7: Show me the money: funding the net zero transition
Who pays for local energy systems in the net-zero transition, and why? What are the financial barriers that local and community energy models need to overcome? Barbara Hammond MBE shares lessons she's learned over ten years of running Oxford's Low Carbon Hub, and renewable finance guru Bruce Davis of Abundance Investment details different types of green energy finance.
Episode transcript
[Music flourish]
Matt: Hello, I’m Dr Matt Hannon.
Rebecca: And I’m Dr Rebecca Ford and welcome to Local Zero. In this episode, we’re talking all things local energy finance. What does it look like today? What are some of the key innovations, drivers and barriers and what might the future of local energy finance look like?
[Music flourish]
Matt: We’re going to be chatting with green finance guru Bruce Davis of Abundance Investments, a sustainable investment platform that brings together people who want to invest in exciting and innovative, green energy projects.
Rebecca: We’ll also be talking with Barbara Hammond who is the Chief Executive of the Low Carbon Hub in Oxfordshire. They’re a leading social enterprise and they’re out to prove that we can meet energy needs locally in a way that’s good for both people and the planet.
[Music flourish]
And remember to follow us on social media. Use our hashtag #LocalZero or tweet us @EnergyREV_UK. Send us any questions, comments or things you’d like us to get to in future episodes and we’ll make sure we try to address as much of that as we can. As always, we’ve got Fraser Stewart with us to keep us on the straight and narrow. So hi, Fraser, welcome back.
Matt: Hi, Fraser.
Fraser: Hi everyone. How are we all doing?
Matt: Yeah, managing. As I’ve said before, this is our third lockdown now and so I’ve likened it to a very, very bad trilogy and the worst of said trilogy.
Rebecca: [Laughter] But the end is in sight. It feels like we’re on the final peaks of the mountain.
Matt: You’d hope so.
Fraser: Yeah, it’s starting to look a little bit more optimistic. I feel like January lockdown just hits differently. It’s just a barrage of grey, and wet, and cold and... it’s a lot. It’s a lot.
Matt: Yeah, and you’ve got this weird kind of juxtaposition that there’s not much happening on our day-to-day personal social lives but there’s just so much happening out there in the world that we’re working in. So every day, you’re logging on and you’re hearing about Cumbrian coal mines or Sixth Carbon Budgets and there’s a new consultation and new White Paper. It is just an avalanche of stuff at the moment.
Fraser: It’s non-stop. It’s non-stop and what are we going to do today? What are we talking about today?
Matt: Well, I guess today, we’re really kind of picking up on some of the discussions we had with Chris Stark a few weeks ago and talking about the Sixth Carbon Budget and the net zero transition. Really, we’re talking about the money here. When we spoke to Chris, he was very frank that this is going to cost but it’s not going to cost as much as some may have initially indicated. These numbers are so big that they’re rather meaningless to your average layperson but about 1% of GDP, the actual cost per year and the expenditure when we get up to 2030 that we’re going need to spend is about £50bn. So to put that into perspective, Crossrail will cost about £18bn when it’s finally there, at least that’s what TFL are suggesting. So it gives you a sense of how much money we need to spend.
Rebecca: Well, it gives us a sense of how much money but also, on the one hand, £50bn compared to £18bn doesn’t sound like a lot for decarbonising our entire economy compared to putting in one high-speed railway line. So it’s a huge amount and great to have scale but feels like this is something we really need to be doing and need to be prioritising. We’re not talking about hundreds of billions here. So it feels like a lot but something we can focus on.
Matt: Well, that’s £50bn per annum. The Crossrail project, not to be confused with HS2, the high-speed line or the new ‘Lizzie Line’ as it’s called, was over a number of years but it just gives you a sense of just the scale of the money. We’re roughly spending about £10bn a year at the moment, so the uplift is fivefold.
Rebecca: So where’s that money going to come from?
Matt: Well, I don’t know. Fraser, what’s your piggybank looking like?
Fraser: [Laughter].
Matt: Well, it’s going to cost a lot of and, of course, the state is going to be involved, so multinationals. I guess the question of where the money is coming from and who is spending it is rather aligned with what kind of an energy system we expect to see. So if it’s a centralised energy system, whether that’s privatised or nationalised, these are big organisations planning the spending. If we’re looking at a more decentralised energy system where local actors, that we’ve covered often in these episodes, are much more involved, then maybe the money comes from elsewhere and it’s being spent by other much more local organisations.
Rebecca: Yeah, and I think, for me, the big question is what is this money being spent on? Are we talking about just expenditure on new, renewable generation infrastructure or actually, as we start to see these changes in our energy system and the increase in renewables, meaning we need to think more about flexibility, storage and how we integrate across transport, electric vehicles and new forms of heating, what that money is being spent on is not clear yet either.
Matt: We did a bit of research at Strathclyde in conjunction with the University of Manchester and Imperial College where we were looking at community energy. We did a survey a couple of years back and looked across the entire UK and tried to understand what they were spending the money on. It turns out that still, people were traditionally spending the money in the way that you framed with on-site, small-scale renewable and maybe a wind turbine or some on-roof solar panels. But actually, things are starting to change and these communities are starting to move into new territory, whether that’s demand reduction through energy efficiency measures, battery storage or electric vehicle charging points, they’re slowly moving in a different direction.
Fraser: So as the things that we spend the money on are changing, do the actors involved change as well? Are we looking at different partnerships? Are we looking at different relationships to get these things moving?
Matt: For me, I don’t see how you can do a net zero transition... and, in fact, this was echoed by the CCC, particularly in their local authorities report, you just can’t do it without this on-the-ground, local, grassroots connection. It’s not just me saying it. This is being echoed by those that are advising the government now.
Rebecca: But when we look back and if we think about your report and what people are spending on is changing, I’m sure this must have come through in your work that the policy landscape is going to be influencing that, right? So the Feed-In Tariff Scheme, which was quite a significant incentive, when we look back a few years, is no longer the same sort of incentive. At the same time, the capital costs of a lot of these technologies are starting to shift as well and the cost recovery mechanisms are starting to shift. Have you seen that coming through?
Matt: There’s a really weird thing happening at the moment. The costs are coming down and quite rightly, the subsidy should peel away. If it’s cost-effective against other more traditional techs, then you don’t necessarily need the government propping it up but, and this is a big but, for communities and local authorities, it might even be other public organisations like universities, if they don’t have the money in their bank account to deliver these projects, they need to find the money from elsewhere. For the uninitiated, things like the Feed-In Tariff are subsidies that last 20 years plus and can guarantee a certain amount of income per unit or kilowatt-hour of electricity generated that’s renewable and that meant that finance was cheaper because there was less risk attached to these projects. So actually, its removal has really dented the hopes of these local organisations because they just can’t bring the cash in at a reasonable price. I say ‘can’t’ but we’re going to speak more to Bruce Davis later from Abundance Investments who’ll tell us a bit more about how they’re getting around this. My last point is the importance of local organisations. They are typically very highly trusted and people are happy to engage with them and work with them, householders specifically. I think that’s really where they’re going to play a key role.
Rebecca: For me, the next question or the next logical question, I guess, is as we start to see a shift in a little bit of this landscape and we’ve had quite a thriving community energy sector that’s been evolving over the years, we’re seeing increasingly local authorities getting involved. When we look at some of the new projects coming online, and I’m particularly thinking about some of the smart local energy system projects, I feel like we’re starting to see this shift from, perhaps, funding through these policy mechanisms and we’re now very much seeing a lot of innovation funding, so research and innovation, proof of concept. But surely, the next phase is then to think about how that becomes sustainable in the long-term; how that becomes sustainable without these policy incentives.
Matt: Deployment. I think you said this earlier. The key word is deployment and the big question is where is the money going to come from at the local level? Because we know councils have been hollowed out in terms of the level of funding that they had. The Institute for Government has done a recent analysis suggesting that in the last ten years, the core grant from central government has fallen by 38%. So if you’re a council, you’re almost losing one in every £2 that you can spend and so when it comes to deployment and what you’re talking about, where is the money going to come from? Who is going to stump it up? That’s what today’s all about.
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Bruce: Hello, my name is Bruce Davis. I’m Joint Managing Director of Abundance Investments. We’re a crowdfunding company funding renewable energy projects in the UK. We set up just over ten years ago with aim of allowing anybody to invest in renewable energy projects directly. That was something that wasn’t possible at the time and to do that through a platform that was regulated, so offering investments that were a lot like mainstream investments but they’d got this very direct local connection for people. Abundance has basically raised just over £100m through that mechanism. We’ve evolved somewhat. We back renewable energy projects but we also now back the businesses that are involved in building all sorts of green infrastructure in the UK but always with that focus on those projects being place-based or at a local level. The minimum investment that our investors can make is £5 and they’re able to do that just normally or through an ISA account or even as part of a special type of pension. At the moment, we’ve backed just over 45 different types of projects ranging from wind and solar at the very most basic through to more innovative stuff like tidal and most recently, working with local councils who themselves are interested in issuing green investments to their local residents.
Rebecca: So who are you finding is investing in these sorts of projects? Is it people just within the community in which that project is based or are you seeing investment from people across the country?
Bruce: Across the country in the main. Our platform reaches everybody in the UK and we find that people are interested both in backing the technologies as well as backing things local to them. The place-based nature of this is that it is a real project and that you’re not just looking at an index of a stock market or the share price of a company on a screen. These are projects with real assets on the other side of it that you can go and visit and go and see if you want to. I think that’s more what brings the investors together. Yes, there are some where there’s a strong local connection for people and that can sometimes be a reason for investing. We’re hoping that that increases over time. Usually, these sorts of transitions are about centralisation. The National Grid and the creation of the electricity grid and so on, took all those assets and put them into one system. What we’re looking at now with the green transition is this is a change that’s happening in pretty much every bit of the economy and so it’s important that we’re not just focusing on big flagship projects. We’re actually looking at each individual town, village and city and asking how it’s going to basically transition to a net zero economy.
Matt: You’ve outlined the need for investments. I can only assume that Abundance is stepping in to fill a gap because there isn’t the money there already to fill that need for investment.
Bruce: Yeah, there are two elements to that. I think there’s a lot of money looking to invest. The false assumption you can make about that is that all money is the same. The reality is that it’s all money tied up in particular types of assets or particular types of investment vehicles and they can only do certain sorts of things. They’re very mechanical. They’re not flexible. Pension funds can only invest in certain types of assets. Investment funds can only invest in certain types of assets. So when we’re looking at the transition, what Abundance saw was there’s a whole group of investments which could really only be made through, up until that point, what would be called private investment vehicles. Those generally were quite exclusive. You could almost think of them a bit like golf clubs. You had to know someone to be in them and ideally, you’d be dressed in a blazer and were in your mid-50s. We tried to break the hold that those guys had over the market. I think the thing that then differentiates us is we’re able to do investments that are of a range between £1 and £8m and that is a particular gap. If you talk to a banker, it’s only interesting if it’s below £1m because you don’t need to do very much due diligence or above £20m because it costs a lot to put on expensive designer wellies and go to a field.
Matt: There’s a niche in the market.
Bruce: Yeah, definitely.
Rebecca: With the people that are investing, are they seeing the sorts of return on investment that they might get from putting their money elsewhere or are they investing in this because they’re getting something else out of it beyond that direct financial return?
Bruce: They sort of refer to it often as a win/win. It sounds like marketing speak but actually, it’s what my customers say. They’re looking for a financial return. That financial return depends on their financial needs. So we offer a range of different returns and our lowest risk investment is at about 1.2% up to 12-15% return, so you’ve got quite a range there. What’s interesting is there’s an assumption that you do green investment to get something out of it that’s not just financial. My view on that is all investments have either a cost or benefit to society. You don’t get to choose whether that happens. It happens. We’re sort of tapping into a broader need that people have to feel their money is not just sitting there, essentially, at the mercy of the ups and downs of the stock market but is actually making a difference. So one of the big drivers of green investment is actually ‘what sort of planet am I leaving behind for future generations?’ and a realisation that your money has an impact on the world beyond simply your own financial wellbeing.
Rebecca: You’ve talked a little bit about what Abundance is, what you’ve been doing and the sorts of scales of investment that you’re looking at. Earlier in the pod, we were chatting about what needs to happen now to deliver net zero and Matt was reminding us that we need about £50bn a year in capital investments for net zero projects. So what sort of a role do you see Abundance playing in that future?
Bruce: Obviously, yes, we would love to be doing that kind of volume [laughter]. I mean what’s the market for local investment? We look across the different sectors that we’re now looking at and you’ve got transport, food production and local councils which is beyond energy and so you are talking about billions of pounds worth of investment being needed. The amount that can be delivered through individuals? Well, in a way, it will be individuals’ money ultimately that does invest in this. It’s just whether or not they’re making the decision for themselves. Part of the problem with that £50bn is that there’s an assumption that somehow we’ve consented to that and we haven’t. We don’t know what that £50bn is going to be spent on. We don’t know who’s going to benefit. Making that transparent and clear to people will be a really important part of people accepting what is going to be both a positive and negative transition for communities.
Rebecca: Do your shareholders then hold you accountable to higher standards? Do you think that by leveraging mechanisms and organisations such as yourself will start to have really strong accountability structures when we’re looking at those investments?
Bruce: Well, there are two types of investors in Abundance. There are those that have invested in our platform, so our business, and then there are the people that have invested in the projects. The people who invest in the projects invest via a debt instrument rather than shares. They buy a bond or a debenture, as we call them, and that means that you are lending money to that company and the company owes you that money and so there’s already a relationship there. Twice a year, that company has to pay you some form of interest or repayment of capital and, again, we require those companies to give updates at that point. If something goes wrong, you have certain rights. We’ve had a couple of companies who have had to either change the terms of investment or manage a difficulty, particularly working with the regulator, OFGEM, and our debenture holders have had a say in how that works. I think the next level of accountability, you’re right, is to then look at the impact of those projects and ask whether they do what they said on the tin. For some, that’s very straightforward because you’re generating green energy and they should do that successfully or not. For others, where, for example, we’ve been working with more controversial areas like energy from waste, it’s about those companies being held to account and that they do what they said in terms of environmental protections. They are conscious that they have retail investors.
Matt: Bruce, I wanted just to turn to local councils. Before we talk a bit about the projects, particularly councils that you’ve been involved with and how you’ve gone about raising finance, I wanted to ask the question about why councils have been reaching out to you and why they are maybe not in a situation to fund this themselves.
Bruce: We’ve been working to help councils issue a bond that they used to do on a regular basis called a municipal bond. That’s an investment that’s backed by a council rather than being backed by a company which makes it lower risk. The situation is changing very slightly but up until last year, it was very clear where they could get money from which was central government. Councils were borrowing between £3-7bn a year through what’s called the Public Works Loan Board and which is part of the government’s debt management office. They also issue all the bonds to the general markets and gilt investments as well. Local authorities could borrow to invest in these types of projects but what they were concerned about was that the local residents had pretty low awareness actually of what councils were doing and pretty low engagement. What they wanted was to raise the money pretty much on the same terms as they could get from government but also that they then felt that their residents were part of that solution.
Matt: Excellent. Bruce, there are probably two more questions we’d just like to cover if that’s okay. The first is whether you see there being a big difference in the way that local authorities may go about raising finance versus communities because I know you’ve been very involved with communities and crowdfunding in the past. Can they learn from each other or are they going to have to go their two separate ways on this one?
Bruce: Well, we’re hoping that we create more of an ecosystem. I think there have been some sensitivities around councils getting involved in this and whether that means that communities are crowded out. My experience is that councils are looking at projects that are quite different to community projects. The councils are looking at, essentially, larger-scale infrastructure improvements that need to be made, a lot of which they are responsible for. It’s really about encouraging the councils to get on with the tasks that they have for the transition. At the same time, we would see that as encouraging communities to look at themselves and come up with ways that they can contribute. For most councils, this was about getting communities more aware of both the need and the opportunity of local investment rather than saying, ‘No, the only way we’re going to do it now is through the council.’ Obviously, those community investments offer a very different sort of risk and return. So we see this, if you like, as a gateway to more communities actually seeing that this is something they could be doing for themselves as well as through the council.
Matt: Do you think they’re going to be working much together in partnership?
Bruce: Yeah, so we’re involved as one of the tender consortia for the Bristol City Leap project. That whole tender has the involvement of the community energy sector written into it. Working with the other councils, they were really keen that they then used this as a springboard for those community energy groups to actually come up with ideas and come forward. Actually, they’d found that there had been a bit of a lack of dialogue and possibly a little bit of distrust of each other’s motives. I don’t know but that wasn’t really a productive conversation. Hopefully, doing this, we can kind of show that. I think also the council co-investing with those groups is possible through these structures. You’re providing another source of capital for those community energy groups. Maybe they raise the equity and the council provides the debt, for example. So I think it’s being a little bit more flexible about how these projects work is what is needed.
Matt: So they could potentially complement each other.
Bruce: Yeah.
Matt: That’s fascinating, Bruce. Thank you so much for your time.
Bruce: That’s okay.
Matt: We maybe hope to have you back further down the line but until then, stay safe, take care and we look forward to seeing you again in the flesh soon.
Bruce: Thank you very much. Thanks for having me.
[Music flourish]
Rebecca: You’re listening to Local Zero with Matt Hannon, Rebecca Ford and Fraser Stewart. Remember you can find us on Twitter @EnergyREV_UK. Use the hashtag #LocalZero if you want to ask us any questions and we’ll try and address them in future episodes.
So we’ve just been chatting with Bruce Davis from Abundance Investments. Wow! He covered a huge amount of ground, didn’t he, Matt? I guess, for me, the first thing that was really interesting that he talked about was that they’re providing this gap in the market, so people that want to invest in these sorts of projects but don’t have the huge amounts of money to invest. I thought it was great that you could invest with as little as £5. Brilliant! It really opens the door for more people to get involved.
Matt: Absolutely and it’s also about people’s appetites. I think they’re linking or hooking into a wider trend where people are not only looking to invest in something greener but they’re also looking to invest in something that is more meaningful. As he said, and I thought this was a wonderful thing, you’re not just investing in stocks or shares. You’re not investing on the basis of a graph. You’re investing on the basis of trying to change your local neighbourhood. Fraser, what was your take?
Fraser: I couldn’t agree with that more. I think it was really, really fascinating and it’s exciting as well. From a selfish, personal perspective, I’ve been working with Glasgow Community Energy recently and something that Bruce touched on at the end there was that with councils and community groups, there’s scope now for them to complement each other. In my experience, we can often look at the council as a hurdle to overcome to try and get a project off the ground and to get through the red tape and the bureaucracy. So it’s really, really exciting I think to hear that Bruce sees a way forward where councils and community groups work more closely and more collaboratively going forward.
Rebecca: I want to pick up on this issue of local because this was one thing that I was quite interested in. Generally, when we talk about councils and community groups, we’re very much thinking about a specific place – a project in a specific place backed by local organisations. But right at the beginning, Bruce said that some of their investors are not explicitly local and they’re not just investing in something that’s right there in their neighbourhood. They could be from all around the country. So I think that this is quite an interesting issue of how these different elements fit together to support investment in that community.
Matt: You’re poking a hornets’ nest here, Becky, [laughter] because what is local and what is community? What I’ll say is that from the research that we’ve been undertaking, we know that people invest in localities that are way, way beyond where they’re physically located. Now sometimes, there’s quite a clear link. Maybe they used to live there, or they’ve got family there, or maybe they go on holiday there, or something like that. For other reasons, there is a much less obvious link between the two and they maybe just like the concept of investing in local community projects that have a real-world impact that they can google in two or three years’ time and read the newsletter about it. It’s something that they can point to.
Fraser: Yeah, you see it with cooperatives as well, especially with community energy as I’m sure you’ve read as well, Matt. It tends to be the same maybe few hundred or few thousand members within the same cooperatives that invest in a lot of the same projects. They’re scattered all across the country. Take things like Edinburgh Community Solar Co-operative and those kinds of projects, they’re invested in from all over. It feels much more purpose-driven rather than purely local-driven; a belief in the idea of local rather than being local.
Rebecca: We’re going to move on now and talk to somebody who is not only financing but also implementing local energy projects in Oxfordshire.
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Barbara: I’m Barbara Hammond. I’m Chief Executive of the Low Carbon Hub in Oxfordshire which is a group of social enterprises that all work together with the aim of helping the whole of Oxfordshire to make the transition to zero carbon energy systems but working through people and communities rather than thinking that it’s all about top-down technology.
Rebecca: Brilliant and I hear congratulations is in order or perhaps happy birthday because the Low Carbon Hub is ten years old this year.
Barbara: It will be ten years old on 4th December.
Rebecca: How exciting.
Barbara: It is really exciting and it’s also something that makes you really proud because I’m sure all of you guys know that most start-up businesses die before they’re five and we’ve made it to ten. We’re just about to reach financial close on a project that has a 40-year lifetime.
Rebecca: Wow!
Barbara: So I’m starting to see beyond my own lifetime [laughter] with the Low Carbon Hub and that’s just amazing because it means that we really should be there for the whole duration of making the transition to zero carbon.
Rebecca: A lot has happened in the last ten years actually when we think about renewables and the state of the sector, so maybe you could just give us a little bit of the history of the Low Carbon Hub looking back over the last ten years. What prompted you to even start it and how far have you come in that time?
Barbara: I never started thinking that I was going to set up a social enterprise. In 2007, in West Oxford (that’s the western side of the city), we had a gargantuan summer flood that meant that we were flooded for ten days in the middle of July. We were in wellies for that time. You couldn’t drive a car along the Botley Road which gets you into Oxford. It really prompted the community to think about whether that was a little signal of climate change starting to happen. For a community that exists on the flood plain of the River Thames, that’s quite a scary thought. I’d been thinking, with my husband, David, who is an architect and passionate about zero carbon buildings, for quite a long time about how we would disseminate the knowledge that we’d got from doing our own house. We just had this epiphany on the towpath of the River Thames one morning outside our house, looking at the crinkly tin above the old power station that was the university engineering lab, and saying, ‘Wouldn’t it be fantastic if we could cover that in PVs and use the income from that to support people to work with the community to understand what we’ve done on our house and repeat what we’ve done our house because how else are we going to work with 26m households to make these changes that we’ve got to make?’ That idea got taken up by Low Carbon West Oxford which was set up by a group of women around their kitchen tables, all of whom knew each other from meeting at the school gates. I was still working as a senior civil servant in the Department for Trade & Industry at the time and running the UK Renewable Energy Programme. Just that bringing together of national-level policy and real grassroots stuff was fascinating. So we set up Low Carbon West Oxford as a charity and we set up West Oxford Community Renewables with the first ever third-party leased solar PV roof in the whole of the UK. We set up Osney Lock Hydro to build the first community-owned hydro on the Thames. We then started thinking, ‘How we do deal with all of these enquiries from communities all over the place about how they can repeat what we’ve done?’ At that precise moment, Oxford City Council rang up and said, ‘We think you’re doing a really fantastic job in West Oxford. We’d love to work with you on how you repeat it in other communities in the city. We’ve got this possibility of grant funding but we don’t know what to do with it. Do you have any ideas?’ We said, ‘Oh, we may have one or two.’ We had a week to put a bid together for £300,000, a part of which went into the business planning for the Low Carbon Hub. It’s just been a whole history of community activity but a local authority and a city council who really notices that but doesn’t take it over. They support it to help it grow.
Rebecca: It sounds like some really love collaborations there to get you off the ground. But talk to me a little bit more about some of the finance that’s helped underpin a lot of this. You mentioned third-party finance which was one of the first in the UK and also the grant funding. How important have these different sorts of streams been to you in setting up some of the projects that you’ve been running?
Barbara: Oh, hugely important. I mean when we started in West Oxford and then the hub, we were learning about social enterprise business models as we went. Not many people knew how to work them at the time. As we were learning about what it is to be a social enterprise, we were also learning about the different forms of finance. I think the key thing about social enterprises is if you do it properly through legal forms like a community benefit society, a co-op, or a community interest company, you don’t do what businesses normally do to get early-stage investments in. You don’t give away part of the ownership. You don’t expect to sell it on after a while to make your money back because the profit in social enterprises is all actually owned by the community if you’re our sort of social enterprise. You don’t get a big chunk of investment in to help you develop a good idea. You get investment in that you can secure against assets or against income flow. That just makes it a whole different ballgame in terms of starting up a social enterprise.
We didn’t rely on private equity at the beginning as most start-up businesses do. We relied on grant funding. I need to be really clear about that because, for us, that’s the equivalent of angel investment, venture capital investment and there’s no shame in it. It took me quite a long time to realise there was no shame in having done that. We started up with grant funding. We also worked out how to raise equity into a social enterprise. The big thing about equity in our sort of social enterprise is that the equity investment is treated as if it were a long-term loan. The profit is all owned by the community. It’s all there to make the community benefit happen. So you have to be very clear with members of the public investing in you that we’re not regulated by the Financial Regulations 2005, there’s no ombudsman backing us and there’s no £80,000 secure. They should only invest in us what they can afford to lose and so that limits how much we can raise in that way really. We’re also limited by law to £100,000 per person. That means that it’s really important for us to be working with other sorts of partnerships to be able to add to that particular sort of equity with long-term finance or with construction finance.
Matt: I often characterise funding into the community energy space in three waves. The first may be pre-2009/10 which were typically grants and I think you mentioned that. We started to see government grants fall away as government started to introduce long-term revenue payments, so this kind of second wave where you had the Feed-In Tariff and Renewable Heat Incentive. Now we’re kind of in this third wave where we’ve started to see those fall away and there are inklings now with things like the Green Home Grant that we’re going back to phase one and it’s going to be grants again. I just wanted your view to characterise where we are and what kind of money you are able to draw down at the moment most easily.
Barbara: We have a long, thorny history in this country with those income subsidies with a Treasury that didn’t like them at all and, as a consequence, put them on the nation’s balance sheet which made it look terrible in terms of national borrowing and, therefore, wanted to get rid of them as soon as possible. The Feed-In Tariff, we all know finished about two years too early. It was brilliantly designed to reduce as cost curves reduced but government just pulled it down for political reasons (with a small p... or maybe a large one) too early. At the same time, OFGEM piled in with their Targeted Charging Review which meant that the embedded benefits that projects had enjoyed are really gone and you can’t rely on those any longer to make a project stack. That means that it’s really difficult to make any projects stack at the moment. The ones that are happening, with no subsidy at all, are really easy vanilla things like solar ground mount that are really big and are modelled over 40 years.
Matt: One of the other characteristics of projects that I’ve heard that have become really desirable in this move away from subsidies are projects that encourage self-consumption. This is why battery generation, alongside solar, was becoming a lot more popular for communities and the like.
Barbara: It’s really complicated. Scale is one thing, as we’ve just talked about. The other thing that’s really important in those projects with large scale is that they have really solid, long-term power purchase agreements and funding contracts with them as well.
Matt: For our listeners, it’s probably worth just unpacking what a power purchase agreement (PPA) is.
Barbara: It’s a long-term contract whereby they buy the power that you generate. That’s the big change. Whereas you had three bits of your stack, the Feed-In Tariff, the embedded generation and the PPA, now you’ve got the PPA and so you’re really reliant on it. You need to make it rock solid in order to make your investments bankable. That means that the contracts are being set up for a very long time with very little flex in them. When we’ve looked at our portfolio of 43 solar rooftops in terms of making them flexible and dispatchable by adding a battery, the costs of the battery are still prohibitive. It’s really hard to stack up something that makes sense unless you’ve got access to a lot of money of your own. So I think private equity is funding quite a lot of this early-stage stuff.
Matt: I heard one of my colleagues in the past refer to these batteries, depending on the size of course, as a £10,000 wallet that you can stash a few hundred quid in. It does paraphrase it but hopefully, that captures your point a bit.
Barbara: Yeah, I think one of the things that we really realised coming into Local Energy Oxfordshire and the Innovate UK funding was that firstly, Innovate UK doesn’t know what to do with social enterprises. We had a really hard time with them even getting the contract signed [laughter] because they weren’t used to the way that we work but also because it’s set up to assume that their funding widgets that are at a particular technology readiness level, they find it quite hard to fund things that are about the system where some of the time, we’re working post-commercial really in putting solar ground mount in. Other times, we’re working pre-commercial because we’re making that solar ground mount smart. Other times, we’re right back at proof of concept on what the data and comms widgets are that you need and how you put that whole system together so that everything can talk to each other and respond to signals in time so that the grid doesn’t fall over. We’re having to make our 45% grant funding spread across everything from projects that need 45%, because of what we’ve talked about with the Feed-In Tariff and Targeted Charging Review, right across to projects that need 100% because they’re at an earlier TRL. We’re doing it, we’re getting there and we’re sorting it out but it’s really complicated.
Matt: So Barbara, can communities rely on these going forward to generate the income they need and deliver the kind of community benefit they want?
Barbara: I would say not for quite a while. We don’t yet know what the value to the system is and so we don’t know how much we’re going to earn. You may sign up to a contract for years maybe but the service you’ve won the auction for is only needed for one half-hour on a January anti-cyclone day [laughter], or not at all, or you’ve invested in this kit, you go into the auction and you don’t win it. So you cannot rely yet, and probably for quite a while, on predictable, consistent revenue from flexibility services.
Matt: I’m looking forward and I know from the research we’ve done that communities are in a position now post-fit and many are still scratching their heads around what to do next and where to draw down funds. So if you had a plea to government, what do communities need to put in place the finance and the funding to ensure that these projects happen?
Barbara: Certainty is the thing that we need. We need to test these markets and work out how things actually work. I think there does need to be a relook at the way that the costs of the network are socialised. I don’t think that the current way of doing it is fair actually. It was meant to be fair but I don’t think it is fair. I think we need incentives in terms of a really stable policy framework that is requiring these things to happen, along with innovation funding that is tailored for communities and social enterprise in the way that communities tend to operate which it certainly isn’t at the moment. We need access to investment scheme reliefs. We probably need some specific programmes for community/grid-edge demonstrator projects where the funding is targeted at communities and not at local authorities. I think that we need to put energy policy together with other forms of policy. One of the things that I think communities would be really, really good at is community-led housing with microgrids, so really high-quality fabric, microgrids, community energy service companies selling the services to the households. I think community energy is really well set up for that because the housing in itself gives the bottom to the project that you need in terms of the certainty.
Rebecca: It sounds like a very, very complicated environment at the moment. At the beginning, you talked about how innovation funding and this grant funding is really a key aspect of getting everything off the ground but you just said it’s not working that well. So I’m just wondering what it is about it that’s not working well and what are some of the biggest challenges. What do you need to be doing, for example, in Project LEO, to start to change that? How do you see that moving forward and what might the next five to ten years bring for you?
Barbara: There are some very good funding programmes that do help communities to start projects up. The Royal Community Energy Fund is an example of that. The next generation of fund run by Power to Change is another example of that but they’re fairly small pots of money that will run out. What I would really like is we really ramp up on the innovation funding going through Innovate UK which I think is what the government’s strategy is. I would like to see a bit of Innovate UK which is really geared up to help social enterprises of all sorts and not just energy so that when you go into an Innovate UK project, they don’t, as part of the financial due diligence on you, require you to produce the letter from your investor saying that they are just about to put a huge pot of money into your bank account which is the way they do it at the moment. No social enterprise can do that. We fund ourselves in different ways. We raise equity when we need it. We managed to convince Innovate UK to work with us in that way because we were part of one of the four smart energy demonstrators in the PFER programme. If we hadn’t been, we wouldn’t have gotten through that process I’m absolutely sure. So communities need to be seen as not just fluffy pink stuff on the side that you pay lip service to because you need to sound as if you’re woke. Communities are where real innovation for really good reasons happens and that needs to be supported. We’ve seen, with the COVID situation and vaccines programmes, how proud people are when they can take part in an innovation programme like that by risking their health and offering themselves up for jabs. We know that communities feel exactly the same way about energy. What’s the local public health-type really on-the-ground system that we put in place in the UK to enable that to happen?
Rebecca: So that’s the key challenge for the next or so, isn’t it? It’s about really bringing community into the heart of all of these programmes.
Barbara: Well, I do think that behavioural science thing is an important one. I sort of feel that the behavioural science that we bring to bear on energy problems isn’t as sophisticated as that which we bring to bear on medical problems.
Matt: Barbara, we’re entering a new phase and I just wanted to, I guess, wrap up the discussions about how net zero transition is stepping forward and what your hopes and dreams are for Oxford and beyond. What are you looking at doing in the next few years and why?
Barbara: One main thing. Every time we write a business plan, we need to rewrite it after a year [laughter].
Matt: That’s business plans for you, yeah.
Barbara: We wrote our business plan a year ago and we already need to change it. So I think the big thing that we’ve found from Project LEO, which I think is going to be really important for community energy and for us, is how you bring together energy efficiency and energy generation so that you don’t have a split between the two and different programmes for those and different business models for those. What you’re actually doing is working with a household, a business, or a community about their whole energy metabolism. What are the business models and what are the products that you can offer to people that really take their whole lifestyle, make it zero carbon and also much healthier? We’ve got programmes for domestic retrofitting called Cosy Homes, for SME retrofitting called Energy Solutions Oxfordshire and then we’ve got Project LEO, Energy Trading and Flexibility Trading. We need to bring all of those programmes together into one set of products and we need to know what the customer journeys are for the household, the business or the community that allows them to come in from any direction that is good for them.
Matt: So is it a one-stop shop kind of concept?
Barbara: Yeah, it’s a one-stop shop which allows people who want to take control to take control but allows people who don’t to be working with things like the community energy services company model.
Matt: Many thanks, Barbara. That was absolutely fascinating and all the best to you and the Low Carbon Hub team. We look forward to seeing how things progress in Oxford.
[Music flourish]
I hope you might be able to stick around for our next venture which is Future or Fiction? If you are happy to, it’s over to Fraser.
Fraser: Yeah, so Barbara, I’ll explain to you how it works. It’s very, very simple. I will present to you some kind of technological innovation and you have to decide if you think it’s the future of technology or if you think that I’ve just made it up and I’ve just pulled it out of my backside.
Matt: We should say, Fraser, that we’re all going to do it as well, so don’t worry.
Fraser: Not just you, yes [laughter].
Matt: We’re not going to spotlight you. We’ll all get it wrong with you, or right, or whatever.
Fraser: For Matt’s benefit, I’ve made it not too technical this time [laughter].
Matt: Thank you [laughter].
Fraser: Sorry, Matt [laughter]. This technology is called Robocrop.
Matt: Oh man, this is yours. This has got your fingerprints all over it [laughter]. I can see you’ve been lying awake at night coming up with this one [laughter].
Fraser: It’s going to throw you off. I promise you it’s going to throw you off... maybe. Okay, so Robocrop...
[Music flourish and low steady beat]
...an organic farmer in the United States has designed a solar-powered scarecrow that moves and makes noise throughout the day to keep birds and pests away from his crops. It’s powered by a small PV module on the scarecrow’s arm. According to the farmer, the moving scarecrow is more effective at keeping birds and pests away and he plans to manufacture and sell them to other farmers around the world. Do we think [laughter] it’s the future?
[Music flourish]
Matt: This is a good one [laughter].
Rebecca: So hang on a minute. [Laughter] I haven’t spent much time on a farm. My extent on a farm really is looking at some of the TV shows that my kids watch but aren’t scarecrows kind of sticks in the ground?
Fraser: Yes!
Matt: Well, the old generation of scarecrows was pretty sedentary.
Rebecca: Yeah, a big stick in the ground.
Fraser: It’s like a broom that sticks out of the ground that you dress up with a hat and stuff. The idea is that you want something that looks like a person in the field to scare away crows, specifically.
Rebecca: So is this something like a solar-powered Terminator?
Fraser: Kind of. Kind of. It would be a great start to a dystopian movie [laughter] but it doesn’t look like the Terminator. If you could imagine like a mechanical toy dog or something like that that moves and makes noise.
Matt: Well, Barbara, have we seen any of these in the fields of Oxfordshire yet?
Barbara: We haven’t. I sort of reckon you wouldn’t because I can’t see how they would offer you more than for about 10 times, 20 times, 40 times the price of sticking your broom in the ground with old clothes flapping from it personally [laughter].
Matt: Yeah, it’s one of these classically over-engineered solutions I think, Fraser. The name is definitely yours, I’m convinced of it, but the idea [laughter] – I can see somebody has made one of these somewhere, yeah.
Fraser: The names are always mine, yeah [laughter].
Matt: So I’m torn.
Rebecca: Where did you say this was from?
Fraser: It’s a farmer in the United States.
Rebecca: Where in the United States?
Matt: Silicon Valley [laughter].
Fraser: I don’t have that.
Barbara: He said it was an organic farmer in the United States.
Fraser: An organic farmer, so probably Portland or something [laughter].
Matt: I mean there’s nothing more low carbon and organic than a stick in the ground, is there? [Laughter]
Barbara: I’d like to see the cost-benefit analysis [laughter].
Matt: It doesn’t look good.
Fraser: My understanding is it doesn’t start as a big ‘here’s a business pitch.’ It’s a guy who’s made one and said, ‘This works. I’m going to sell it.’
Matt: So scores on the doors. Barbara, future or fiction?
Fraser: Yeah, what do we think?
Barbara: Oh, fiction.
Matt: Fiction, okay. Becky?
Rebecca: I’m sure somebody has made one of these somewhere. I don’t think anybody is commercialising these.
Matt: I’m going future because I genuinely think somebody has made one of these somewhere. This may not be called Robocrop but somebody out there has done this for sure.
Fraser: [Laughter] It’s definitely not called Robocrop. It’s not. That’s what keeps me awake at night is the names and not the ideas.
Rebecca: I’m going with fiction.
Barbara: Go on! I want to know.
Matt: Well, Fraser is the man who knows.
Fraser: I am.
Matt: What’s the answer?
Fraser: So is that locked in? We’ve got two fictions and Matt’s going future?
Matt: Yeah.
Fraser: The answer is... fiction. I completely pulled that out of my backside about half an hour before we started recording the show today [laughter].
Matt: You’re just so happy with yourself with Robocrop [laughter]. Well, well done.
Fraser: Before the show, I was thinking, ‘Can I make a fridge interesting? Can I make a coffee machine interesting?’
Matt: Yeah, and I bet you started with the Terminator, didn’t you, and tried to figure out how that could sound agricultural? The Germinator is not quite as obvious, is it? [Laughter]
Rebecca: Oh, fabulous.
[Music flourish]
Well, that was another absolutely brilliant Future or Fiction? Thanks, Fraser, for that... and I have to say I’m absolutely stoked because I finally got one right [laughter] which makes me very happy.
It’s been a great show. Thanks to Bruce, thanks to Barbara, and thanks to you all for listening. Remember to share this with your friends and tell everyone about the podcast. Tweet us @EnergyREV_UK and use the hashtag #LocalZero and we’ll see you all next time. Bye for now.
Matt: Yeah, see you again soon.
Fraser: Bye, bye, bye, bye.
[Music flourish]
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