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Connection and route to market issues for community energy

Posted on 30 October 2013

Co-operative Energy kindly invited me to speak about policy issues at its Community Energy Conference on 19 October. The main areas I focused on were grid connection, including a summary of Cornwall Energy’s recent paper Overcoming Grid Connection Issues for Community Energy Projects, routes to market for power generated by community schemes and why there is a need optionality of support mechanisms after 2017. The report was commissioned by the Co-operative Group and identifies a number of barriers in the connection process, including high connection costs and grid reinforcement charges. We were given access to project details for 21 community schemes that have come across grid connection issues. These show a huge variation in connection costs, ranging from the equivalent of £150,000/MW up to £7.4mn/MW. The vast majority (19) of these projects reported expensive connection costs as being the primary reason for schemes being reduced in size, delayed or even abandoned altogether. So, what are the electricity distributors (DNOs), whose networks many community projects are connected to, doing to improve the situation? Well some progress has been made, much of which has been forced upon the DNOs by the regulator Ofgem. They have set up annual forums in London, Cardiff and Glasgow to discuss issues with the developers. Heat maps to show where capacity can be deployed without the need for reinforcement are now available on the DNO websites. Drop-in sessions and “surgeries” to discuss projects at early stages have also been introduced by some operators. And a steering group, which includes community energy stakeholders, has been formed to share best practice and communicate progress. These are all welcome changes, but still more needs to be done to ensure the industry’s development is not hampered. A lot can be learned from our European neighbours who have more focused policies to support community energy projects. In Denmark, for instance, the costs of connection are socialised across all users and renewables projects receive priority grid access. And in Germany the grid connection process is transparent, renewables receive priority access (though this is changing), and almost a half of renewables projects are community-owned. We made a list of 10 recommendations to improve the connection process for community schemes, including:

  • providing priority access for community energy projects;
  • allowing community projects to pay back site-specific connection costs over time (perhaps through feed-in tariff (FiT) payments over 20 years);
  • connection offers based on standard cost assessments with higher/ lower costs recovered in general DNO cost recovery;
  • socialisation of wider costs of reinforcement; and
  • further information remedies to improve transparency, consistency and communication.
Once a generator connects to the grid, the next issue is how to sell the power. This is traditionally achieved through a power purchase agreement (PPA), but unfortunately the economic climate has made many lenders increasingly risk averse and risks of managing PPAs have led to larger reductions in pay-outs through long-term agreements. Larger FiT generators, including community schemes, have tended to opt out of the guaranteed export tariff in favour of taking export to market. The generation tariff within FiTs can be seen by lenders as a floor price, meaning these generators are able to sell their power in more competitive short-term offtakes (where discounts are 2%-10%, rather than 10%+ in long-term PPAs). The news that the government’s energy department DECC plans to extend the FiT threshold to 10MW is a positive step, but after 2017 projects above this capacity level will have to apply for a contract for difference (CfD) FiT. DECC expects CfD FiTs to eliminate price risk and lower the cost of capital. That may well be true but they also introduce more complexity compared to current FiTs or the Renewables Obligation as there are now prescriptive allocation rules. CfD FiTs are most suited to those that trade directly as they would benefit from achieving the full reference price. Therefore this hastens the point, there is a need for optionality for projects above 10MW after 2017, as on current plans the CfD FiT will be the only show in town. Ben Hall is senior renewables analyst at Cornwall Energy. Ben leads Cornwall Energy’s coverage on the Renewables Obligation and Feed-in Tariffs, and tracks policy issues relating to low-carbon generators and developers. He is also vice-chair of a Cornwall Energy lead industry group for renewables developers. For more information contact: Ben Hall, senior renewables analyst, Cornwall Energy ( 01603 604405.

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