COMMUNITY ENERGY

Price support allows communities to raise low-cost citizen finance for renewable energy projects

Community energy groups can raise citizen finance for renewable energy projects at lower interest rates than from commercial lenders, but they often depend on price guarantee schemes. Policies providing price stability and business model innovations are needed to realize the sector’s potential contribution to the zero-carbon energy transition.

Messages for Policy

  • Schemes like the Feed-in Tariff provide price stability, thus de-risking community energy projects for citizen investors and allowing smaller projects to be funded by low-cost citizen finance.

  • Without some price support, only a minority of current community renewables business models are likely to still be viable.

  • Projects with an on-site customer for their power — typically solar rooftop photovoltaics on buildings with high daytime energy demand — are the ones that perform best without price support revenues.

  • Growth of the sector could be supported by encouraging, or even 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 for community energy.

based on Braunholtz-Speight, T. et al. Nature Energy https://doi.org/10.1038/s41560-019-0546-4 (2020).

The policy problem

Local energy projects delivered by community groups could play a pivotal role in realizing the transition to a zero-carbon energy future. Community energy schemes offer an alternative to centralized large-scale energy provision, with various forms of community energy already found across Europe, North America and elsewhere. The sector in the UK has grown due to favourable government policies and the decreasing cost of renewable energy technologies. However, recently the government has withdrawn most support for small-scale renewables, putting community energy business models under strain. Exploring which business models and financing mechanisms have worked for community energy projects across the UK can identify ways forward for the sector. A healthy community energy sector could not only help with the zero-carbon transition but also strengthen and empower communities, providing a broad range of co-benefits.

The findings

The UK community energy sector is dominated by renewable electricity generation. Activities addressing demand-side issues, such as energy efficiency or fuel poverty, are mostly cross-subsidized from renewables revenue or grant funded, although a few groups do run financially self-sustaining demand-side projects. For renewables, two basic business models exist. First, larger projects supplying the grid, like wind or solar farms, are increasingly professionalized and ‘bankable’: they raise commercial loans alongside citizen finance (Fig. 1). Second, rooftop solar photovoltaic projects, supplying an on-site customer as well as the grid, are small enough to be funded primarily through community share issues (Fig. 1). In both cases, community shares represent a low-cost source of finance: we find that on average, they offer interest rates two percentage points lower than loans, making them the cheapest form of capital (other than grants). However, these two business models rely on price guarantee schemes, such as the Feed-in Tariff. Over 90% of the projects in our sample made a financial surplus in our single-year snapshot, but this falls to just 20% if we remove Feed-in Tariff income.

Fig. 1: Percentage of capital raised by different instruments in relation to scale of project capital expenditure.
figure1

For each size category of project capital expenditure (CAPEX), the chart shows the proportion of total finance raised for all projects in that CAPEX range, broken down by different instruments. Smaller projects are financed primarily by community shares, while loan finance becomes more important as project size increases. Where less than 100% of CAPEX is shown as being raised, this is due to some instruments that only raised relatively small sums being omitted from the figure. Where more than 100% of CAPEX is raised, these organizations retain surplus funds for reinvestment in future projects, in agreement with investors. The chart is based on 111 energy generation projects with sufficient data on financing and CAPEX to perform the analysis. Reproduced from Braunholtz-Speight, T. et al. Nat. Energy https://doi.org/10.1038/s41560-019-0546-4 (2020); Springer Nature Ltd.

The study

Little is known about how community energy projects raise finance, so we conducted a new UK-wide survey of the sector. Our survey structure used the Business Model Canvas to analyse organisations’ value propositions (what they offer the customer) and associated activities, customers, resources, costs and revenues. We collected data on up to 200 variables per project, paying particular attention to financing mechanisms. We received substantive responses to our survey on 145 projects from 48 organizations. We conducted cluster analysis to identify groups of similar business models. Descriptive statistical analysis allowed us to examine financial performance, the impact of removing price guarantee schemes on project revenues, and the prices different customers pay for community energy. We also used econometric analysis to examine the relationship between the cost of finance and financing mechanisms.

References

Further Reading

  1. Berka, A., Harnmeijer, J., Roberts, D., Phimister, E. & Msika, J. A comparative analysis of the costs of onshore wind energy: is there a case for community-specific policy support? Energy Policy 106, 394–403 (2017). Detailed comparison of the costs of developing community and commercial wind energy projects.

  2. State of the Sector Report 2018 (Community Energy England, Community Energy Wales, 2018). The leading report on the latest trends in community energy in England and Wales.

  3. Braunholtz-Speight, T. et al. The Evolution of Community Energy in the UK (UK Energy Research Centre, 2018). Highlights the key policy and other factors behind the emergence and growth of the community energy sector in the UK.

  4. Nolden, C. Governing community energy - Feed-in tariffs and the development of community wind energy schemes in the United Kingdom and Germany. Energy Policy 63, 543–552 (2013). International comparative study of price support mechanisms for community energy in the context of wider policy and energy sector factors.

  5. Community Energy Finance Roundtable: Final Report and Recommendations (Department for Energy and Climate Change, 2014). Policy report from the working group on community energy finance convened by the UK government.

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Acknowledgements

This research was funded as part of the UK Energy Research Centre Phase 3 Research Programme (grant no. EP/L024756/1).

Author information

Correspondence to Tim Braunholtz-Speight or Maria Sharmina or Edward Manderson.

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Competing interests

Carly McLachlan is chair of the trustees of the climate change charity Possible (formerly 10:10) and a director of Community Energy North. Both of these roles are unpaid. Matthew Hannon is an unpaid trustee of South Seeds, Glasgow, a community environmental charity with a focus on energy. Jeff Hardy is a non-executive director of Public Power Solutions Limited, a renewable energy developer that has worked with community groups.

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Braunholtz-Speight, T., Sharmina, M., Manderson, E. et al. Price support allows communities to raise low-cost citizen finance for renewable energy projects. Nat Energy 5, 127–128 (2020). https://doi.org/10.1038/s41560-020-0556-2

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