Why today’s energy bill could spell trouble for community energy projects
22nd May 2012

The Government today published the Energy Bill, which sets out proposals for far-reaching reforms to the way that electricity is bought and sold (the Electricity Market Reform process, or EMR in the jargon).

The aim, we are told, is to provide a stable market for all forms of low-carbon generation – nuclear, renewables and carbon capture. But there’s a sting in the tail. A system designed to promote low-carbon energy may well have some nasty unintended consequences for community-owned projects.

There’s been lots written about the benefits of community-owned energy – like my report for Co-operatives UK and this piece by ResPublica. Germany and Denmark have high levels of community ownership of wind farms, which has helped build public acceptance and trust.

Community-owned energy can be at all scales. There’s small, local schemes like Green Energy Nayland, where parents and villagers clubbed to gether to buy solar panels for the village primary school. But there are also big projects, like Westmill Wind Farm, which has a capacity of 6.5MW (enough to power 2,500 homes), cost over £7 million and is co-operatively owned by nearly 3000 members.

Under the EMR, projects like these face an uncertain future. But while there’s been a lot of publicity for the government’s cuts to feed-in tariffs, there’s been virtually nothing said about the dangers of EMR. I have a sneaking suspicion that this is because EMR is so fiendishly complicated that very few people (even paid-up energy geeks like me) have a full understanding of the proposed reforms. It’s a bit of an in-joke in energy circles that the number of people who truly understand EMR could be counted on the fingers of two hands at best.

So what are the dangers? From the many chats I’ve had with experts over the past few weeks – and I’ve talked to energy suppliers, generators, government officials and financiers about this – there seem to be two linked problems. Excuse the descent into geek-speak here, but it’s hard to avoid.

First, it seems likely that smaller renewable generators will be paid less for their electricity than larger generators like nuclear stations. This is because of the way that the new price support mechanism, the so-called ‘Contract for Difference’, works.

The amount a generator receives is made up of two components: the actual amount the electricity is sold for on the market, plus a top-up payment designed to bring the total amount earned up to the ‘strike price’ (this is the amount that the electricity is deemed to be worth, given its added low-carbon benefits.) But the problem is that the amount of top-up is not calculated on the actual amount that the generator receives. Instead, it is based on an average market price, or ‘reference price’. And for small renewable generators, the actual price they receive will in reality be far less than the reference price. This is because they produce smaller amounts, and because output is less certain. In short, they don’t have the buying clout of major producers. So the top-up will not actually bridge the gap between what the electricity is sold for and what the government thinks it’s worth. Smaller, intermittent generators end up losing out.

The second problem is simpler. It’s just that smaller producers will find it much harder to participate in the market. Given its complexity, the transaction costs are high, and proportionally much higher for smaller generators than larger ones. Whereas larger generators will be able to trade directly, smaller ones will need to work through aggregators, which bites further into revenues.

This isn’t about technology. A community-owned wind turbine is just as efficient as a commercially-owned turbine. But the new market structures will make electricity from the community-owned turbine far more expensive than the commercially-owned one. Surely that’s the wrong way round?

There are potential solutions. One is to adjust the system to compensate, for example, by having a different ‘reference price’ for smaller renewables projects. Another is to take smaller projects out of the EMR system altogether, instead making standard Feed-in Tariffs available for all community projects below a certain size. All these need to be considered carefully. But I’m worried that there’s precious little thought being applied to this, in government or elsewhere.

Unless we think this through, we could inadvertently create a hollowed-out energy market. Individual consumers will be able to profit from generation, through Feed-in Tariffs. Large corporate generators, like nuclear and offshore wind, may benefit from the reforms. But mid-scale projects will become the ‘squeezed middle’ of energy policy, losing out on all fronts.

This matters. It matters because of the massive potential of mid-scale projects to add up to a significant source of new renewable capacity. It matters because community-owned projects help to build public acceptance of renewables, and awareness of climate change. It matters because resilience is built through diversity, so we need a good mix of scales to build a secure energy system. And it matters because there are thousands of investors out there, ready to put their hard-earned money, not to mention time and effort, into community-owned schemes. But unless we get the policies right, it won’t happen.

I’ll be doing what I can to try to shape the EMR to avoid these problems, primarily through Co-operatives UK. Please get in touch if you’re working on it too, and can help with my analysis and on getting the message through to government.

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Rebecca Willis

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