Community energy and low-income households

Community energy is a form of energy generation and storage that offers benefits to the local community. The traditional community energy model allows participants to receive financial returns from co-investing in an asset and democratically deciding how profits are deployed. There are also models of community energy where people get lower bills when consuming locally generated electricity.

With the Government’s commitment to creating a new local power plan that will allow communities to ‘take back control’ of the energy system, we’ve asked 2 experts to answer some of the major questions facing community energy. Nick Plumb from Power to Change and Nako Thompson from Octopus Energy look at the opportunities and challenges posed by community energy schemes.

Have we made progress on community energy in the last decade?  

Nick Plum (NP) The past decade or so can be broken into 2 phases. The first phase, from 2013 to 2017, was one of rapid growth and expansion of community energy. During this period, we witnessed the generating capacity of the community energy sector grow by 37% annually.

During the second phase, from 2018 to today, growth has slowed and plateaued. This is largely down to changes in the policy environment, particularly the loss of the ‘feed-in tariff’ in 2018, which paid people for generating and exporting renewable energy to the grid and underpinned so many of the business models used by community energy groups.

Despite making less progress during the second phase, the last couple of years are marked by a sense of renewed optimism for the future of community energy. In large part, this is due to major commitments from the new Government to bring forward a Local Power Plan (LPP) – a policy regime which will pump billions of pounds into the community energy sector, through grants and loans. How this policy is designed, delivered and targeted will have a huge impact on the next decade of community energy.

Today, the UK community energy sector’s generating capacity is estimated to be 398 Mega Watts. The policy ambition of the LPP refers to ‘a million owners’ of community energy projects and 8 Giga Watts of generating capacity – enough to power up to 4.35 million homes. So, we’re talking about a twenty-fold increase in a 5-year period.

Nako Thompson (NT): Community energy can mean many things, but we interpret it as local generation and storage which offers benefits to community members. This could be the ‘traditional’ model, where participants receive financial returns from co-investing in an asset and democratically decide how profits are deployed, but it can also encompass a range of other structures.

Whilst the traditional model has faced a boom-and-bust cycle over the past decade in line with the implementation and withdrawal of subsidy support (not just in the UK, but across Europe), there has been growing innovation in newer models.

For example, Octopus has trialled a model called the Fan Club, which provides residents near wind turbines up to 50% off their energy consumption when the turbine is spinning. There are currently 4 fans in the Fan Club in the UK, with tens of thousands of requests for more. There has been innovation too in models based on private wires or microgrids, or structures where people can invest minority stakes in new company-owned renewables to generate financial returns at minimal hassle.

Alongside this emergence in new models, the traditional model will also seemingly get a boost with the renewed focus from the Local Power Plan. The relative growth of the different options will depend on the benefits and convenience to the communities participating.

What are the biggest barriers community energy faces?

NP: Since the loss of the feed-in-tariff, community energy groups have struggled to develop viable business models. Part of this is down to a lack of access to early-stage development and feasibility funding. Some communities lack the technical capacity, skills and resources needed to navigate the community energy landscape. Finally, as with many things, securing the right finance at the right time can be difficult.

The financing challenge is of particular interest now, as we’re still in the design phase of the Local Power Plan. The Government has spoken about £400 million in loans available for community energy grants and £600 million in grants for local authorities, annually. Ensuring the loans are available on favourable enough terms for community energy groups, possibly with a blend of grant and loan, will be vital. Indeed, bundling multiple community-owned energy assets together can provide access to cheaper finance through scale.

Of course, many of these challenges are overlapping and intertwined.

If a community lacks financial literacy, the chance they can navigate the complex funding environment is diminished.

NT: One of the biggest barriers faced by all community energy projects is that they are not as cost-effective as large generation projects, nor do they save people as much money compared with very small rooftop solar projects. Large-scale projects (such as huge wind farms) benefit from economies of scale and generate vast amounts of energy to recover their costs. On the other hand, small rooftop solar projects give the ‘host-building’ they are connected to free electricity (because it never goes through the electricity grid), making it a good investment.

In between the large and the small-scale projects is community-scale energy. The challenging financials of community energy do not reflect the substantial positive value they provide to our energy system: making it cheap, resilient and enabling fast decarbonisation at scale.

The traditional community energy sector also faces barriers around starting up, accessing funding, and operating. Around the country, there is limited awareness of what community energy is to begin with.

A poll commissioned by Bristol Energy Cooperative (BEC) showed that just 13% of respondents knew about community energy.

Even after that fundamental barrier, setting up a formal legal structure for the group can be complicated. When community groups do not have financial or legal experience they may need external support which requires upfront funding that takes time to apply for. Beyond getting set-up, many community energy groups rely on volunteer time, also often a scarce resource.

Can community energy schemes help to decarbonise at pace and scale?

NP: The Committee on Climate Change and the National Energy Systems Operator recognise that involving people on the journey is the only way we are going to make progress on net zero targets at the pace we need. This journey is going to involve individual behaviour change and unlocking public consent for new renewable energy infrastructure. Community energy provides a route through both of these knotty challenges, and will be a vital contributor to the Government’s ambitious 2030 clean power target.

However, it’s worth considering community energy in context. The rate of growth in renewable energy in the UK over the past few decades has been remarkable. We’ve witnessed exponential growth in wind power capacity, and huge increases in solar capacity. As discussed above, the speed of expansion in community energy has been more mixed.

What we do know is that in places like Germany and Denmark, community energy at scale is unremarkable. Wind energy is roughly 50% community owned in both places. There is nothing to say the UK couldn’t one day do the same, but we have to learn the lessons of such an approach. These include the importance of an enabling national state, the coordination between local projects and a wider support infrastructure, including municipal government. 

NT: Community energy models can be deployed and replicated quickly. They are small, modular building blocks of the energy system that find pockets of unused potential (for example small sections of available land or unconstrained grid capacity).

If each deployment of community energy could learn from the ones before, it would help lead to exponential progress, as evidenced in How Big Things Get Done. For example, Northumberland Community Energy Group has been installing solar and batteries for all local community buildings. The model is now being replicated in Yorkshire and Durham by the same partnership of organisations. By replicating and learning from the Northumberland model, it is already taking a fraction of the time.

In addition to community energy models having the potential to scale fast, they also allow the whole energy system to decarbonise faster and cheaper. Building electricity grids is neither cheap (National Grid plans to invest £35 Billion in UK transmission between 2026-31) nor quick.

Locally consumed electricity means less grid capacity is needed to transport electricity from far away.

Therefore, community energy saves all customers money and reduces the time to decarbonise. By reducing our need for transmission grids, community energy lowers the risks of missing our ambitious targets.

Projects that directly benefit local communities often enjoy greater public support which makes obtaining planning permission faster. This public support was demonstrated by a 2011 study in Germany where 45% of residents in a town with community-owned wind turbines supported further development, compared to just 16% in areas with externally owned turbines. A 2022 YouGov survey found 9 in 10 (87%) people would support a wind turbine in their community if it meant cheaper energy.

Community energy models can also increase demand-side flexibility which prevents wasting renewables and supports the grid, again reducing the overall system investment needed. This is where communities adapt electricity consumption to both lower their costs and support the system.

58% of Octopus customers who participated in the Demand Flexibility Service, where customers are rewarded for using less electricity at the busiest times of day, stated that ‘supporting the grid to help manage pressures (such as avoiding blackouts)’ was the 2nd most important motivating factor after cost. Technologies like community-scale batteries can enhance this flexibility by storing excess green energy to discharge when needed. Moreover, strong engagement in community projects can accelerate individuals’ adoption of new domestic technologies, such as solar panels and heat pumps, with research from the United States showing how adoption in 1 household can drive similar uptake in neighbouring homes.

Who benefits from community energy schemes? 

NT: At some level, everyone benefits from community energy models because they help the energy system by lowering the grid capacity needed, limiting the constraints in our network and reducing our reliance on fossil fuel imports. This will reduce costs for everyone. However, depending on the type of community energy model, the distribution of benefits may differ.

The traditional community energy model does require volunteer time and money to invest, and any financial returns only go to those members. There are concerns that these people are of a typical privileged demographic. Of 822 responses in a 2022 Community Energy Member Report, 95% where white/white British, 88% were over the age of 50 and 61% had annual personal income above £25,000.

However, many community energy groups have wider community benefits, such as through supporting those in fuel poverty, providing energy advice services, or supplying local buildings with cheap electricity (such as rooftop solar on schools).

In a model where any local person can invest in private developer projects, time no longer becomes a requirement which can help boost accessibility, particularly as the minimum investment can be under £100. However, this model will likely have lower engagement and a greater financial focus, thus may have fewer wider community benefits compared with traditional community energy models.

NP: This depends on where the emphasis lies - start up, scale up or shift focus? Does the LPP focus on new community energy schemes and new community energy businesses? If so, can it target its support at more deprived areas? Will the LPP focus on helping existing community energy schemes scaling up? If so, does this risk entrenching existing inequalities in the sector – particularly between those with time and capacity to engage in community energy schemes and those without, and the overlaps this has with economic deprivation? Could the LPP focus on helping existing community businesses shift their focus, so community energy becomes a bigger part of what they do?

YouGov polling for CommonWealth and Power to Change shows that a lack of time and a lack of funds are the 2 biggest reasons the public give for not participating in a hypothetical community energy scheme. Government has a role to play when it comes to allocating funding and support, including at pre-feasibility and development stages, which should be targeted at areas with higher levels of economic deprivation and lower levels of social capital.

We’ve seen that community energy projects are not just the preserve of the rural middle-classes, with excellent projects like Ambition Lawrence Weston – the UK’s largest onshore wind turbine – owned by a community in one of the most deprived bit of Bristol. However, examples such as this are the exception rather than the norm. If we are serious about community energy being a route to lower energy bills in more deprived communities, these sorts of schemes need to be prioritised by the LPP.

Will it put money back into people’s pockets?

NP: One of the most common questions I’m asked is - if we introduce a community energy scheme in our neighbourhood, can we get energy for free when the wind blows or the sun shines? At the moment, the answer to this question is ‘no’. Our aspiration surely has to be to something like this imagined model (while ensuring that such an approach doesn’t lead to stark energy price inequality between community energy ‘haves’ and ‘have nots’).

The way our grid system works at the moment means that any energy produced by community energy schemes is sold to the national grid, and then individual households buy their energy from national suppliers. So, we need to introduce a ‘right of local supply’ that enables the creation of local energy markets, where there is a much closer link between community energy producer and consumer.

Despite this seemingly perverse existing system, community energy does still put money back in communities’ pockets, through the impact it has on the local economy, providing jobs and building economic resilience through community asset ownership.

Power to Change was involved in the largest ever transfer of community energy assets, through our CORE joint venture with Better Society Capital and Finance Earth. These solar farms generate enough energy to power almost 13,000 homes and they are already delivering community benefit and providing a basis from which other community-led businesses are built.

We have seen projects tackling fuel poverty on the Isle of Wight, working with formerly homeless people in Kent and a running a community-based electricity ferry service in Devon.

NT: The electricity prices in the UK are some of the highest globally. This puts the public support for net zero at risk. A recent study by Octopus revealed that while most households support net zero, 71% would only maintain their support if energy bills did not increase further. Conversely, 65% of those currently opposed to net zero would reconsider their stance if the policy resulted in lower energy bills.

Community energy has the potential to provide a route to these much-needed lower bills, but it is not possible today due to UK regulations. Whilst a participant will get money back from their project selling electricity to the grid, it won’t be as financially profitable as getting the electricity discount directly.

One thing to make progress in the short term?

NP: As mentioned throughout, an LPP which focuses on cheap and patient finance (investment with low interest rates that can be repaid over a longer period than your typical high street loan) for communities is key. This needs to be combined with a well-designed and targeted programme of pre-feasibility, capacity building and business planning support – particularly for the most deprived communities.

Alongside this, we need to keep pushing for bigger changes to our grid infrastructure to give communities a right of local supply. It’s only with these elements combined that we’ll fully realise the potential of community energy here in the UK.

NT: Altering the market rules (in particular passing a rule called P442, making Licence Exemptions more generous and implementing locational pricing) will make community energy more financially viable and help lower bills. This would save money for community energy participants, but would also help build a resilient, cheap, decarbonised system that would benefit wider society. This, in turn, will help maintain the social consent for net zero - a critical asset we should not take for granted.

Illustrations by Emily Rand