Municipal energy’s power surge

If the last 12 months are anything to go by, local government is set to become a force in renewable energy production. But councils have numerous challenges to overcome before they are a serious threat to the Big Six

It’s been a year of milestones for local and renewable energy. The UK’s first council solar energy bond, in Swindon, reached its investment target at the end of May, a month ahead of schedule. Portugal covered its entire electricity consumption through solar, wind and hydro power for four days during May; Germany announced on 15 May clean energy had powered almost all of its electricity; and last week’s Renewables Global Status Report found worldwide renewable energy capacity additions smashed records in 2015.

Does Swindon’s success within a context of ‘technical, economic and market transformation’ of the world’s energy markets point towards a thriving future for the municipal and community energy sector in the UK?

The Association for Public Service Excellence (APSE) published Municipal Energy: ensuring councils plan, manage and deliver on local energy in 2015. Its 38 pages included recommendations for ten things councils should be doing, and five policy proposals to government, to support ‘local energy stewardship’.

Then in December 2015, innovation charity Nesta published Local energy in an age of austerity, focusing on ‘preserving the value of local and community energy’. Author Harry Armstrong wrote ‘reliable, affordable and sustainable energy supply is key to the long–term success and prosperity of a city’, and the report explored how closer partnerships with community energy groups could help local authorities to organise and benefit from local energy projects.

Phil Brennan, head of APSE Energy, told EJ: ‘Local authorities are trying to deliver services in difficult circumstances. One of those services used to be energy 60 or 70 years ago. There’s no reason why local authorities shouldn’t be doing so again. The concern about fuel poverty is now one of the prime motivations; the problems around the energy market and the ‘Big Six’ suppliers is another prompt. The traditional energy market is not working, so what can we do about it?’

Energy has become a focus for many councils, according to Nesta’s Harry Armstrong, because of its high economic, social and environmental costs: ‘Councils spend over £1bn a year on energy (around 3% of total spending) and the cash total has more than doubled over the last ten years. As central government’s green policies swiftly disappear, cities are now taking the lead on the green agenda.’

Local authorities with energy ambitions
Which cities in particular? Let’s start with Bristol. Bristol Energy describes itself as ‘a force for social good… championing social equality, renewables and stronger communities’. It’s one of the UK’s first municipal energy supply companies, is owned by the council and fully licensed to be a supplier of electricity and gas.

Though the council has a 100% shareholding, the company has its own board and, as a national energy company, can offer its energy to customers across the UK. ‘Tens of thousands’ of them, according to a Bristol Energy spokesperson.

Council ownership brings community benefits. Bristol Energy’s Vikki Rogers told EJ: ‘We can take a more holistic approach and help address the issues that matter – like fuel poverty, which is above average in Bristol. We’re setting up partnerships with local charities and community groups to find the best ways to tackle a very real problem. The social aims are joint aims – the council wants us to be a force for social good in the city, so we have the flexibility to do more than a traditional energy start-up.’

How so? ‘Opening a face to face customer centre may not be a priority for a traditional energy company, but for us it is key to engaging with the local community,’ adds Rogers, and ‘we’ll also support local producers of renewable energy, boosting the regional economy and providing sustainable energy for future generations.’

Nottingham’s Robin Hood Energy (RHE), which launched in September 2015, was the UK’s first local authority-owned fully licensed gas and electricity supplier. Selling energy throughout mainland UK, its key drivers are around ‘reducing fuel poverty, not disadvantaging those on pre-payment meters, and delivering great customer service’.

RHE’s launch has benefitted more than just its own customers. APSE’s Brennan says: ‘When RHE launched, the East Midlands had the highest cost of prepayment meter electricity in the UK. This is important because people who use prepayment meters are also likely to have the highest incidence of fuel poverty. Since Robin Hood Energy was established the price of prepayment meter electricity in the East Midlands has reduced: RHE has had an impact in the market and forced the price of prepayment meters down. Agitating the market isn’t something that local authorities normally do; RHE has made a positive impact.’

Then there’s Public Power Solutions (PPS), a £12m-turnover company wholly owned by Swindon Borough Council. We’ve featured PPS’s unique solid fuel recovery plant, which helps divert 97% of municipal waste from landfill. But that’s far from the only innovation in Swindon.

Swindon Council has set up and manages Swindon Common Farm Solar CIC, which launched the UK’s first council solar bond in February. The bond issue sought to raise £1,783,000 from investors in 20-year bonds by 30 June and sold out a month early. Investors’ cash will be used to part fund the solar PV – the council will also invest £3,000,000 in the project – and members of the public who invested are set to receive an effective rate of return of 6% over the project’s 20-year term. In addition, 65% of the distributable profits from the solar farm will go towards funding local community initiatives, with the remaining 35% going to the council.

Councillor Dale Heenan, the council’s cabinet member for transport and sustainability, says it was a ‘bold decision’ to offer ‘the first council bond direct to the general public in over 100 years’, but adds ‘we knew there was an appetite from residents to invest in something with genuine environmental and community benefits’.

Heenan continues: ‘All councils need to find new and innovative ways to fund the vital work that they do for their communities, and Swindon now has a template which other local authorities can follow. Embracing renewables will help Swindon Borough Council raise £1m more in business rates and rent by 2020, which means £1m more every year which can be spent on important local services.’

Future expansion
How can more projects like Bristol’s or Swindon’s launch? APSE Energy held the Big Energy Summit in May. Brennan told EJ: ‘There’s growing interest from councils who can see how they can directly reduce fuel poverty plus generate income.’

What are the challenges? ‘The main issue to contend with is policy continuity: the more stable a policy environment we have, the more likely projects are to be successfully developed, and the more likely it is for the private sector and investors to play their part. Research and development is more likely too.’

Brennan adds ‘there’s a need for a whole council approach, from the need to get the information about local assets which could be used for energy generation through to implementing a council-wide strategy for energy’.

What about government support? Patrick Allcorn, head of local energy at the Department of Energy and Climate Change (DECC), attended APSE’s summit. Brennan comments: ‘Allcorn says, as you’d expect, that DECC are very supportive of the local authority sector but not that good at keeping up to date. Their ideal situation would be for local authorities to promote themselves more. But until recently, local authorities haven’t been good at this.’ Perhaps this is where organisations like APSE can help.

Nesta’s Armstrong told EJ: ‘DECC are in a really difficult place and I’m not sure they have the clout to create policies to change the system radically. The stuff that really needs to change is quite radical. OFGEM is reluctant to push too much. Everyone is kind of waiting to see what happens and then do something about it; this is partly a reaction to the unstable political environment.’

Our attitude to energy is changing. Dr Richard Williams, a senior research fellow in the energy and climate change division of the University of Southampton, and a special advisor on EU energy and climate change policies and initiatives to the shadow energy and climate change team, describes the ‘democratisation of energy’ as ‘a political, economic, social and cultural concept that merges the technological energy transition with a strengthening of democracy and public participation’.

Plymouth is taking a community approach to democratising energy. Plymouth Energy Community (PEC), a community benefit society, launched in 2013 with support from Plymouth Council, which then passed control to a board of volunteer directors.

After launching with a switching and advice service, PEC began collaborating with organisations in what chief executive Alistair Macpherson calls the ‘quest to change Plymouth’s energy future’. This evolved to include affordable or free insulation and boiler schemes, a fuel debt advice service, a home energy team, a volunteering and training programme and a health service referral pilot project.

In 2014 PEC set up PEC Renewables, another community benefit society, to fund community-owned renewable energy installations. Successful ‘community share offers’ ran in 2014 and 2015, with the cash raised used, alongside council loans, to provide schools and community buildings with free solar panels and to build solar roofs.

PEC Renewables has another community share offer underway. This time it’s enabling investors to become part-owners of something already built so ‘more tangible’, according to Alistair Macpherson.

‘Towards the end of 2015, PEC teamed up with a local economic development trust to build a 4.1MW solar array on derelict land,’ he explains. ‘Community investors’ cash will enable PEC to refinance the costs of the build, which had to be completed by March before cuts to feed-in tariff subsidies came into effect.’

Does the feed-in tariff cut mean future projects won’t be able to offer attractive rates of return to investors? Macpherson told EJ it’s too early to know: ‘Future renewables projects which use community share issues will be able to offer returns dependent on what new business models we can find.’

But he adds: ‘What could immediately be more problematic is the government’s withdrawal of tax reliefs from investments into renewables.

‘Changes in national policy for renewable subsidies and tax relief for community energy schemes have driven changes to the original business model but innovation, resilience and adaptability are securely built into the foundations of PEC and PEC Renewables.’

Harry Armstrong agrees, telling EJ: ‘The removal of tax relief shocked a lot of people and there doesn’t seem to be any reason behind it except a political one.’

He says the feed in tariff ‘was a great scheme to support new and emerging energy systems and helping them move towards a point of grid parity, but in the long term, it was not sustainable’. He adds: ‘However, I don’t know of any bit of the energy industry that doesn’t rely on some sort of subsidy.’

Improving the case for investment
Offering attractive returns to investors has certainly helped Swindon, Plymouth, and other community energy schemes. Are institutional investors getting involved? The UK’s Green Investment Bank (GIB) was by created by government – its sole shareholder and provider of its initial capital, although a privatisation process was launched in March this year – to invest in green projects on commercial terms and mobilise other private sector capital into the UK’s green economy.

To date, it’s backed 75 green infrastructure projects, ‘committing £2.6bn to the UK’s green economy’ according to a transactions report on the bank’s website. The bank has created a number of funds to invest in projects, with its Offshore Wind Fund ‘the largest renewable energy fund in the UK’. Backers include UK-based pension funds as well as international institutional investors, including one of the world’s largest sovereign wealth funds and a leading European life and pension company.

So institutions are involved. But one problem for local authorities seeking UK GIB investment for their projects has been quality and quantity of sufficient projects, says Nesta’s Armstrong, who told EJ: ‘The Green Investment Bank has sometimes struggled to invest its funds – a lot of local authorities put in bids which weren’t of sufficient quality.’

Perhaps this is changing. GIB’s recent investments include £9.87m for Stirling Council in a LED-lighting project forecast to reduce power consumption by 63% and save the council £31m; a £10m co-investment (with sustainable investors Equitix) into a combined heat and power unit and district heating system in Wick, Scotland; and co-investment (with Strathclyde Pension Fund and Greater Manchester Pension Fund) into Albion Community Power, a power generation company that builds and operates community-scale energy projects.

Another deal was finalised in late May, again with Equitix, to invest in Green Plan Energy’s £25m biomass facility in Wrexham, which will generate enough electricity to power 2,400 local homes.

Wrexham launched Wales’ first local authority-owned solar farm, opened in 2015 in a partnership with British Gas, and was highlighted by Brennan for another project addressing the challenge of battery storage: ‘Wrexham Council have a pilot project so that rather than generating electricity and using it straight away, users can release stored energy at times when there’s most demand – and generate some income. This technology would multiply the value of the energy generated enormously.’

Storage is at the centre of a project unveiled in May by the London Borough of Hounslow described as ‘the largest solar panel installation using battery storage in Europe’. Supported by the Mayor of London’s RE:FIT programme, the council has installed more than 6,000 solar panels on the rooftop of Western International Market which should generate half of the market site’s required electricity.

Charles Pipe, energy manager for Hounslow Council, says: ‘This project has been about reducing our carbon footprint and making savings and investments for the future. Not only can we expect to see immediate savings on our electricity bills, but we are expecting to see a return on this investment within seven years.’

If councils, institutional and individual investors can see, or forecast, a healthy return on investment alongside the ‘significant community engagement, involvement and benefit’ that Harry Armstrong says is built-in to many local authority energy projects, surely investment makes sense for head and heart.

Bruce Davis, the managing director of investment platform Abundance, which hosted Swindon’s bond-raise, says the success of their investment offer has ‘really set a standard for local authorities looking to fund green infrastructure’. He adds: We’ve had lots of inquiries from other councils interested in following Swindon’s pioneering lead. Energy is one area where local authorities have the power to make a difference, engaging and enabling their residents to take positive action and invest in a more sustainable future. We’d also like to see them going beyond solar and fund other infrastructure projects this way.’

What about projects that don’t work? Last year Forest Heath Council decided not to invest £14.4m in a solar farm, after due diligence checks highlighted several risks. The key issue, according to a council statement, was the risk of not completing the project before 31 March this year, the deadline to qualify for feed-in tariff subsidies. With these no longer on the table, local authorities and project developers should take a medium-term strategy, according to APSE’s Brennan: ‘APSE expect the price of PV panels to come down within the next 18 months to two years, so people should get planning and other permissions sorted, and be ready to go when the finances and business case stack up.’

He adds: ‘It’s about being ready to go when the financial case is there – that is what we’ve been doing with a lot of the councils that come to us. What we are saying is don’t waste the investment you’ve made already, be in a place to take advantage when the business case stacks up.’

Nesta’s Armstrong extols collaboration and argues there’s ‘an opportunity for councils and the community to use their skills, time and resources more effectively’. He believes operating alone is detrimental: ‘The biggest problem is the local energy sector in the UK is really disjointed. Individual projects create their own approach and business model. People don’t work together particularly well; even at a local authority level, many are doing their own thing. There is a lot of leadership, and others are following, but there’s a gap in terms of sharing resources, expertise and even backroom operating costs. Look at the results in Germany and the Netherlands from working together to see the potential.’

APSE is encouraging this sort of collaboration. Brennan describes a powerful end-point: ‘The move towards localised networks is seen by a lot of people in local authorities as a final point they want to get to.’

How would this work? He gives the example of a city centre site owned by a council that is looking to put in infrastructure. ‘The council will get an income through the infrastructure and will essentially become a DNO [distribution network operator]. A council becoming in charge of supply plus ownership of the distribution network would be very powerful.’

This is the point at which ‘the Big Six would be looking over their shoulders with a bit of fear’, adds Brennan.

With the milestones reached this year from councils who have already seen how they can directly reduce carbon emissions and fuel poverty, and generate income, it sounds like the Big Six should already be running scared.

Photo by James Cridland