Tyndall Centre recommends policy support for community energy

Following the Government’s decision to close the Feed-in-Tariff (FiT) scheme to all new small-scale renewable assets from 1 April 2019, the Tyndall Centre for Climate Change Research has been exploring ways in which policy should be applied to offer support.

In its paper published on 10 February, Business models and financial characteristics of community energy in the UK, community energy in the UK is broken down into types of business models, financing and price guarantee support. In addition, it gives recommendations for policy that could be implemented to continue support for small-scale renewable assets.

Market breakdown

Three forms of community energy were identified as part of the study. These include:

  • standalone renewables
  • on-site customer renewables, and
  • demand-side activities

Standalone renewables see all electricity generation exported to a third-party (e.g. to an energy supplier). On-site customer renewables see consumption sold at the site of generation or by private wire (e.g. to a business owner). Demand-side activities include energy efficiency and fuel poverty advice projects, potentially in addition to self-consumption from an on-site renewable asset.

The majority of projects were found to be on-site customer renewables with 22 different organisations involved.

Financing

Most community energy projects (75%) were found to use community shares to finance projects. This was followed by loans (54%), grants (40%) and other instruments such as bonds (7%). The majority (77%) of projects were discovered to utilise only one or two forms of financing.

Projects with higher total capital expenditure (CAPEX) were found to be predominantly made up of loans (Figure 1). Projects with lower CAPEX were predominantly formed of community shares. Community shares are expected to provide interest rates that are two percentage points lower on average than loans, making the feasibility of small-scale community projects promising in terms of CAPEX.

The average wind project was found to have higher total CAPEX than the average hydro or solar project. However, wind projects on average saw the highest return on CAPEX at 18% compared to rooftop solar (12%), hydro (11%) and ground-mounted solar (10%).

Annual average financing costs across all forms of community energy projects is expected to be £46,000 per annum. This is equal to an average cost of financing of approximately 5% of total CAPEX per annum.

Revenues

Of the 153 projects analysed, 151 were in receipt of some form of revenue guarantee through price support of one of the renewable heat incentive (RHI), renewables obligation (RO) or Feed-in-Tariff (FiT) schemes.

In utilising the available data from 110 of the surveyed projects, 92% (101) were found to have a financial surplus with the presence of a price guarantee scheme. In removal of a support mechanism, only 20% (22) of projects were found to have a financial surplus. Of these 22 projects, more than 50% (12) were rooftop solar supplying to the occupiers of the building. Of these 12 sites, ten were found to consume at least 80% of the electricity generated by the panels. In addition, only four of the 22 projects were found to have a financial surplus greater than £3,000 after removal of a price support guarantee.

Customers willingness to pay for electricity varied by customer type (Table 1). Energy suppliers and community or third sector bodies were found to offer the lowest prices to community energy projects at 5.03 p/kWh and 4.81 p/kWh respectively. In the case of energy suppliers, this is due to pricing models being based on wholesale prices in order to sell-on at retail prices. Public and other private sector bodies were found to offer the highest rates at 7.32 p/kWh and 6.24 p/kWh respectively.

In terms of energy generation and its impact on the return on capital costs, the paper makes reference to project-specific characteristics (e.g. size) and the expertise of personnel (e.g. previous experience and the amount of learning-by-doing) as important components of technology performance.

As a result, in order to be successful in the current policy environment, the Tyndal Centre highlights that projects will most likely need to use rooftop solar technology, with a large on-site energy demand and a customer with a high willingness to pay for generated electricity.

Policy solutions

The study proposed three policy interventions that could be made to benefit the uptake of community energy projects. The first is a floor price for exported electricity, whereby community assets export at a minimum price to buyers of all forms.

The second is by making changes to the Contracts-for-Difference (CfD) scheme which is currently only open to large-scale renewables (>5MW). Due to the low CAPEX costs associated with community energy projects as a result of community shares, electricity could be provided at low rates favourable to the bill-payer.

The Tyndall Centre also proposes encouraging, or possibly mandating, public sector bodies to purchase electricity generated by community energy projects on long-term contracts. This would enable price stability for developers with public bodies willing to pay the highest value for electricity generated from community energy projects.

Nature Energy            UKERC