Community Energy Fortnight began last Monday (15 June 2020), structured this time around the theme of Building Strength and Resilience. Support activities have already kicked off with the launch of the State of the Sector report for 2020 and a new 2030 Vision last Friday by Community Energy England (CEE) and Community Energy Wales (CEW).
Here Nigel Cornwall identifies some of the main headlines impacting community energy from the past 12 months or so, searching for positives, and looks ahead to what is likely to prove another very difficult year. He sets out the case for a coherent new strategy, supported by targeted measures to stabilise the sector, allowing it to make up lost ground and an appropriate, potentially significant, contribution to support delivery of net zero.
In the doldrums
The community energy sector has struggled to reach critical mass in England and Wales and has experienced turbulent times of late. Sure, there have been some positives, such as an uptick over the last two years in local heat and transport projects, and good work has been initiated around a handful of pilot smart local energy system demonstrators. Some local groups including councils are beginning to test the new waters of energy storage and flexibility trading.
But these positive steps are from a very, very low base, and the general tenor in the sector continues to be one of increasing uncertainty. The more optimistic days of 2014-15 when BEIS’ predecessor DECC produced its first and only Community Energy Strategy1 and First Year Update2 seem long gone. This is not just because of the loss of subsidy for any generation below 5MW with the close out of the Feed-in Tariff (FiT) regime in March 2019. There has also been systematic withdrawal of virtually all avoided cost benefits and imposition of higher VAT rates on PV systems. Crucially, there is now no minimum price guarantee or a commitment to purchase beyond the very short-term, and most new projects cannot cover their costs. Energy suppliers, who should be exploring niche markets, have tended to steer well clear of local supply offerings.
The outlook was already poor and deteriorating before the pandemic. Indeed, the previous State of the Sector report from Community Energy England reflected the worst year on record with less than 8MW of new generation capacity installed in 2018. Community projects represented less than a quarter of build the previous year and less than a tenth of all FiT accreditations in an already sluggish market. As a result, the community energy sector has been able to achieve only 10% of the potential build out envisaged in 2014’s strategy3.
This time last year we were acclimatising to a world without FiTs for new projects, although it has taken a while for the shape of the new Smart Export Guarantee (SEG) to emerge with implementation from 1 January 2020. BEIS has positioned this as a significant intervention, which it isn’t. And despite adoption of the net zero target, there has been no communications strategy from the centre to support community involvement. Compare this with the tens of millions being spent on adoption of smart meters and next day switching. An overseas observer (or even one from Scotland, where policy support has been much more consistent) would be perplexed by what must look like deliberate policy neglect.
The latest 2020 State of the Sector survey covers 2019 and reflects these real challenges and changes. Highlights are shown in the figure opposite. While it shows almost twice the 2018 level of new projects at over 15MW achieving total capacity of 265MW, the large majority are an over-hang from the FiT regime as pre-accredited projects came to fruition or have benefited from the extended wind-down period for certain types of schemes.
Since then, of course, we have seen the onset of COVID-19, and power prices have tumbled. The only real positive looking ahead seems to be the emergence of a wide-ranging debate on the merits of a green recovery. Within this there is also discussion around Building Back Better, including supporting local resilience and engagement with communities as insurance against existential uncertainties, so there is something to build on.
Remarkably given the huge setbacks, we embark on this new daunting challenge with the appetite and enthusiasm of community groups undiminished.
Having it both ways
Politicians and regulators continue to talk up the merits of community energy and local markets and their potential role in the transition to a smart, flexible energy system. We have seen the development of local industrial strategies and energy plans at the regional level through the Local Enterprise Partnerships and the establishment of a new breed of local energy hubs.
But development of local energy strategies and action plans has been scatter-shot and deterred by electricity industry complexity and fragmentation. Although the majority of councils have now declared climate emergencies, these do not generally connect through to stimulus packages to support low-carbon technologies and demand-side programmes. At the same time funding streams have dried up with little confirmed as yet to replace EU monies around regional development. What activity there is seems largely to bypass community energy groups.
We await some sign or positive move from BEIS that allows us to better understand how local projects can play their part in the delivery of the net zero target. There has been a consultation on clean heat, which has just closed but stakeholder feedback has not been positive. Furthermore, as a result of the pandemic, government initiatives such as the long-promised energy white paper and various implementing strategies flagged by the Clean Growth Strategy have been consistently pushed back.
A rapidly shifting market
The SEG has only been live for less than six months and is to be subject to review. But it is not a guarantee as suppliers can set whatever purchase rate they choose for exports. An excellent analysis of the impact on scheme economics was published by Tim Braunholtz-Speight et al from Manchester and Strathclyde Universities in February.4 They estimated that over 90% of schemes based on a sample of 145 projects were in surplus under the FiT regime, but this figure fell to only 20% without it. The comparison is even more unfavourable as it does not take into account the long-term price guarantee that came with FiT accreditation, which also plays a significant role in de-risking projects and attracting finance.
So far, there are 15 suppliers that must offer the SEG, but only four offering rates at 4p/kWh or more. Interestingly one supplier, Social Energy, is offering terms voluntarily and tops the table at 5.6p/kWh, a shade off the legacy FiT export rate. But this type of activity is very much an outlier in a commercial market-place where electricity is mainly traded at a national level with little regional differentiation.
Since the withdrawal of FiT subsidies, the real value of on-site generation remains from being able to consume the power on-site. But to be viable in the new environment an investor must do one of two things. First it can undersize an array, which in a world of net zero is perverse. Alternatively, it can install batteries, although the storage market is in its infancy and energy suppliers to date have been slow to include these in offerings because of uncertainty around the economics and the market rules.
The value of exported energy to the system is also changing, but that is likely to further undermine the commercial value of local purchases to the supplier. The FiT export price, which is not a true energy cost but a subsidy paid by consumers, was already looking generous a year ago compared with the average price of traded electricity, which has fallen 20% over the past 12 months. And system “spill” prices have also fallen dramatically over the intervening period from in excess with the current excess of generation over low demand for sustained periods.
So it is possible that SEG prices offered by suppliers, which anyway tend to be low, could be further reduced reflecting the avoided cost of buying from a system that is typically long. Perversely a real contributor of this price collapse are the subsidies paid to FiT schemes and other legacy renewable energy schemes that allow operators to offer low (or even negative) prices so they can continue to run and claim subsidy payments.
No one could have foreseen this level of turbulence in the market when FiTs were withdrawn with no commercial safety net introduced to replace it. Its impact on the track of wholesale prices, and how this is further undermining community energy, was simply not factored into the policy process.
Against this background, many generation installers have already scaled back or gone out of business. Those that remain have refocused on the larger, business market where consumption levels as a proportion of production tend to be much higher and installation accounts for a lower share of total costs. But even here, the market changes are impacting on incentives to invest in self-generation and demand-side programmes.
Have we reached the bottom?
The answer to this question is “probably yes”.
It is hard to see wholesale prices falling further on a sustained basis, especially with a phased return to work. We also know that non-energy costs will steadily rise over the coming years. There will be some indication of further rises when the latest costs of legacy FiT costs that suppliers must pay are invoiced in July, which will reflect record sunshine levels, clear skies and a smaller charging base. The Contract for Differences (CfD) fund will also be short given the need to fund a bigger gap between contract strike prices and realised wholesale prices during the lockdown. And, the costs of balancing the system are showing sustained increases by well in excess of £100mn a month. So, the avoided costs of investment in generation behind the meter all other things being equal are set to increase again.
Equipment costs continue to fall, but what the impact of COVID-19 is on the supply chain and installation costs into the medium term is anyone’s guess.
Another positive factor is the increased availability and lower costs of citizen finance. New innovative funding structures are emerging (for instance, West Berkshire Community Bond scheme with Abundance Investment) and these enjoy a positive cost differential (perhaps upward of 1-2 percentage points) over traditional lending.
It is also evident that some communities are diversifying away from pure power generation models as they seek new sources of value and different stakeholder benefits. This means some are tending to gravitate further down the supply chain, in-so-doing delivering more complex service-oriented offerings beyond the customers meter. These include “pay as you save” (Brighton and Hove Energy Services Company), electrical storage along with EV charging and smart heating (Gwent Energy) and load shifting (clearly incentivised by the Agile tariff of Octopus).
Another discernible trend is a migration into alternative energy sectors, such as heat from biomass, and we have already noted the move into EV charging by some community groups. Over the longer term this diversification can only increase the resilience of schemes, though delivery will undoubtedly be more complex. But for now we remain a long way from demonstrating that such projects are viable under today’s rulebook, and local government entities enabled by more supportive policy frameworks need to find a way of joining up and tailoring energy (generation, storage and demand-side), heat and transport schemes for their communities.
The scale of the task to reach the 2030 Vision is daunting. But, given the appropriate policy and financial support, CEE and CEW believe the sector could become 12 to 20 times larger by 2030. Community energy could contribute over 5GW of capacity, power 2.2mn homes, support 8700 jobs, save 2.5mn tonnes of CO2 emissions and add over £1.8bn to the economy each year. But critically there is as yet no consensus on what measures are required to enable the vision to become reality.
What needs to be done?
We need to revive urgently the concept of a community energy strategy, updated for today’s market conditions and primed to optimising its contribution to delivery of net zero. This needs to establish an enabling framework that can support disparate local actions and establish staging posts to measure progress to an agreed 2030 target. This strategy needs to link up and be consistent with local energy strategies and plans established by LEPs supported by local stakeholder bodies. Some of the more obvious options that need to be considered are set out below.
The first is for government to scope and deliver a single communication and engagement plan aligned with the strategy but highlighting the scope for individual and community action with regard to both production of energy and its consumption. This needs to focus on the behavioural changes needed, and the need for much more extensive local participation.
The Committee on Climate Change acknowledged this imperative and the linkage with regional stakeholders back in 2018 in its advice to government on net zero5: “clear leadership is needed right across government, with delivery in partnership with businesses and communities. Emissions reduction cannot be left to the energy and environment departments or to the Treasury”. It continues: “Some of the difficult decisions that will be required […] will only be possible if people are engaged in a societal effort to reach net zero emissions and understand the choices and constraints.” This must be achieved as “a collaborative, participative endeavour which needs much more than engagement. It needs citizens to consent and want to participate.”
Community Energy England (and the sibling groups in Wales and Scotland) would provide a natural partner to work with local groups and stakeholders.
The second is to fix the SEG. It is critical that the review re-examines key elements of the mechanism and options for reform against the backdrop of today’s market, including:
- some form of price stabilisation mechanism, perhaps a price floor
- a longer-term guarantee of purchase, and
- a requirement on suppliers to offer a market-related, time differentiated tariff (which might be tied to average spill prices).
Third public sector bodies should be encouraged to purchase community energy on long-term contracts. These might also reflect the contribution such arrangements make to delivery of CO2 reductions. There also needs to be proactive consideration of how local partnerships more generally can be facilitated. Mandating local authorities and other public agencies to deliver social, environmental and economic benefits possibly as part of a just transition could provide a major incentive for them to partner with community organisations.
Where the Local Electricity Bill fits in all this is presently hard to determine given the absence of detail provided by its proponents. The Bill was initially introduced last year as a Private Members Bill but “fell” with the December 2019 General Election. It has been reinforced under a Ten-Minute Private Members Motion and was presented to Parliament last week.
In principle a right to local supply could be an important mechanism in unlocking community energy. But what we need to see here is a clear structure that reassures consumers more generally that this is not simply a device for exempting costs that would be pushed onto other bill payers. Perhaps development of some form of short-haul tariff might help, as would proper accounting for thermal loss reduction. Also, further development of local markets for flexibility and incentivisation for load shifting could be used to incentivise smarter, local energy usage.
This is a complex area, and one that requires urgent, focussed attention from BEIS and Ofgem.
A fourth option is to level the playing field with commercial technology developers. BEIS is currently consulting on proposed amendments to the CfD scheme. Formally this is a follow-up to the five-year review mandated in the enabling legislation, with changes to be implemented in the fourth allocation round due in 2021. The proposals are welcome in several respects, not least because they contemplate reintroduction of CfD support to onshore renewables, but not below 5MW.
Clearly this threshold is arbitrary and discriminates against community energy. As part of the changes for this round, BEIS should:
- specify a minimum level of community ownership as a condition of participation in the CfD auction process, and
- pre-allocate a specified share of the “pot 1” monies in each allocation round to sub-5MW projects (preferred) or alternatively permitting aggregation of separate projects into a regional portfolio that exceeds the current participation threshold and which would have its own administrative strike price.
Not all these levers need to be pulled, but we do need an objective assessment of these and other available measures so that there can be sensible modelling of what community energy targets should be adopted on the road to net zero, along with the associated costs and benefits.
Tough but achievable
As we are seeing in Europe, there is no one solution to the advancement of community energy, and solutions need to address regulatory and governance circumstances found on the ground. It is clear that we can do significantly better in engaging customers and boosting innovative local supply. This should be seen as an important strand in Building Back Better as we move forward from the pandemic.
If community energy is to achieve its potential and support the recovery and delivery of net zero, there needs to be a shift in how policy-makers and regulators see community energy, and this must start with active recognition of the wide-ranging benefits low-carbon schemes can bring to local households and businesses. It is essential that we head towards the delayed COP26 conference in late 2021 with a clear goal of seeking consensus on the strategy for community energy and what is expected of it. There needs to be explicit consideration in the Energy White Paper or alongside it. If we can do this, a rebalancing of local energy systems and achievement of the 2030 Vision may well still be possible.
3 The 2020 State of the Sector report shows 265MW of generation compared with the 2014 strategy document that
targeted up to 3GW.