Consultation on the Review of the Feed in Tariff Scheme

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[Response from Mongoose Energy]

Mongoose Energy

Mongoose Energy is a company founded in 2015, working in the sector of community energy. We work with a large number of community energy groups, helping them with the identification, development, financing, implementation and management of clean energy assets. We have also recently obtained our electricity supply licence and are looking to launch our community-owned energy supply offering early 2016.

We have secured a portfolio of approximately 75 MW of clean energy assets that we are aiming to get into community ownership by June 2016.

Community Energy and the Feed in Tariff

Community Energy needs the Feed in Tariff as a short term support mechanism to address market disadvantage as the sector matures and before more sustainable financial mechanisms kick in.

The levels of Feed in Tariff proposed in the consultation document are too low, based as they are on flawed assumptions.

To continue providing support through the Feed in Tariff to community energy projects, community groups need the re-instatement of pre-accreditation and there needs to be attention to the definition of community energy to prevent abuse.

DECC should enter into a dialogue with the community energy sector as a matter of urgency to help create the more sustainable financial mechanisms for supporting community energy needed to replace the Feed in Tariff in the medium term.

Why Community Energy needs short term support from the Feed in Tariff

Community energy offers a fundamentally different way of doing business by re-investing profits back into local communities and offering local governance and accountability. As a result, community energy delivers a wide range of benefits, acknowledged within the Government’s first ever UK Community Energy Strategy and on which the justification for the additional support community energy already benefits from within the current Feed in Tariff mechanism has been based.

The rate of growth in the community energy sector has been significant with over 200 enterprises set up over the last few years[1]. We are now seeing community energy projects operating at scale, both in terms of size of project (e.g. Westmill Solar)[2] as well as numbers of projects (e.g. Gen Community)[3] and introducing innovation around training and apprenticeships (e.g. Brixton energy)[4] and split ownership of projects with commercial partners (e.g. Wiltshire Wildlife Community Energy)[5] and through mechanisms that are able to offer significant community benefit (e.g. Bath & West Community Energy)[6].

But community energy faces a number of significant challenges, not least the immaturity of the community energy sector itself. This is mainly reflected in disadvantages faced by the community energy sector when it comes to access to relevant financial instruments, purely because the financial market is not used to dealing with community energy. This is on one hand because of the size of the projects (but this can be dealt with by aggregation), and on the other hand with the overall structure of a project, including familiarity with community forms and structures.

In addition, the financial structuring options open to the commercial sector that can help them to mitigate the removal of the Feed in Tariff are not currently available to the community sector.

Whilst the cost of capital and the returns sought for investors/members is typically lower for community projects than for the commercially owned projects, this is only over the entire project life. In the early years, the commercial sector can withstand low project returns with the prospect of selling the project after 3-4 years and so making significant profits then, typically because of a sale to a party with a lower cost of capital, for example an institutional investor. Initial capital and the returns can be utilised again to invest in new projects. In this way commercial ownership can offer significantly higher overall project returns as a result of the re-financing premium, than come from just the project’s Internal Rate of Return alone.

This is not an option open to the community sector, where the idea is that the project stays in community ownership for the whole project life.

Project development can also be more expensive for communities and the timescales are longer, especially because of the community share offer, which can easily take a couple of months, and the obligatory senior debt element for larger projects (with associated relatively high upfront costs). As a result, risk and upfront costs are significantly increased. This is particularly problematic for community energy groups with weaker balance sheets than commercial counterparts.

So when faced with significant reductions in Feed in Tariff and a removal of pre-accreditation/registration, the community energy sector has significant additional obstacles to overcome.

Whilst many technologies such as solar PV are on a trajectory towards grid parity in the not too distant future, there is also a parallel journey for the community energy sector towards sector maturity. It is this, immature state of the community energy sector, that makes it particularly vulnerable to abrupt changes in current support mechanisms.

However, unless community energy can access short term financial support there is a very real danger that community energy will wither on the vine before the sector can reach a position where it is more able to compete on a level playing field within both financial and energy markets.

The Feed in Tariff should however be regarded as short term support for the community energy sector as it matures. A mature community energy sector will be able to access more sustainable financial instruments and mechanisms on the back of a pipeline of investment ready organisations and projects, both at large scale and by aggregating smaller scale projects. This will require both the community and financial sectors to adapt and develop new approaches and mechanisms.

These more sustainable financial instruments and/or mechanisms might include for example:

  1. An underwriting facility for a community bond (for example through the Green Investment Bank) that could come in after 3-4 years with lower returns than equity. This would provide a community led instrument offering a potential exit for investors and a refinancing uplift that will enhance financial models for community energy projects.
  2. Equity fund raise underwriting instruments on a large scale (£50-100m). This is the biggest uncertainty in the development process and is what leads to longer development periods for community energy projects than commercially owned projects.
  3. Flexible mezzanine (junior debt) instruments that could bridge the possible gap between senior debt and the community share offer
  4. Commercial finance providers prepared to lend into the community energy sector with manageable transaction costs
  5. Minimum export tariff set at a level that gives a basic floor of project viability

All these instruments could be at commercial finance levels, thereby not leading to additional costs for UK plc, but importantly will enhance a community’s ability to generate community benefit whilst not undermining community control.

This is all in addition to, and separate from, the potential added value that community energy projects may be able to derive from stronger community based local energy supply models as they are developed and come to market alongside the growing energy storage market.

But all these ideas will take time to come to market at sufficiently large scales to really allow the community energy sector to take off. However, in the meantime the community energy sector is less mature than the commercial sector, and is in need of short term support to provide assistance during this transition period.

With reference to the first two questions within DECC’s consultation

  • Whilst we support the move towards a subsidy free renewable energy sector, the cuts to FIT are too much too quickly (Q1). Community renewables in particular needs support for reasons outlined above and the level of FIT proposed is too low, based as it is on the flawed assumptions that bear little relation to real world experience
  • We strongly disagree with the assumptions outlined in the Parsons Brinkerhoff report (Q2) including the average yield being too high, the 4% return being too low, the lack of inclusion of panel degradation, the assumptions on electricity price and export tariff life. The STA provide a good critique of the assumptions in their response. In addition, the Parsons Brinkerhoff report makes no reference to the particular situation facing community energy groups, as outlined above and in Community Energy England’s consultation response drawn from evidence from its membership.

Additional needs for community energy as they relate to the Feed in Tariff

For community energy to continue to receive short term support within the Feed in Tariff it will require the urgent re-instatement of pre-accreditation and predictable degression pathways. Without pre-accreditation, it will be impossible for community energy projects in particular, with their longer development timescales and requirement to raise finance from non-sophisticated investors, to bring projects to fruition with any confidence.

In addition, there is also a need for a tighter definition for what constitutes community energy, particularly around parent company ownership of community enterprise forms like Community Interest Companies. This will be vital to protect any short term support mechanism from abuse. Essentially the definition should include Community Benefit Societies, Cooperative Societies, Community Interest Companies, Charities and for ALL forms (not just charities) the definition should include their wholly owned subsidiaries. The definition should specifically exclude Community Interest Companies that are owned by traditional commercial entities at the point of commissioning any project.

We strongly urge DECC to start working now with the community energy sector and other key stakeholders to support the development of more sustainable financial and other support mechanisms that don’t add to the financial burden of consumers and that support capacity building within the sector itself. In this way the Feed in Tariff can be removed as the sector matures without a hiatus and the consequent negative impact.

Summarising

Community energy has great potential to offer tangible benefits via a mature sector, making a significant contribution to the energy agenda within the UK. However, community renewable energy needs support as a rapidly growing but still immature sub sector of the wider renewable energy sector, less able to access long term commercial and institutional finance at low rates, but more vulnerable to market fluctuations due to longer lead in times and weaker balance sheets.

Short term support through the Feed in Tariff, at rates based on realistic assumptions, would give time for the community energy sector to mature such that it grows the skills and capacity to engage with energy and finance markets to greater advantage, and time for the markets to better acknowledge and accommodate community energy needs.

Temporary support, that could soon be replaced by typical financial market instruments under commercial conditions, provides an opportunity to, at a relatively low cost, bring a sector to maturity, whilst still delivering clean energy with significant community buy-in and benefit.

The community energy sector is keen to move community renewables as quickly as possible to a position where it can stand on its own two feet, as some key technologies move to grid parity. However, if current market conditions remain the same, grid parity alone is not enough for community energy to be able to compete.

 

[1] Based on searches of the FCA mutuals public register – https://mutuals.fsa.gov.uk

[2] http://www.westmillsolar.coop/projects.asp

[3] http://www.gen-community.co.uk/newport-solar-pv/

[4] https://brixtonenergy.co.uk

[5] http://wwce.org/press-release-first-split-ownership-solar-farm-launches-in-the-uk/

[6] http://www.bwce.coop/communityfund/