While the FIT review is targeted at large scale installations, the reclassification of solar projects over 50kW as ‘large scale’ threatens community schemes too. The question for government, therefore, is at what scale can community energy projects succeed?
This post is intended to provide a background on how the community energy sector works. It looks at how to define a community energy project (CEP), how CEPs approach returns to their members and the benefits to their communities. It considers how they organise their overheads, as well as their business models, technologies and costs.
Based on this analysis we believe CEPs require 400kW of solar at the current level of FIT (or equivalent revenue via other technologies & FIT) in order to:
a – remain financially attractive to the membership
b- be able to deliver substantive community projects
c – manage realistic overheads
By suggesting this as a baseline for community energy projects, we believe the government has the opportunity to ease the congestion in the solar market whilst retaining the dynamic localism of this exciting, emerging sector.
It should be noted that several CEPs to date have received substantial grant funding. These are outside the scope of this post which considers self-funded CEPs only.
Defining Community Energy Projects
CEPs are, in the main, registered as Industrial Provident Societies or Community Benefit societies (the two are similar). These societies are regulated under the Industrial and Provident Societies (IPS) Act by the Finacial Services Authority, and are constituted differently from a company limited by guarantee. At the same time there is a company that helps out of such situations. Maximum investment is £20k (generally energy co-ops have lots of investors), surpluses and withdrawal rights are regulated, and each member has one vote.
It is important to note CEPs are distinct legal entities. These entities have a history of exemption from certain FSA regulations (such as those governing share offers) designed to reign in overheating commercial markets yet retain a community benefit.
Returns to members
The IPS law states returns to members can only ‘be sufficient to retain capital in the organisation’. It must be on a par, therefore, with other places members might put their cash, such as Green ISAs, renewable energy bonds or other CEP schemes.
Community benefits
Community energy projects can deliver large amounts of money to their home communities: one new start up schedules hundreds of thousands of pounds. The funded projects range from solar buying clubs, behaviour change initiatives, financial support for external community projects, starting new energy projects and many more.
Returns to community projects vary in inverse proportion to the financial returns offered to their members. Some provide almost no financial returns to members and all surpluses go to funding community projects. Some use their surpluses to re-invest in further renewable start ups. Some deliver almost no community projects – since most locals are usually members, the rationale goes, the financial benefits are sufficient to spur further investment (like a locally-funded Green Investment Bank).
CEP renewables are also usually sited locally, delivering cheap or free electricity to local organisations such as schools, hospitals and local amenities.
Overheads
While much work is done on a volunteer basis, CEPs are highly complex, time consuming beasts. They raise large amounts of cash – all of which demands responsiblity, commitment, professionalism and professional advice.
Despite local goodwill, this does not always come free. Neither is it sustainable for multi million pound organisations to be pro bono for 25 years. Office and staff costs are therefore usually factored into financial planning.
Business models
Community schemes are varied, but most involve revenue from renewables. They look to balance their overheads, returns to members and community benefits.
Some models see sequential installations as each providing a small chunk towards overheads and community benefits, one project at a time. Others look to cover them in one go and are viable from the outset, but require more intitial capital outlay.
Some offer virtually no yield to members, viewing community benefit as the overiding concern. Others take precisely the opposite view. Yet more strive to maintain a balance between the two.
Technologies used
CEPs use a mix of technologies – wind, solar and hydro are popular – and as such rely on varied funding calculations. However it’s worth pointing out that most community schemes so far have been developed in rural areas. Community solar schemes allow large-scale community deployment in large urban areas.
Costs
Startup costs
Project development costs are often around £50k: cheaper than commercial developments since the goodwill of the community often generates input from a wide range of individuals.
Community benefit costs
Experience shows £10k pa delivers one project a year. £50k delivers 5-10 non-installation community projects a year. Again, some view allocating cash towards start up development of new projects as a community benefit in itself. These are expensive and as such may only deliver one project pa. Community programmes tend to use a mix of paid and voluteer inputs.
Overheads
Taking into consideration accounting, membership management and organisational structure once the equipment is in place, CEPs generally require around £25k of overheads each year.
