critical to community organisations, playing a key role in providing them with a wide range of complementary resources and capabilities. These include funding, technical support (e.g. legal and planning), political capital and revenue through the sale of energy or other services. However, one contribution stood out above all the others across our cases; access to land and buildings.
Community energy projects are highly reliant on land and buildings to provide the space necessary to deliver energy projects. In the case of Green Energy Mull (GEM), the Forestry and Land Scotland made land available to operate their hydro scheme.
For Edinburgh Community Solar Cooperative (ECSC) and BHESCo, their respective local authorities enabled access to their buildings for these projects to take place. The former installing rooftop solar power on council buildings (e.g. schools, community centres, etc.) and the latter doing the same but combining this with efficiency measures (e.g. LED lighting). Finally, Gwent Energy’s local council was instrumental in supporting its establishment and more recently contracted it to deliver a fleet of EV charging points – some located at council car parks.
These strategic relationships are highly dependent on a variety of top-down influences, such as rules around public procurement, mandatory reporting of performance indicators and pressures to deliver corporate social responsibility. Imposing a requirement on these bodies to provide demonstrable evidence of delivering social, environmental and economic benefits – aligned with the principles of a ‘just transition’ – will be critical to supporting community energy projects in the future. In particular, mandating local authorities to deliver these benefits could create a major incentive for them to partner with community organisations.
Citizen finance a powerful tool but not sufficient on its own
Three of our four cases raised community shares, together generating almost £2.5m in funding. The case of Gwent Energy however points to how citizen finance can be raised by alternative means, namely community bonds and loans. They established a members-only Investor Club, which has raised at least £170,000 in investment to date. Even so, all of our cases relied on other investment streams beyond citizen finance, typically drawing on a combination of grants and loans to cover CAPEX, which were paid back in part through revenue from price guarantees like the FiT.
This points to the limitations in terms of the total amount of citizen finance that can be raised locally, especially in lower income areas, or nationally through crowd-funding platforms (e.g. Ethex). This means communities must commit time and effort to secure any outstanding funds from alternative sources, namely commercial or government loans. These bring with them an additional set of terms and conditions, some of which can dilute the degree of control the community has over its own projects.
Intermediaries are key to economic, technical, social and political capital
Intermediary organisations, like Energy4All and Communities for Renewables, are assuming an increasingly prominent role in the financing of new community projects. They offer access to an investor community, as well as providing the necessary resources and experience communities often lack to successfully design credible business models and maintain their operation. In essence, they can help communities to secure finance, by providing access to finance and de-risking projects to a point where investors are satisfied.
Legal structures stem from financial and ethical considerations
The choice of legal structure influences the type of finance communities can raise. This then potentially has implications for the amount of finance raised and from whom this finance is sourced. For example, Community Interest Companies (CiCs) limited by shares are only able to raise ordinary (transferrable) shares, whilst cooperatives can raise only community (withdrawable) shares. The two different share types have some important differences, including how regulated and ‘liquid’ they are, the maximum amount individual shareholders can invest and whether capital gains are permitted. Consequently, each share type will suit some investors but not others.
Legal structures have other important implications for how the organisation is governed, such as the type of voting rights the investor has and the extent to which the community is exposed to the risk should the organisation experience financial hardship (e.g. asset locks). In the case of BHESCo a cooperative model was adopted, largely to raise relatively low cost community shares but also because it provided a ‘one shareholder-one vote’ model, which was considered to be more democratic than the ‘one share-one vote’ model employed by companies limited by shares. Finally, the absence of an asset lock meant its community investors could liquidate the assets and claw back their investment should the organisation fail.
Communities ultimately choose the legal structure that best suits their needs at the time, taking into account the impact it has on: their ability to raise finance, how democratically governed the organisation is and the degree of risk the community will be exposed to.
Communities are entering a brave new world where finance will be much harder to secure. Our research reveals that with the decline of price guarantee schemes (e.g. FiT) has severely compromised the traditional community energy renewable power model. In the eyes of investors, the removal of these guarantees heightens their risk profile.
This has served to stymie the growth of UK community energy and forced communities to experiment with alternative energy business models in a bid to remain profitable. Whilst these unfamiliar and more complex business models present a host of challenges to communities with little experience beyond small-scale renewable power, they could play a pivotal role in accelerating a ‘just transition’ to a net-zero economy.
To realise this potential, government will need to play an active role in nurturing these new models, not least the provision of affordable state-backed finance, community access to land, incentives for local partnerships and funding for technology innovation projects that prioritise community benefit. With the right architecture in place, communities could play a pivotal role in realising a ‘just transition’ to a net-zero economy.
For more detail on each of the four case studies, please download them at the links below. If you would like any further information relating to the project or the case studies please contact Dr. Matthew Hannon or Dr. Iain Cairns.
- Edinburgh Community Solar Cooperative
- Green Energy Mull
- Gwent Energy CIC
- Brighton and Hove Energy Services Company (BHESCo)
The Financing Community Energy project was initiated in 2016 to explore the different options for helping community energy to attract investment and scale-up in the future. Led by the University of Manchester, working with the University of Strathclyde and Imperial College London, the project provided the first large-scale systematic mixed-method analysis of the role of finance in the evolution of the UK community energy sector. The team began by covering the recent evolution of UK community energy before undertaking a UK-wide survey of community energy (Braunholtz-Speight et al. 2020) and four workshops with practitioners and stakeholders to co-develop a long-term vision to deliver a thriving community energy sector.
First published by UKERC 3 June 2021
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