Community Energy Strategy: Opportunities for finance and investment

6^th February 2014

Mark Luntley, founding director of Westmill Solar Co-operative, highlights the impact of community energy intervention

Last week’s Community Energy Strategy sets out, in part, to identify how to support investment funding for community energy. A series of grants and funding schemes from across different parts of government are highlighted.

The issue is there is actually no shortage of investment funding available for renewable energy in the UK. If you are a big six utility company, or high net worth investor with a spare £20 million you can easily invest in a range of renewable energy projects, and benefit from their secure, index-linked returns. But if you only have £500 to spend, your options are more limited.

At the same time, in 2013 – a fairly typical year – Britons collectively invested £1.4bn in equity ISAs. Individuals may get a return, but only once the different intermediaries have deducted their guaranteed fees.

So at both ends, the system is weighted against the smaller investor, though these individuals in their millions, ultimately pay for renewable electricity. It’s no wonder there’s an audience for groups that generate misleading publicity about the cost of green electricity.

Some projects have started to unlock this circle. At Westmill Wind and Solar we developed community energy projects that generated renewable energy and created an investment opportunity for thousands of people. Members get long-term financial returns but can also become involved in the management of their cooperative. Several hundred people attend and vote at AGMs, others help show around the 7,000 (and rising) visitors who have been inspired by touring the site. Many members buy their “own” electricity via the two smaller power suppliers – who have a power purchase agreement with the two cooperatives

The Government’s Community Energy Strategy has many action points. The danger is we lose sight of the interventions that will make the greatest difference. Here are five.

First. Community ownership is quite different from community benefit payments, but the strategy conflates them. Ownership is active and participative; it generates enthusiastic advocates for the projects. Benefit payments are similar to S106 planning payments: they are passive. If big developers can get away with tossing a few thousand into a community fund they will certainly do so, and community ownership will not even get off the starting blocks.

Second. Community projects need not be small, as the Strategy appears to envisage. Between them, the two Westmill share offers raised over £10m in share capital – and both offers were significantly over-subscribed. Both projects attracted other funding to finance the balance of the project – in the case of Westmill Solar – £12.5m from Lancashire local authority Pension Fund.

More broadly, 5% of the annual ISA equity investments could mean £75m a year invested in community projects. Meanwhile Social Finance Ltd estimated in 2012 that if 1% of UK pension funds were invested in community projects around £23bn would be made available.

Third. Community ownership is popular. A 2012 Cooperative Futures survey showed that fewer than 7% of people would oppose a nearby 100% community-owned wind farm. Yet Westmill wind almost wasn’t built because of a small minority of people who dominated the planning process. Community projects are uniquely vulnerable to such individuals. In the case of Westmill Wind, the project only succeeded because of the perseverance of the landlord, and the community developer – Energy4All. ResPublica have suggested ways of reforming the planning process so the views of the many are not drowned out by the vocal few. These should be actively pursued.

Fourth. Projects typically need a combination of loan and equity, but bank loans can be hard to find. Pension funds have expressed an interest in this sector but individual projects are not usually large enough to justify due diligence costs. We were told that creating a pipeline of projects is absolutely key to unlocking such investment. The emerging Local Enterprise Partnerships would be well placed to help develop this area.

Finally, community energy strategies must be grounded in their communities. Local authorities are best placed to lead and support this change – as the research from Keele University quoted in the Strategy already recognises. Indeed, many of the successful community ownership structures in Denmark – which the Strategy highlights as best practice – have municipal authorities at their heart. Yes, too much of the Strategy assumes change can only come from Whitehall.

The Localism Act gives councils enhanced powers to lead in this area. They can identify and bring together landowners, entrepreneurs, national agencies and financiers. Councils can provide the time and encouragement for communities to work up schemes. They can also support them through the planning process, perhaps by offering them first development rights on key sites.

Councils face a delicate balancing act: they must resist the temptation to take over and fund the schemes themselves through prudential borrowing, often under the guise of getting projects off the ground quickly. That would simply replace large commercial developers with a public ones, whilst also adding to public borrowing.

The Community Energy Strategy has come at an important time and should be welcomed. The UK public is cynical, caught between rising costs, fuel poverty (partly because we live in leaky and poorly insulated homes), and an opaque energy generation oligopoly. Community energy can provide much more than a minor contribution, but all sides need to focus on the key changes that will make the greatest difference.