Local Matters

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Summary of the Regulatory and Policy Changes Needed to Support Local Energy.

Wind back 3 years to when Ed Davey was Secretary of State and DECC (as was) had an active Community Energy Strategy.

Wind forward to today and in key documents like the Ofgem/BEIS Smart Systems and Flexibility Plan there is no reference to community or local energy. There are references to peer-to-peer trading and local flexibility markets but the community angle seems to have got lost. This is in contrast to the Scottish government Energy Strategy where local energy is a key theme. At a time when National Grid has Community Renewables as one of its FES scenarios and Ofgem is keen to support non-traditional business models, this is an area that needs more attention.

Over the past 2 years I’ve been working with Cath Cooper of Veitch Cooper Ltd supporting the Smart Fintry community energy project in Scotland and have just completed a report for Scottish government on the policy and regulatory changes needed to support local energy, drawing on learning from Fintry.

The ambition in Fintry was to explore how local supply and demand matching could be done in practice and the commercial benefits of doing so. The conclusion is that – as with storage – community energy really needs to access a “stack” of benefits to be commercially viable but at the minute very few of these benefits are properly rewarded.

So where are the benefits?

The first and obvious benefit is in consumer engagement. In Fintry 30% of households signed up to the local tariff and they have all stayed loyal (apart from one customer who moved house). While Good Energy were offering an attractive local tariff it is clear that being part of a community project and contributing to wider goals were also motivators and would be likely to help with driving DSR in due course. That sort of engagement is hard to achieve in the energy market and suppliers should be looking at this as a model to replicate. For the community though it would be better if they could more readily effect a collective switch - to get the best supplier offer - rather than being reliant on individual consumer choice going forward.

The second area of benefit is encouraging load shifting to enable the supplier to better manage wholesale energy costs. Half-hourly settlement is key to this and Ofgem has been driving that agenda forward but there are still real risks and challenges for suppliers (especially at community scale) in taking that step.

The expectation is that communities will be able to help deliver DSR – either through promoting behaviour change or through providing reassurance to households about direct control of electric heating, for example. However communities will probably be more motivated by adjusting load to match “their” generation (which they can judge by looking out of the window at the weather). As yet there is no reward for local balancing.

Moreover a move to half hourly settlement also results in network charges being levied on that basis. This can give rise to significant distributional issues with winter time-of-use-weighted network charges varying from 3.7p/kWh to 8.2p/kWh for Fintry customers depending on their current usage profile. Communities will want to be clear who the winners and losers will be if that “cost to serve” difference is ultimately reflected in retail prices.

This leads on to the third area of benefit which is to the local distribution networks. It’s well known that the growth in renewables combined with the growth in EVs and heat pumps will create more challenges for the DNOs. Where there are constraints on the networks, community DSR could provide an alternative to traditional reinforcement which DNOs might be expected to be willing to pay for. However in Fintry in turns out there is plenty of capacity on the network – even when we modelled what might happen with ambitious levels of solar and EV growth 20 years out. Nonetheless the opportunity exists for other communities and could be facilitated if DNOs were to produce “heat maps” for community energy showing areas where there are potential constraints.

The one issue that SSEN’s monitoring of the Fintry area did highlight was reverse power flows at the local sub-station which they would prefer to avoid and which local balancing could help with. Increasingly networks will need to think about wider services like this that community projects could provide and how they could be rewarded for doing so.

The final benefit area is that through the community coming together it is possible to invest in community scale resources such as battery storage which in principal would be more cost effective – and more inclusive – than individual household scale storage. However the current network charging arrangements strongly incentivise behind the meter solutions and are likely to do so increasingly as Ofgem’s Targeted Charging Review reforms take effect. In Fintry we rejected the idea of building private wires (ie duplicating assets) but the concept of virtual private wire solutions for local energy projects is one that would merit further consideration. Community solutions are actively encouraged in the US through their equivalent of FITs. Given the valid concerns about the primary recipients of FITs being the better off in society the opportunity to promote more inclusive models is one that both government and Ofgem should support.

In summary, what the Fintry project has demonstrated is that there are potential benefits from community energy across the value chain – without considering the wider benefits for local re-generation that the Scottish government highlights. However these benefits are fragmented and for the most part not rewarded. There is a need to revitalise thinking on community energy to secure these benefits and support the shift to a decentralised energy system.

The full report is available at www.smartfintry.org.uk where you can also check out the galloping stag on the energy dashboard that tells the community how much local energy is available at a point in time.