What next for community energy?

by Blog

Community energy has been hard hit by cuts to renewable subsidies and it’s time of great change and uncertainty for those in the sector. In this blog post I look at some of the ideas for the way forward for community energy. We will be discussing all these issues and more at our forthcoming event ‘Hacking the energy system’.

Over the past month I have been to a variety of energy-related events around the country including the Community Energy Conference, Clean Energy Live, and the Low Carbon Networks Innovation conference, which has given me a broad overview of the current state of the progressive part of the energy sector. Times are hard for community energy following the drastic reductions in subsidies, which formed the basis of most community energy schemes and registrations for new organisations have plummeted. This follows the fortunes of the small-scale solar sector which has collapsed with several businesses going under and the loss of thousands of jobs.

The new government has also not given much reason for hope in the future. Having agreed the Hinkley Point C nuclear reactor at a strike price far above market rates (and according to some above even the cost of solar plus storage today) it has also recently progressed plans to impose fracking on communities around the UK in seeming contradiction with its recent re-committment to EU and international green house gas reduction targets. The recent proposed changes to rate relief (currently the subject of an early day motion in parliament) and talking up of the ‘costs of embedded generation’ are also worrying.

Onshore wind also continues to be out of favour (despite buoyant public support in most of the country) and subject to special local vetos despite its low costs (to be compared with fracking which enjoys a government veto over local objections!). There is talk of a new Contracts for Difference (CfD) tender aimed at large scale solar and storage, although this will likely only benefit existing large EPC (Engineering Procurement Construction) contractors and financiers who have dominated the large scale solar sector for several years.

Despite all of this community energy groups continue to deliver schemes around the country and new technologies and market reforms offer a way forward.

New business models/technology for community energy

Whilst the country has seen an unprecedented shift away from coal to gas and renewables over the past 10 years, other technology has been waiting in the wings ready for its turn.

The national smart meter rollout has properly begun despite serious concerns around its ability to meet targets for deployment, ongoing uncertainty over the technical specficication of the metering systems, and delays in deploying the IT infrastructure which will collect all the data. Community energy could make ready use of the data from smart meters to conduct energy assessments and plan and deliver products and services to members and consumers. But there are questions over costs and speed of access to consumer data which could make it difficult for small organisations to make the most of this opportunity.

Whatever happens smart meters and smart grids are here to stay as they are crucial to shifting to a low carbon electricity system. It is more a question of when it will happen rather than if it will happen.

Many companies are currently trialling demand side response technology which also depends heavily on smart metering in order to determine if and when people use their electricity. Demand side response seeks to effect changes in electricity use on the demand side (usually reductions in use) and has been used to balance the national grid for decades by controlling large industrial consumers with non-time sensitive applications (think aluminium smelting and cement plants). This is a relatively easy way of introducing flexibility into the grid with clear financial benefits for all parties. Smaller business and domestic customers are much harder and costlier to engage, although there is a lot of potential flexibility with millions of electricity consumers (and/or their appliances) involved. Community energy could have a role to play in such efforts as a trusted partner to other organisations trying to engage communities who are mis-trustful of external organisations and energy companies. This has been shown to be crucial in various demand side response trials to date.

There is also a huge amount of excitement over lithium battery storage at the moment due to rapid cost reductions from mass production and developments in cell technology. Storage in general has been identified as crucial for creating flexibility and offering a range of services in the electricity system. Despite this it remains expensive and competes directly with efficiency savings and demand side response which arguably should come before throwing more tech at the problem. Storage offers some opportunities for community energy; it could be added to traditional schemes or even deployed on its own in the right circumstances to access new revenue streams. There is a danger with storage technology that it removes large companies and high-income consumers from the grid, driving up costs for everyone else who has to continue to rely on grid infrastructure. Community level storage makes a lot more sense both economically and to ensure everyone can benefit from low carbon electricity supply.

Local Supply

One idea that could provide a lifeline to community energy schemes is local supply, where local small scale generation can sell directly to local consumers, possibly in partnership with an existing supplier. Given the make up of an average electricity bill (16% supplier operational costs/profits, 27% network costs, 32% wholesale costs) there would seem to be substantial value that could be extracted from local supply of electricity which could be passed on to consumers in bill savings whilst supporting local community renewable generation. These numbers are distorted for large suppliers who are vertically integrated and sell electricity to themselves thus reducing the effective price they pay and increasing the pay outs to their shareholders on either side of their diversified businesses. In some ways local supply is a way of beating the Big 6 at their own game! For this reason local or direct supply is one of Community Energy England‘s key policy areas and has risen up the agenda with the withdrawal of subsidies.

An example of local supply would be a small scale renewable generator, which typically can get only basic export tariffs (~4-5p per unit) for the electricity they generate and export to the grid, supplying electricity to local consumers on the same part of the distribution network. These local consumers may be paying 15p per kWh at the moment to their normal supplier, but could directly pay the local generators and a proportionately smaller amount in other costs, hopefully saving money in the process. Some have taken this even further suggesting peer-to-peer energy trading, although such an unregulated arrangement might make balancing supply and demand difficult and increase charging complexity in a way that offsets the benefits.

The main issue with such an idea at the moment is that supply of electricity is a highly regulated activity and so organisations wanting to sell to consumers need scale in order to break even. It is an activity beyond the reach of small volunteer led community organisations. The regulator Ofgem has made some efforts to address this possibility with their ‘Licence Lite’, but this requires generators to partner with an existing electricity supplier in a complex manner and suppliers don’t have much incentive to engage in such arrangements. In the case of large suppliers it undermines their business models as vertically integrated supply and generation companies and in the case of small ‘independent’ suppliers the legal and logistical overheads make it difficult to make work. More forward-thinking suppliers have push ahead with local supply anyway with the example of Co-operative Energy partnering with Energy Local in Bethesda, Wales to supply locally generated hydro power.

Part of the solution may lie with the Distribution Network Operators (DNOs) who stand to benefit from local supply arrangements as it can reduce network reinforcement and upgrade costs on constrained parts of the distribution network. Western Power Distribution have negotiated a novel connection offset agreement with local generators and Tempus Energy in partnership with WREN and RegenSW in a project known as the Sunshine Tariff. This avoids the need for network reinforcement due to the connection of new generation by offsetting it through offering time of use tariffs to local consumers which encourage them to match their consumption to local generation.

Going forward DNOs could help enable such schemes with small changes to the charging infrastructure such as the idea of ‘virtual private wires’ or ‘virtual MPANs’ (the unique identifiers associated with electricity billing unit) which aggregate demand and generation units for settlement (the process of determining who used what and how much to bill them for). This would allow settlement to occur within the current system automatically under current charging arrangements (see: https://www.ofgem.gov.uk/ofgem-publications/43856/ce-electrics-paper-virtual-private-networks.pdf). This may also obviate the need to move to a specific supplier to make schemes work as the charging is transparent to any particular supplier’s system (the need to move to a particular supplier has caused recruitment problems for local supply schemes in the past). The supplier/local generator relationship is then reduced to a commercial contract for electricity supply/generation which is much simpler than that proposed under License Lite. The creation of virtual meters would also fully realise the role of aggregators in the energy system who could then derive income from reducing distribution and transmission charges by balancing across local networks and pass these savings onto their members. Energy co-operatives would be a natural fit to administering such aggregator arrangements.

However, like some of the schemes mentioned above, this would still probably mean operating in a grey area of regulation or requiring special dispensation from Ofgem – so more work is needed to make it a reality. It would also probably require reform (and more complexity) to Distribution Network Use of System (DUoS) and transmission network use of system (TNUoS) charging to better reflect the value of local balancing for the rest of the network. Such activity is fully consistent and should be expected with the envisaged transition of DNOs to Distribution Service Operators (DSOs), offering a range of products and services to various actors and engaging in proactive management of demand and generation beyond the management of the network infrastructure. A lot of the focus in recent years has been on getting suppliers to setup and participate in complex local supply schemes, but it may be more effective to lobby distribution operators to become activists in promoting better arragements which can only benefit them in the long run.

It is also worth noting (again) that smart meters and half-hourly (or even quarter-hourly) settlement are crucial to the success of these schemes. Delays in the introduction of these will require ad-hoc solutions which will increase operational and other costs and mitigating some or all of the benefits.

‘Right to local supply?’

The concept of a ‘right to local supply’ was floated by 10:10 and was taken up as part of Jeremy Corbyn’s (second) leadership platform.

It calls for local small scale generation to be allowed to directly contract with local consumers (think people sharing the same sub-station) to supply electricity, something that is difficult if not impossible under current regulation. Campaigning for such a ‘right’ would provide impetus to change regulation which is currently lagging behind the ambitions of many new entrants to the sector. It would also help overcome objections from existing large energy suppliers who could only lose under such arrangements.

A ‘right to local supply’ isn’t necessarily inconsistent with recognising the supposed costs of embedded generation (as discussed above) either. The suggestion is not that anybody can connect whatever and whenever they like to the distribution network. Generators would still need to comply with connection requirements (G59 etc.) and pay for connection/reinforcement where appropriate (although these costs could also be socialised – rehashing the ‘shallow’ / ‘deep’ connections debate which has taken place in transmission sphere). It would just ensure a level playing field and market access for small generators or groups of generators who want to supply their local community without the need to become full suppliers.

What’s coming up?

The government is about to launch a ‘Call for evidence’ on smart systems and storage. This will deal with many of the regulatory/policy issues above and could help deliver some of the potential in the existing or near future electricity system. Carbon Co-op will be engaging with this and is hosting a one day conference in a few weeks entitled ‘Hacking the Energy System‘ to help formulate a repsonse. All interested parties, including our members, are invited to attend and contribute to a vision of a future low carbon and more democratic energy system. You can find more details and book on the  event page.