The closing of the feed-in tariff scheme (FiT) in March this year caused dismay, inviting accusations that it was a retrogressive step for an aspiring low carbon economy and unfair to community energy groups. FiTs had underpinned the growth of this sector over the past decade. It was the means by which small scale renewable energy generators, including households, were paid for surplus energy they fed in to the grid.
The government has now published the response to its consultation on a replacement for FiTs, the Smart Export Guarantee (SEG), a new mechanism to ensure clean energy projects under 5MW capacity are paid adequately and fairly for exporting their power to the system. This marks the end of subsidies and the start of a largely market driven process, one that comes with new risks to the community energy sector.
Green Alliance has worked with Community Energy England and its members to develop a manifesto for the sector. Top amongst its asks of government are that a level playing field is created and clear routes to market are provided. The government has said that the SEG is the answer and will offer new support to community groups. But will it do enough?
Who will dictate the market?
The SEG requires energy suppliers with over 150,000 customers to design an export tariff for small scale generators. For the close to a million households with solar panels and hundreds of other local generation projects, the SEG potentially offers the chance of an important revenue stream. Suppliers will be expected to develop smart energy tariffs that value generators for their contribution to the energy system, based on the time and location of their generation and the flexibility of supply.
So far so good, but, as it currently stands, there is a high incentive for suppliers to pay as little as they can while making healthy margins overall. This is because there is no clear framework guiding suppliers to take a whole systems view in valuing distributed generation, including rewarding any environmental and social benefits it offers.
Successful business models for community energy depend on predictable, long term income and the SEG fails to offer that. Suppliers are not required to offer long term contracts and neither are they required to offer a minimum floor price or one linked to wholesale markets. While it may drive innovation to a degree, it risks limiting its scope to only those stakeholders in the energy system that can navigate its complexity. This will not include your average local community group scheme or household.
SEG also does not offer any incentive for suppliers to support community groups. Energy supply companies like Co-op Energy buy community energy and bundle it into tariffs at a small premium compared to their other fixed rates. This is, however, a unilateral decision and there is little to signal that other major suppliers will develop similar tariffs through long term contracts.
The government’s own impact assessment of SEG has identified a very limited growth of small scale solar and wind over the next seven years with the majority of new capacity addition limited to scenarios where generators also have large self-consumption (ie large businesses and industry).
What next for community energy?
Community energy groups are well aware of the characteristics of the energy transition underway and the need to develop new business models that also offer flexibility and new energy services. As local flexibility markets emerge, new revenue opportunities will arise alongside the SEG, but those markets are a long way from being fully developed.
As suppliers develop market options for community scale generation, they should be thinking creatively about how to engage the different groups and the value they can bring to the energy system. This could be as part of a social responsibility programme, but should be part of their wider business offer too.
There are ways the government can help to minimise the risks and restore the confidence of community groups to invest in clean energy. For instance, it could reinstate tax relief for investment in community energy projects, while ensuring the eligibility criteria excludes private energy providers without a strong community focus. It could support clean energy ownership by giving the community benefits of energy projects material weight in planning applications, and in particular levelling the playing field for community onshore wind projects amongst other renewable technologies in the English planning system. Finally, it could assist with knowledge and capacity, allowing community groups to actively participate in an energy system that continues to be dominated by large, well-endowed corporations.
Part of the rationale behind the SEG is to boost the underdeveloped private market, but merely acknowledging its limitations for community groups, as the government has done, without offering other routes to market is short sighted and will leave many promising projects in limbo. A government committed to a net zero carbon target should be looking enthusiastically at opening up all the routes to a clean energy system.