COMMUNITY ENERGY IN THE UK

Unlike other countries, the majority of renewable energy projects in the UK have been and still are owned by commercial companies. While such companies do make financial contributions to local communities, the sums involved are small compared to what could be contributed from fully community owned projects. The lack of local benefit is one factor that contributes to strong opposition to some renewable energy developments.

Until 2010, small-scale renewable energy projects were not viable. The introduction of a feed-in tariff scheme changed this, and provided a market driver for smaller scale community-owned projects. A number of community energy companies were started and they raised funds to install solar roofs on community buildings such as schools.

The business model is simple: the community energy company rents roof space through a long-term lease; it finances the installation of the solar roof and receives income from the feed-in tariff and sale of electricity; it covers the operation and maintenance costs from income.

The building owner benefits through the supply of cheaper electricity. The investors in the community energy company benefit through a return on their investment. The community benefits since surplus profits are paid into a fund that is available for grants.

This model ensures a more resilient local society, not only through the provision of more sustainable energy supplies but also through economic development, since much of the cash generated from the projects flows into the local economy.

Community energy is generally funded through crowd funding either via local share offers or through share offers on new platforms such as Ethex, Abundance and Trillion Fund.

The legal structure of a community energy company is normally an Industrial and Provident Society of which there are two forms: a bona fide cooperative or a community benefits society (“bencom”). The difference between a coop and a bencom is that the former trades for the benefit of its members and the latter trades for the benefit of the community. Both have to be registered with the Financial Conduct Authority (FCA) and recently the FCA has refused to register co-ops as community energy companies since the member investors do no trade with the co-op.

Bencoms can issue 2 types of shares: withdrawable and transferable. Withdrawable shares cannot be sold to a third party whereas transferable shares can be sold. A share offer of withdrawable shares is not subject to FCA regulation, whereas a share offer of transferable shares is regulated. Both shares always

remain at par value and the bencom can pay interest on the shareholding “at a rate sufficient to attract the investment”.

Typically share offers have target interest rates of 5-7% - these are not guaranteed returns and actual interest payment will depend on the performance of the bencom. As a principle, equity investors in a business should receive a higher interest rate than a secured lender, which means that interest rates of 7% are needed to attract capital for the larger projects.

The maximum investment in withdrawable shares is limited by law to £100,000 and share offers generally have a lower limit (typically £500) to avoid excessive administrative costs. The average investment is around £4,000 to £5,000. Investors are attracted by both the ethical nature of the bencom and the potential longterm returns.

One emerging issue is what qualifies as a community energy investment. A share offer that is offered nationally and does not use surplus profits for the local communities benefit is not really a “community share offer”.

There are over 200 groups in the UK actively developing projects. Some are building on their early projects and are looking at larger solar and wind farms. If community energy is to become a significant player in the UK’s energy sector, it needs to scale up, otherwise it will run the risk of becoming a side issue and eventually fizzling out. Ultimately, a vibrant community energy sector can offer an alternative energy supply to local consumers. This will not happen if changes in government support pull the rug from under the sector.

So far, there has been positive support from the Government. Investments in bencoms and coops qualify for tax relief of 30% of the investment. This relief is not available for commercial projects.

The Government has published the