Article

Why local authorities should consider decentralised energy

Michael Berrington Michael Berrington

Decentralised energy is a proven and deliverable investment opportunity for local authorities. By investing now, local authorities can make significant savings and take advantage of the newly streamlined process.

Decentralised energy is energy generated near to the end user and/or sold by small-scale locally focused suppliers. Although the private sector is developing many decentralised energy projects across the county, local authorities are in a unique position to effect change in the sector.

The sector has developed a lot since the release of Your generation - Making decentralised energy happen [ 2223 kb ] report in 2016, where we set out the value of decentralised energy and how it can be delivered.

South East London Combined Heat and Power (SELCHP) is an example of decentralised energy as a heat network. Southwark Council has teamed up with Veolia to deliver a district heating network, using heat from the incineration of rubbish. SELCHP delivers heat and hot water through a 5 kilometre network to 2,800 council homes in Southwark, and is set to save 7,700 tonnes of CO2 per year as well as make savings on gas1.

The decentralisation of energy is often driven by a combination of:

  • revenue generation
  • direct and indirect job creation
  • alleviation of fuel poverty
  • carbon reduction
  • cost reduction
  • security of supply.

Here are five things every local authority needs to know about decentralised energy.

1 The concept is proven

There is significant precedent to show how heat networks can be delivered to efficiently generate low carbon energy. This means meeting consumer’s heat and electricity demands more cost effectively than the grid.

With momentum building in the number of decentralised energy projects in operation, there is now a broad range of examples which can help a local authority understand how best to deliver their own projects.

Questions to ask when considering decentralised energy:

  • Will the project involve the generation, distribution, and or supply of energy?
  • Will the energy be in the form of electricity and/or heat?
  • What technology will be used to generate (or capture) that energy?
  • Who will the customers be?
  • Under what structure will the scheme be delivered?
  • How will the project be funded?
  • What are the risks and rewards?

2 The funding community is prepared

Many funders (such as commercial debt/equity funders, crowdfunding platforms and lease funders) are keeping a close eye on the decentralised energy space as they see it as a growth opportunity. Developing a decentralised energy project does not need to be a drain on local authority financial resources.

In particular, third party debt funding may be available for decentralised energy projects but given the relative immaturity of the market, classic ‘non-recourse project finance’ is unlikely. As an alternative to this, the debt funding would need to be lent to the local authority directly (on the strength of their covenant), guaranteed by the local authority (as parent company) or the funder may want a controlling equity stake in the project.

3 The supply chain is gearing up

As more decentralised energy projects are being delivered, the UK supply chain is advancing quickly. This includes players from other European countries (where decentralised energy is more commonplace) coming to the UK to sell their skills and technologies. This will have the impact of driving down prices and pushing up quality standards.

4 The consumer is getting protection

Where a decentralised energy project involves the supply of heat, a local authority must navigate this currently unregulated market. Heat networks have in the past been criticised for their monopoly over supply and heightening consumer costs.

The Competition and Markets Authority is carrying out a market study into domestic heat networks, to review how well the market works and if consumers are getting a good deal. The Heat Trust has also emerged in the market, which is an industry led self-regulation body, setting standards for consumer care and protection.

5 Government funding is available

The Heat Networks Delivery Unit (HNDU) within BEIS provides financial support to local authorities in England and Wales through the early stages of heat network development. HNDU grant funding can provide up to 67% of the estimated eligible external costs of early stage development studies including heat mapping, energy master planning, techno-economic feasibility, detailed project development and early commercialisation.

Since its inception, HNDU has run seven funding rounds, awarding £17 million in total and over 200 unique projects have been supported across 140 local authorities.

In addition, BEIS has announced the Heat Network Investment Project (HNIP), a £320 million capital fund to support heat networks through grants and loans. This is provided as ‘gap funding’ to grow the UK heat networks market and deliver the cost effective carbon savings required to meet the UK’s future carbon reduction commitments. Applications are anticipated to commence in Autumn 2018 and allocate first year funding by March 20192.

If you would like more information about the use of decentralised energy and heat networks, please contact Michael Berrington.

References

  1. Grant Thornton UK, Your Generation – Making decentralised energy happen, June 2016 [ 2223 kb ]
  2. Government.UK, Policy Paper: Heat Networks Investment Project (HNIP): scheme overview, 11 April 2018