60: Prospering From the Energy Revolution 2 - Finance

This February, the Local Zero team are bringing you weekly podcasts focused on the work of the Prospering from the Energy Revolution (PFER) funding innovation. This week the focus is on finance. Joining us for the second of these special episodes are Cheryl Hiles, Director of Energy Capital (West Midlands Combined Authority) and Tim Rose, Programme Manager of Energy Superhub Oxford. But before all that, the team celebrate the submission of a certain PhD...

EPISODE TRANSCRIPT

[Music flourish] 

Rebecca:  Hello and welcome to Local Zero with Matt, Fraser and Becky. Throughout February, we’ll be talking to a bunch of people who have been working hard over the past four years to help turn their communities into energy-smart places, bringing together supply, demand, infrastructure and people and connecting them in a smart way at a local level, like a town, city or region.

Matt:  Yes, so this is the second of four weekly episodes we’re recording this month covering some of the very exciting findings that are coming out of the UK Government’s Prospering From the Energy Revolution programme or PFER for short. If you missed our chat last week, it was on policy and regulation to support smart and more Local Energy Systems. We had Merlin Hyman from Regen and Chris Dunham from Carbon Descent. Be sure to go back and check that episode out if it’s of interest. 

Fraser:  This week’s episode will focus on finance and investment for energy-smart places. We’ll be chatting with Cheryl Hiles, Director of Energy Capital at the West Midlands Combined Authority and Tim Rose, Programme Lead of the Energy Superhub Oxford project. 

[Music flourish] 

Rebecca:  And if you are enjoying Local Zero, do remember to subscribe to the pod. That way, new episodes will land on your device every time we release them as if by magic. Check out our website where you can listen to everything we’ve ever done and also find exciting things like transcriptions of our episodes. You can search for specific topics and lots more. Check out LocalZeroPod.com. You can also find us on Twitter @LocalZeroPod or email any longer musings to LocalZeroPod@gmail.com. 

[Music flourish]  

Matt:  Wonderful. So, Fraser and Becky, we’ve got a really great episode lined up but before we get into it, we have some absolutely staggering and wonderful news, Fraser. You’d better let the listeners know. 

Fraser:  Yeah, staggering news indeed. This weekend, after a mad January, I submitted my PhD thesis. Woohoo! 

[Sounds of cheering] 

It’s been four years in the making. It doesn’t look anything like I thought it was going to look when it started... but yeah, the PhD thesis is submitted and closing that final chapter in every sense; exploring inequalities in the uptake of low-carbon tech, like solar panels and heat pumps, and demonstrating how they evolve over time and unpacking ways to resolve those inequalities at the local level. So very much pertinent to Local Zero. 

Matt:  Yeah! I mean what a different time and context to be releasing this. When you started four years ago, what a different world. Obviously, these inequalities have been rife for some time but have got worse and worse. You’ve timed it nicely [laughter] if I can say that. 

Fraser:  When I started doing this, and Becky can attest to this, I was doing it with my feet up. I thought, ‘I’ve got all the time in the world to fix this. This is no problem at all.’ 

Rebecca:  Yeah, I remember some of the early meetings just chilling out in coffee shops. It wasn’t very serious at all [laughter]. I have to admit, over the last few months, I’ve been thinking, ‘Is he going to submit it? Are we going to get there?’ [Laughter] 

Matt:  Many of the listeners won’t know that Becky has been Fraser’s supervisor. 

Rebecca:  Yeah, for my sins [laughter]. 

Matt:  So there’s that sense of relief. I mean I’ve been through that. Once your students submit, it’s not quite as big as the relief of the student but it’s a big one. So well done, Fraser, and we look forward to introducing you soon as Dr Stewart but not quite yet. 

Fraser:  Not quite yet. 

Rebecca:  Oh, that’s got a scary sound to it, doesn’t it? [Laughter] 

Matt:  You’ve got to earn your stripes [laughter]. We got a viva but this is the big one, yeah. 

Fraser:  That’s it, yeah. 

Matt:  I guess some other good news through our friend of the pod and regular guest, Dr Jen Roberts, who is a senior lecturer at the University of Strathclyde. Jen, who has been on many times, sent us an email which basically captured some of her students’ feedback. She has given her students a three-line whip and they all have to go and listen to an episode of Local Zero pod – lucky them – and I think the episode that they covered was one titled ‘Infrastructure and Environment’ which, if you cast your minds back, we heard a little bit about how we need to build the infrastructure to deliver net zero.

Now, the good news is the feedback was positive. We were really put through our paces here. One of the comments I’ve really, really enjoyed, which, if I can paraphrase, was ‘I didn’t realise how much of the effort that’s needed for net zero isn’t just building stuff and isn’t just technology – and I quote - It’s about changing people’s mentality and making them not focus on just the individual materialistic aspects of making changes but that bigger mindset.’ I thought that was fantastic and they gave an example, which we must have talked about in the kickaround, of the drive-through restaurants in Glasgow and this push to boycott these so that people aren’t necessarily driving for a hamburger... 

Rebecca:  Yes! 

Matt:  ... which seems like an imminently sensible thing to be doing in a net-zero world. What I will say is we’ve had some constructive feedback, folks, which was along the lines of really enjoyed the pod; excellent listening; did start to zone out after a while and it would be better if there were more pictures – ideally moving pictures. So you’ve heard it hear first: Local Zero, the film is coming to an IMAX cinema near you. Thank you for that. Thanks, Jen, for some fantastic feedback. This really keeps us going. 

Fraser:  First of all, I don’t think I was on that episode, so that might explain the zoning out comment [laughter] but I think somewhat terrifying and a real sense of scary responsibility that we’re being used for educational purposes. 

Matt:  I just think it’s great they’re able to use this as a resource. As we know, this pod is all about local climate action and that lives and dies on education and informing people about what to do. Doing this in the classrooms, whether it’s primary schools all the way through to universities, I’m thrilled it’s being used and I am increasingly using it for my own teaching.

Thank you to our producers, Patrick and others, who have helped to turn our website into a repository. If you have any teaching needs – it doesn’t have to be in the classroom and it could be in the local community – please get on to the website and have a look at what we’ve done there because it’s a lot of hard work. Thank you, Patrick. 

Rebecca:  It’s absolutely amazing what’s been done with that. I take Fraser’s point that perhaps we do get a little bit loose sometimes on the show but I do think there’s a real value in the sorts of guests that come and talk to us and the insights we glean from them from actually working on the ground trying to do and deliver... it’s just golden. So absolutely thrilled that it’s being used in this way. 

Fraser:  Especially those Local Zero lives when we’ve had a couple of wines beforehand as well. 

Matt:  Oh yes, yes, loose. Emphasis on loose [laughter]. I think, Becky, that is an excellent segue into today’s episode where we hear from two further experts in their field who are actually doing this and getting their hands dirty in delivering these Smart Local Energy Systems.  

Rebecca:  But before we hand over to those experts, let’s just tap into the brain of the genius boy sitting right in front of us [laughter] because, Fraser, you’ve just been doing some brilliant work talking to a lot of people on the ground, focusing in on Smart Local Energy Systems and all about some of the finance and investment challenges that they’ve been having. 

Fraser:  Yeah, absolutely. A terrifying thought tapping into my brain at the best of times [laughter] but the work that we have just done... we spoke to, more or less, all the different Prospering From the Energy Revolution (PFER) Smart Local Energy System projects and finance and investment was a key theme of that and something that we were trying to unpack.

Some of the key findings around that, I guess, were that while it’s still a complex proposition and we’re still developing some of these ideas and pooling them together, the programme has created a whole load of evidence in this space on developing new business models, new ways that Smart Local Energy Systems can become financially viable and lucrative going forward for a whole host of people. For investors, communities and households in terms of bill savings, the Treasury and anyone in between, there is strong value on offer.

What we also found in those projects’ experience was that actually, there’s a ton of appetite to invest in these kinds of projects. There’s a real understanding of the value that they can deliver but what is required to ultimately shape and deliver that is some kind of certainty in terms of policy and regulation, which I think is underpinned by something that came up in last week’s episode on policy and regulation, and that need for that kind of centralised vision of exactly how these things piece together and exactly how we can incentivise not just investment or new financial models in Local Energy Systems but also to really enable and unlock that social and economic value more broadly that’s on offer.

So a really, really exciting space and a ton of work done to demystify these processes. Lots of appetite, lots of value on offer and excited for the discussion about how we unlock that going forward. 

[Music flourish] 

Rebecca:  So without further ado, I think we’d better bring in our guests to talk about this a bit more. 

Cheryl:  Hello, I’m Cheryl Hiles, Director of Energy Capital at the West Midlands Combined Authority. 

Tim: I’m Tim Rose and the Programme Lead for the Energy Superhub Oxford project and I work for EDF Renewables which is the lead partner in that project. 

[Music flourish] 

Matt:  So a very warm welcome to Tim and Cheryl. Great to have you on board the good ship Local Zero. Tim, maybe you might be able to begin by talking a little bit about the types of projects you’ve been involved with through the PFER programme, what they’re doing differently and how they’re trying to change our energy system. 

Tim:  Yeah, sure. I can give you a very quick intro to the project that I was running which is the Energy Superhub Oxford project. This is one of the three demonstrators that were part of the PFER programme and all those demonstrators, as we all know here, are attempting to deal with power transport and heat elements of moving to net zero. That’s what we were doing in our project. All these projects are very different and ours was different from any of the others in the programme.

Noticeably, I think we were the only project that was looking at a connection to the transmission system. Energy Superhub Oxford had those three main elements. The two transmission-connected elements for us were, firstly, a very large storage project based at the Oxford substation just near the city; a very large battery which is innovative in a number of ways. We all know about lithium batteries and may have heard of very large lithium batteries but this is a hybrid battery. It was a combination of lithium-ion and vanadium flow which is a completely different technology. For that reason, it was interesting to the Innovate project and the PFER programme.

The idea of this project is how we can combine lithium and vanadium, two different chemistries, and show how there can be benefits from using those together. It’s the first transmission-connected, 50 megawatt battery in the UK and so it’s very large. As I say, it also has this vanadium component which is a 2-megawatt vanadium flow battery.

So that’s one part and then on the transport side, under this project, we have also built the first private wire. It’s our own cable network connected again to that transmission point of connection and leading to a Park-and-Ride in the West of Oxford which is an existing Park-and-Ride but is now providing charging services to the public at that station. This is the largest charging hub in the UK at present with 42 different charging points of various different speeds. That’s very exciting and that’s been live since July last year. There are some other nice elements on the transport side, one of which relates to buses and the other one to electrifying Oxford City’s fleet. 

Matt:  Fantastic, Tim. Thank you and by my crude and probably incorrect calculations, your battery is equivalent to about 1,000 pretty long-range electric vehicles at 50 megawatts. We’ll maybe come back to you just to try and give a sense of how big this thing is. Cheryl, your experience of the PFER programme, what exactly have you been involved with, please? 

Cheryl:  We’ve been involved in some different projects. The ones we’ve been working on are detailed design projects, so not demonstration but looking at actual design. In the West Midlands, we’ve been involved in three different projects and we’re leading one of them called the Regional Energy System Operator which I’ll tell you a bit more about in a minute. We’re partnering on one called Zero Carbon Rugeley and also we’re a replication area for the GreenSCIES project. So we’ve had the benefit of working across multiple different projects to see how they interrelate and what the synergies are between them which has been really, really beneficial. The main purpose of the projects has been to look at what value there is in taking a place-based approach to developing these Smart Local Energy Systems, where that value sits and how we can get hold of it, basically.

The RESO project, which is the Regional Energy System Operator project, was looking at how the region could play a role in the way the whole energy system operates; not just how it’s planned but how it actually runs as well. In that, we were seeing where the value sits and how we might be able to change the system in the future; so thinking about what our future systems operator might look like to actually capture that value. It was based in the city of Coventry and looked at a city-scale energy solution.

The Zero Carbon Rugeley project, again, was looking at the value locally but actually, our role in that was to identify how we might be able to extract that value through a finance mechanism. This was about the Rugeley area where there was a big power station which has been taken down and they’re redeveloping the area. Redeveloping the area could be spread through the energy system to the local area that already is established in Rugeley. We were particularly looking at the finance model to see how we could make that attractive and how we can bring private finance in.

In terms of the change that we’re trying to make, everyone knows that we operate in a global energy market which is obviously causing lots of challenges to us at the moment and our national energy system is, again, run in a way that is very much focused on how the whole energy system can operate nationally. We’ve got a commitment to achieve net zero and that transition is the key focus of what most of these Smart Local Energy System projects are about.

Technically, at the moment, most of the investment goes into the big schemes and that transition is about big investments, offshore wind and the government setting mechanisms like the Contracts for Difference to support that transition. The finance community are quite comfortable with that and once it’s proven and it’s underwritten, it’s something they can work with but the new energy system that we’re going to have is going to be much more difficult to balance. You’re not going to have the same firm power that we used to and how we balance the system is the bit that we’ve been focusing on and the role of a local place in doing that.

The trouble is having lots of players and lots of different organisations affecting that makes it more difficult. It makes it more complex. It’s dispersed across the whole country and that doesn’t really attract finance in the same way that those large-scale investments do. So that’s what these projects have really been looking at; how we can innovate to find ways of making Smart Local Energy Systems financeable and attractive. 

Rebecca:  That’s such an important point, isn’t it? I can imagine just listening to some of the challenges that you were mentioning, Cheryl, particularly around that difference in terms of scale and some of the lack of mechanisms when you start to go from this kind of big offshore scale to something that’s smaller and requires looking at doing bespoke things or at least tailored things in different places but also, in some ways, it can be fairly easy to get your head around or at least for me.

If you’re talking about generation, you are creating something that you’re selling and there is a value in what you’re selling. Whereas, sometimes, I think we think about what’s going into the Smart Local Energy Systems and you’re not necessarily selling the same sort of thing [laughter]. You might be selling flexibility. You might be selling reduced demand. You might be selling health outcomes. It’s a very, very different thing to wrap your head around.

I’m just wondering if you can maybe expand a little bit around some of those challenges that you’ve experienced in terms of getting projects like these financed. Are you starting to see investors getting engaged in this? Do they understand the opportunity? Are they excited or is it a real challenge that you’re experiencing? 

Cheryl:  Yeah, those are really good points, Becky. Is the finance industry excited? Yes, there are lots of people talking about big sums of money and saying that there are investors ready, they’re really keen and they want to support this but then the challenge is how and it does come back to that scale thing because actually, a lot of the projects we’re looking at just don’t have the ease of size and are something that people are used to.

The challenges we’ve got, in terms of the projects, some elements of the Smart Local Energy Systems are profitable and have good rates of return but others don’t. There are some significant parts of the energy transition that don’t make a bankable return at the moment and because of that, we’re concerned that if we just let the market operate in the way that it does today, the public sector would be left with a pretty hefty bill to try and pick up all of those elements that aren’t financeable or commercially viable at the moment. The problem is that we can’t really just let that happen because if we do, we won’t be supporting the just energy transition that all of us want to see.

So essentially, we’re going to be leaving people behind and there are going to be people who are negatively impacted by that transition if we can’t fund the non-profitable bits as well. The projects that we’ve been working on have found that there is value in the interconnection between those projects and the different bits like some that are profitable and some that aren’t. There is value in that interconnection but the main values are actually social and economic values rather than commercial values. The challenge for the finance system is how we capture those. How do we find a way of actually paying for them so that the public sector doesn’t have that heft bill and we do have a just transition?

We have been working with the finance sector and they have been great. One of the things we set up as part of the RESO and Rugeley project was our Smart Local Energy System Investor Panel. That’s been acting as a critical friend for us and helping us get an investor perspective and understand how investors see these projects. A number of different projects have come to that panel and then presented what they’ve got.

I could probably go through quite a lot of the different challenges that the industry has thrown up but I guess I’ll put them into two blocks. There are some things where I think the public sector can play quite an important role in helping solve the problem. The projects are complex. There’s a lack of consistency between them. They are all very different. One problem is that there is no easy solution to net zero and there’s no silver bullet, as they say. Everything is costly and complicated but that makes the due diligence really expensive for finance organisations. If they can’t repeat that due diligence, they don’t see the value and struggle with the cost of that due diligence process. The risks are also not really well-understood. There is a business model risk. There are regulatory risks. There are technology risks. There are revenue risks. We need to find a way of helping reduce some of those risks; otherwise, investors are just not going to be able to come forward.

The other thing is the lack of a pipeline of projects. So lots of them all coming forward and being ready and actually investable when they get to the point of talking to those investors is also a problem. There’s a need for some sort of technical assistance to try and get them ready. I think all of those things are being addressed, to some extent, by the place-based models and the role of perhaps a coordinating body. We call it a master developer. We’re looking for a better term. We’re trying to work out what that sounds like but some kind of coordination activity that supports it.

I think there is also an onus on the financiers as well. People aren’t necessarily used to having a mix of different profiles within one funding package. The finance community tends to apply the highest risk to the whole package which doesn’t really help us move them forward and it obviously increases the cost. So I think there’s an important element there where the finance community could help us find blended finance solutions that could apply to energy and that they’ve probably used in other sectors in other places that might help with that. 

Rebecca:  Oh my gosh! There is so much in there for us to unpack. We’ll let Tim come in because I saw you nodding along to a lot of that, Tim. I’m really interested because I remember, a very long time ago and pre-Covid even, being in one of the Project ESO meetings and you were talking about bringing together the transport piece of the work with the battery piece. Part of that was around the fact that some bits are profitable and some bits are not and sort of coming back on to some of that very early stuff Cheryl was saying. We are absolutely going to dig into the rest of that as well. Is that something you’ve experienced and then been able to address directly in terms of the solution that you’ve developed? 

Tim:  Yeah, it’s interesting because we probably are in that sort of - the way Cheryl was talking about it - slightly more traditional financing approach at the moment. I suppose because the project that we’ve been building here is large infrastructure-type stuff, it does have value streams and a battery has revenues. It’s not always easy to determine what those are going to be but then, therefore, is investable in a large charging hub. Actually, for us, it’s an infrastructure that provides the power to that. It does have a business case because we can work with charge point operators who are willing to pay for that energy. You’re absolutely right. There’s an issue for us in joining these things together because that is the model that we have.

Superhub Oxford is the first of these models where we’re combining that battery and that transport piece for that charging hub. We want to be rolling that out to 40 other places in the country, actually, based on these transmission connections. Definitely, there’s a challenge with that. Batteries have changed a lot, even in the last four years since we started this whole project. Incidentally, Pivot Power, who started the PFER project and which was a very small start-up company when I joined the project, had the challenge of trying to secure investment to be able to roll these out and that’s how we ended up talking to EDF Renewables and becoming part of that business.

So combining the two together carries on being an issue. The revenues that you can see associated with the transport side can support the battery and vice versa and that was important to us and important to EDF Renewables when they bought Pivot Power. This was a new model.

Matt:  I’m actually going to ask a question to Cheryl initially but I’d like to come back, I think, to where these revenue streams have changed over time and how capital investment has maybe shrunk in certain areas as costs have fallen but also how things like electricity have shot up in price. I think that’s important to talk about in a moment around the revenue. I just wanted to pick up on something that Cheryl mentioned. Cheryl, I wish I’d spoken to you yesterday before I resubmitted a journal paper [laughter] which was all about financing for community and local energy. I was trying to crack this difficult nut which was is it that the money is wrong or that the business models are wrong... or both? Because if you ask the local and community energy companies, they’ll say, ‘The right money just isn’t out there.’ If you ask the investment companies, they’ll say, ‘They’re not the right fit for us.’

I guess there are two questions here. To Cheryl initially, what needs to change or is the answer both? Maybe then we could talk a little bit about the revenue streams and where we’re at, at the moment, with those. 

Cheryl:  When I first started this, I assumed that it was us in the public sector that was getting it wrong and us in the community sector that was getting it wrong. I assumed the finance system had been operating perfectly well for hundreds of years [laughter] and so it was all our fault because this was all new. What working with the SLES Investor Panel has taught us is that the problem is on both sides and that’s been a really eye-opening experience to understand that. Understanding that is helping us with finding the solutions because we realise that the finance community, the public sector and the energy community all need to work together to try and find solutions that are actually going to overcome these challenges.

In terms of finding solutions that can work, bringing the partners together is critical. In terms of moving money into the space, the finance community I think have quite a lot of power and control in terms of looking at different ways of doing this. Some might argue that they don’t need to because there are lots more attractive things to go after but actually, from a country’s perspective in terms of achieving our net-zero objectives, we really need private finance as part of this and so we do need that collaboration.  

Matt:  I guess there’s an interesting question. Do they need pushing or do they need pulling? The pulling there goes back, Tim, to the value of the revenue streams. If there’s a buck to be made here, you can bet your bottom dollar that many of these financiers are going to look at this space and get serious about it. The economics of low-carbon power generation and supply has fundamentally changed over the last few years and even more so over the last few months. Where are we on that front? 

Tim:  From our perspective, we talk about EDF Renewables as an investor because I guess we are an investment business in this sense because we’re looking for that revenue stream. Being a large corporate, we do have the funds to then invest in those sorts of projects. It’s been interesting how, for example, storage has changed over the course of this project. In the beginning, we tried to create a case for a purely merchant revenue stream. When I say ‘merchant’, I mean no government support mechanisms. Trying to demonstrate that was not as easy as you might imagine it was and during the acquisition process that we went through, we were able to do that.

Of course, the whole market has gone crazy [laughter]. Actually, for batteries, it’s not just the energy prices; it’s the volatility that creates that opportunity for storage. Well, it’s two things really. It’s a kind of arbitrage opportunity but also the volatility in the electricity network means that National Grid is out there securing contracts for people to help stabilise the grid. That has been another enormous change which we didn’t expect at the beginning of this. We thought we’d be doing a lot of trading. 

Matt:  So, on balance, are we in a more positive investment climate space now for these types of projects than when you began this initial project?  

Tim:  This is quite specific because with the large batteries, we are because I think you can make the case for the volatility and that will settle, again, over time. As this whole change to the energy infrastructure balances and we have a system that can deal with these ups and downs in renewables, it will tend to balance out but at the moment, very much so and the last couple of years have really seen a huge increase in that. That’s quite specific to batteries. With the whole transport piece, obviously, there’s just a growing market now and so there’s the demand really. The charge point operators want to open sites and, therefore, they’re looking for power. Certainly, that’s really going to be the case with fleets, buses and all that sort of thing and so there’s a real opportunity.

The other bit we haven’t talked about, and I just want to mention though from a financing point of view, is the heat piece of our project. It’s not transmission-connected. It’s a bit divorced from the rest of the project on that basis but very much, with our heat partner, Kensa, we’ve installed a number of ground-source heat pumps at social housing residences in Oxford. Their vision is very much to roll out green streets and replace the gas network with shared arrays up and down the streets and then people can connect off them pretty much as they do with boilers. The financing side of that is a different challenge I think. I can’t go into too much detail because it’s very much their piece [laughter]. 

Matt:  I’ve seen them pitch that before, which was very interesting, and almost having like a neighbourhood loop.  

Tim:  Absolutely. 

Matt:  Let’s take it even just to the level of a cul-de-sac. That ring of homes would connect to a single heat pump loop... 

Tim:  That’s right. 

Matt:  ... as I understand it, which is very exciting. 

Tim:  In order to do that, obviously, there’s a big investment required to be able to roll that out not just in individual areas but over a broader geography. There is something there that needs some support from government to ensure that it is attractive enough and there’s a patient, long-term element to that finance in some way. I think that’s what the guys in Kensa are dealing with. As I say, I’m afraid it’s not my core expertise that bit but it’s interesting. 

Cheryl:  Tim, I think you’ve picked up on a really important point there and that’s the role of place. Coming from the public sector’s perspective, that’s what we’ve been looking at. If you take those different elements, the transition in terms of the way the network now uses storage I think is fantastic. What we need to get to though is where that storage can be distributed around lots of small-scale properties and places, even down to the vehicle-to-grid type model so that they can incentivise the transition that we need to see because actually, the incentives aren’t there yet.

So the bits that don’t make the money are the domestic properties, the homes, as you were talking about; some of those elements where you need the market to play a slightly different role in order to get the money into those sorts of investments.

Retrofit is by far the hardest element of a complete Smart Local Energy System. It’s the bit where no matter how much you play with the numbers, it just doesn’t seem to work. It’s those sorts of solutions, that Kensa and others are coming up with, that look at whole places where you can get a bit of scale and you can start to create a community around that transition that can really make a difference.

A lot of the work that we’ve been doing in Zero Carbon Rugeley has led to the whole of the West Midlands doing a Net Zero Neighbourhood programme where we’re trying to look at that spatial element and understand how we can bring private finance into the retrofit space which is very difficult but I think we’re really, really close to that now. That’s what these innovation projects really help stimulate.  

[Music flourish]  

Rebecca:  Earlier, Cheryl, you were explicitly talking about the economic and social value that’s being generated. Is one of the challenges that the people that might be capturing that value are not the same as the people that might be investing? Are we seeing a kind of mismatch here around where that value is being captured and who might invest? Also, what sorts of investors? Lots of investors are looking for very, very different things and not just in terms of that kind of financial return, the scale and the duration. Presumably, there are some investors that might be very interested in models that are delivering these additional outcomes. Are you seeing that kind of mix in the space of the sorts of investors that you’re getting here? 

Cheryl:  Yes, you’ve absolutely hit the nail on the head in relation to the fact that those who are investing at the moment aren’t necessarily the ones who are receiving the value. That’s the fundamental problem that we’re looking to try and solve. It’s even true within the public sector itself if you assume that a lot of these Smart Local Energy Systems as a whole will still require grant funding in some way because we have to make sure that we don’t leave people behind; so making sure that that investment takes place.

The value is, at the moment, invested through the Department for Business, Energy and Industrial Strategy. The value that might accrue might be to the health department. It might be that you have warmer and healthier homes with fewer people going to the hospital with respiratory diseases, etcetera. Those connections are virtually impossible to make [laughter] unless you’re at a local level. So we believe that if you’re working at a place-based level, you do start to see some of that investment and you can make the links between who puts the money in and who gets the value out because, from a place-based perspective, you perhaps have a local authority where all of that comes together. That’s where you can track it in a much better way. 

Matt:  How do we do that, Cheryl? This is a really thorny issue. I love your point about who is investing isn’t necessarily who is benefiting. You gave the example there of the NHS. I think we’ve heard, just today, that Amber Rudd, the former energy minister, has been talking about prescribing warmer homes as part of tackling the NHS issues. We’ve heard similar debates there around shifting to active travel and electric vehicles in terms of reducing air pollution. This is there but have you thought a little about how we do this?

Becky, we’ve talked about this at length and about co-benefits and how you monetise these. Until we find a way forward on this, my gut reaction is that a lot of this stuff will remain quite niche. However, once we start to – this sounds quite business school-speaky – internalise those environmental externalities, i.e. putting a price signal associated with those things that affect everybody and the environment around us, this stuff doesn’t fly in my view. Maybe I’m wrong and maybe there is a way forward but I can’t point to somebody who’s had the answer just yet. 

Cheryl:  You’re right. I don’t think we have proven the answer but I think there are a couple of different elements. I think place-based funding could help overcome some of those barriers that we were talking about in terms of governmental departments. You probably know at the moment that combined authorities are negotiating with government devolution deals to take money that all the different government departments want to invest in a place and say, ‘Let’s invest this through a combined authority in a place.’ If the flexibility is put into that funding, you do start to be able to invest in solutions that provide those different value streams and you can recognise that as part of the process, if you see what I mean. You can record it as a return on investment for all of that grant funding that was put forward rather than the individual stream.

So I think place-based funding is a really important element of this. In terms of the outcome buyers’ element, I think that’s where we might be able to see some changes in market incentivisation. Lots of us have worked on the Smart Local Energy Systems projects because we believe that it’s a more cost-effective solution to have a smarter energy system than it is to overengineer the system but we have to try and find a way of capturing that.

For example, if a Distribution Network Operator can see that there is a better business case to invest in flexibility than there is to upgrade the infrastructure and you can capture that value so that they can actually put a money figure on it, then we can start to say, ‘Okay, it’s worth them paying for some of this upfront.’ Actually, that’s what is going to have to happen.

A lot of this stuff has got to be funded through the energy bill payer through the energy system but not just attracting private finance that needs a return. It’s got to be those players within the system. 

Matt:  To try and simplify that then maybe, in my mind, I’ve kind of got this bullseye chart or diagram which has got rings and in the middle of that ring is a person or household. As you go further and further out, you’re going from the local, to the regional, to the national and international. Is it about trying to connect there the money going in to the benefits that are coming out at a particular level?

You’ve mentioned there that if it’s a local council, they have their hands on the purse strings of investments which will yield a benefit at the local level and ditto if it’s a regional investor like a Distribution Network Operator, they’re looking for regional. I know this is oversimplifying it but in some respects, it kind of helps me think through it a bit. 

Cheryl:  Absolutely. There is a huge role for each of those different levels. I’m certainly not saying that Smart Local Energy Systems will solve our problems. We have to have large-scale national investment and transition. We have to have something in between that and the very local as well but I think actually taking it all the way down to that person-centric approach is where we found the story to make sense.

When we started looking at it from a person perspective, and particularly the fuel poverty led us to this, we started to think, ‘Government are investing in measures on a property to address fuel poverty. Why isn’t it working?’ The West Midlands suffers from one of the highest levels of fuel poverty and has done for a long, long time. We want to try and crack that. We want to try and understand why and when you start thinking about it from that individual perspective, you can see those impacts and values. I think it’s a nice analogy. 

Matt:  It’s completely flawed, of course, [laughter] but sometimes, you have to throw it out there to make sense of what the answer is. 

Rebecca:  Tim, earlier, you mentioned that you’re running Energy Superhub Oxford but actually, it’s almost like the first in a pipeline of other projects that might look fairly similar to that in other places around the country. We’ve talked a bit about that kind of pipeline and the need for investors to see that. Do you think that that pipeline approach that you’re taking is helping attract investment into this? Is it addressing some of the risks or insecurities in the models? 

Tim:  Yeah, particularly thinking about this specific model that we’re trying to roll out, which is storage, transport and the private wire charging capability, there are two streams to it really. One of the streams is a bit more traditional. We have 40 connection points up and down the National Grid network. We can roll out those batteries. That’s a pretty traditional development role.

Where it gets much more complicated, I think, is in these superhub-type concepts. What’s come across very strongly to me is how collaborative that piece absolutely has to be in terms of it not just how you build things but the investment side.

For example, at the Oxford one, and this will be the case elsewhere, we have a number of parties who are all really investing in this in their own way. You’ve got us and EDF Renewables building a  piece of infrastructure to pipe power to charge point operators. You’ve got the council with the land, in this case, which is a park-and-ride and they have an investment case to be able to make and offer bays to charge point operators in that particular location and that’s a whole different type of approach and very much public-sector driven. You’ve got the charge point operators themselves who are making their own cases to install what are pretty expensive bits of equipment like some of these rapid chargers, etcetera. All that lot has got to come together and each one of these things is going to be pretty bespoke.

As I said, this is very public, and future ones that we may roll may be more to do with charging buses and fleets. They’ve all got their own investment approach to this but I think that collaborative approach... you’ve got multi-parties and you’ve got the public and private sector. The local authority is going to be absolutely core in this wherever we go and particularly around that charging piece.

What we learnt very much in this project was that we were all doing this for the first time and for the council, from a resources and skills point of view, there were some huge challenges and big gaps that they recognised. I think there’s definitely a role and Cheryl mentioned the body that can support this sort of activity maybe from a finance point of view but definitely from a skills and resources point of view. I think there’s a lot of work that’s gone into a lot of projects in this programme and I do think that would be a huge help to local authorities and other partners launching these sorts of activities to be able to learn what’s happened before and how other people have done it. 

[Music flourish] 

Matt:  Excellent. Tim and Cheryl, thank you very much. Before we end, I’m going to set you both a very small challenge. It’s a bit naughty as we didn’t ask you this beforehand, so you’re rather on the spot. If you could wrap up in 10 to 15 words please, what is the biggest issue that needs to be resolved to unlock this investment?

I’m just going to give you a second to sit back in your chairs and think, ‘Matt, why did you ask me that question?’ Cheryl, I don’t know whether you want to have a go first because I think you’ve kind of... well, both of you have mentioned this in different ways. Cheryl, is there anything you could say... a plea to the wider world? 

Cheryl:  I think where we are at the moment, and this is probably reflecting the piece of work that I’m particularly involved in at the moment, we feel very, very close to getting to a point where we think we can help the finance sector who are very, very keen to invest in the retrofit world because they see that as a huge market, as you can imagine. We’re very close to getting to the point where we could accept their money. Our plea is really to stop working in silos, to actually come to a place and try it because if we try to design something that is perfect now for the whole of the country, we’re going to be here for a long time [laughter].

If we can move forward, invest in the mechanism that we think we’ve got for the series of Net Zero Neighbourhoods that we have already got up and running and we’re working with our cohorts of local authorities, I think we could demonstrate how this could really work and we could bring public grants alongside private finance and actually scale this up because the problem we have got with all of these is scaling it up. 

Matt:  Okay, so you’ve heard it here first. Get around the table now and sort it out. Thank you, Cheryl. Tim, I can see you kind of jotting away furiously [laughter] and I’m also potentially calculating how many words you’ve written down [laughter]. What have we got? 

Tim:  I’m just writing over the same three words multiple times, so don’t worry. No, I think what we do need is some long-term plan. I take what Cheryl says that we’re not going to be able to design it perfectly on day one but I do think there are high-level government targets which are driving this overall initiative towards net zero but there’s precious little, at the moment, detail below that. I think the reason why it’s important to have that detailed plan is that from a finance and investment point of view, I really think that certainty, and long-term certainty, is what drives investment in all these areas.

So I think that’s one very general point but a very big point. The other one for me is about regulatory clarity and this is another challenge that we had in the project. I think regulation and innovation are not always in lockstep. Let’s put it that way. I think we need to find a way of the regulatory system in energy, which takes a long time to get anything changed, trying to find some flexibility that allows us to do some of these things without getting stuck. 

[Music flourish] 

Matt:  Thank you, Cheryl. Thank you, Tim. That’s fantastic. Really enjoyed your company and thank you for all your insights. 

Tim:  Thank you. 

Rebecca:  Yes, thank you to our guests and you’ve been listening to Local Zero. Remember to join us next week for our PFER special on skills and supply chains and if you haven’t already, go and subscribe to the pod wherever you get your podcasts. Find us @LocalZeroPod on Twitter or email LocalZeroPod@gmail.com if you want to share some longer thoughts. 

Matt:  Absolutely and if you are a fan of the pod or you’re simply feeling generous, please leave a review wherever you get your podcasts from and send us soaring to the top of the podcast charts but for now, bye-bye. 

Rebecca:  Bye.  

Fraser:  Bye, bye, bye, bye.  

[Music flourish]