Clare Davey 29 May 2019

Are local authorities the new power players in the energy market?

Are local authorities the new power players in the energy market? image

Local authority investment in commercial property has come under a great deal of scrutiny over the last 18 months. However, away from the headlines, a relatively small but growing number of authorities are looking beyond just bricks and mortar towards renewable energy. Investment of this type is becoming increasingly popular as a means to optimise existing assets, generate new income streams, meet climate targets with clean energy, and support a low carbon economy.

In May last year, South Somerset District Council, in partnership with a local developer, announced plans to create a new 25MW battery storage facility near Taunton to provide essential power management assistance to the National Grid. The system comes as a result of a £9.8m investment from the council as part of its new commercial strategy.

The rationale behind the development and the council’s overarching commercial plan is due to the complex financial climate that the council is currently operating in. In December last year the council announced that between 2018 and 2022, it needs to deliver savings rising to £6m per year. This is in addition to having to cut costs substantially, having sustained a 70% reduction in its Government grant funding since 2010. The council views the scheme as an opportunity to assist with its income generation needs as well as its commitment to its Council Plan to promote the use of green technology.

Elsewhere, Ashford Borough Council’s Cabinet agreed in February to a proposal for a solar farm project in Shadoxhurst. The 50-acre site was purchased by the council in 2017 and is currently used for grazing with little scope for alternative agricultural use. It is believed that Ashford would be the first local authority in Kent to build and run its own solar farm. The proposal is for a system 9MWp (9 megawatts or 9000KWp) in size and would directly feed the National Grid. Again, the rationale cited for agreeing to the scheme, subject to planning approval and public consultation, is that a solar farm is seen as the optimal use for the site and would provide a significant income stream whilst having a low environmental impact. It is estimated that the project could generate £7m over a 25 year period, which supports the council’s entrepreneurial ethos, securing future council services in a challenging economic climate.

Perhaps the most pioneering of these projects is Warrington Borough Council’s deal with a sustainable energy company to create the two largest solar farms in the UK since 2016. With a combined capacity of 62MW, the farms in Hull and York will help make the council the first UK-based local authority to generate all of its own energy. The council estimates that the schemes – once fully operational – will generate enough clean power to supply more than 18,000 homes and mitigate the emission of 25,000 tonnes of carbon every year.

Moving forward, an ability to actively demonstrate green credentials will become ever increasingly important for local authorities and Warrington is a leading example; utilising this technology for income generation alongside its ambitions to deliver its clean energy targets.

For background, Solar PV was once the preferred technology for private landowners and developers seeking to host an energy project, due mainly to the relative ease with which a scheme could be granted planning consent compared to other technologies and the subsidies available for the technology. However, just as the technology started to mature, withdrawal of Government-backed subsidies appeared to signal its demise. Concurrently, Battery Storage and Peak Power Generation (PPG) schemes emerged as a new opportunity for landowners; technology designed to help balance the electricity distribution network by addressing problems caused by the intermittent nature of wind and solar PV generation.

As the battery storage and PPG market continued to grow from strength to strength, in September 2017 BloombergNEF released a flagship report highlighting a tipping point in UK renewable energy deployment; it became cheaper to generate electricity by solar and offshore wind than by creating new coal, gas or nuclear fired power stations. This watershed occurred in the absence of subsidies, as costs decreased and perception of risk reduced as performance data collected over a number of years provided certainty of investor returns. Consequently, solar developers re-entered the market alongside new entrants such as local authorities; business models no longer relied on subsidies and instead produced viable revenues by securing long term Power Purchase Agreements (PPA), Sleeving Agreements and Private Wire Agreements with large energy consumers.

PPA – Electricity is exported directly to the grid via an electricity supplier. The rate received per kWh is currently in the region of 5-6p. Electricity prices are often higher for contracts secured on a short term basis (6-12 months), but funding can be difficult to secure for short term contracts and as such, longer-term (up to 15 years) contracts are preferred by investors.

Sleeving - Similar to a PPA agreement, with a slight premium received as the Solar PV developer usually has an arrangement with a large, normally corporate, off-taker. The generator will agree to sell its entire output to an off-taker so that the off-taker can meet its own green energy targets. In practice, the electricity is not strictly consumed by the off-taker. Instead and through an agreement with a licensed supplier, they cover the distribution and transmission costs enabling the power to be “sleeved” through the network. In doing so, they can enter into a long-term PPA with the generator and the wholesale price of electricity can be determined between the parties.

Private Wire – The energy generator connects directly in to an electricity consumer, usually within 1km of the site, and they will absorb as close to 100% of the electricity generated as possible (the scheme size will have been proposed to match the consumption demand, depending on the cost and complexities of the grid connection for any surplus generation). This is typically the preferred option as there are currently no distribution charges behind the meter, so the rate paid per kWh is essentially at the result of bilateral negotiations and will depend on the market electricity purchase price and electricity sale price.

Public perception of solar is positive so planning applications are typically less contentious; a recent Department for Business Energy and Industrial Strategy (BEIS) survey found 84% of people support the technology. In addition, as a passive technology, solar is more suited to sensitive sites where noise or emissions are not acceptable, making it more likely to be granted consent in rural locations, with livestock able to be grazed under and around the technology.

With solar technology prices continuing to fall, we are seeing an increasing appetite for larger scale solar developments and have been working with a number of local authorities to determine the viability of their sites for such developments. Key site attributes include access to a viable grid connection (or a significant high energy PPA off-taker) and sufficient land (either owned or third party) of low landscape and agricultural quality.

In the absence of renewable subsidies, the viability of solar is now more heavily reliant on the value of the exported price of the energy it generates. The UK energy network is heading towards a “smart grid” system with distributed generation and storage being ever more aligned. As a result, we anticipate developers will seek to collocate battery storage facilities on solar sites thus maximising the export potential of grid connections at times of peak demand.

Whilst embracing the potential of renewable energy as an income stream, it is vital that landowners fully appreciate the merits of their site in order to determine whether it is suitable for a project, be it solar PV, battery storage or PPG projects, and whether the best opportunity presented is via PPA export, Sleeving or Private Wire. This will also depend on what’s in the vicinity to the site and the complexities of connection to the grid e.g. at what cost, what distance from the site (any third party wayleaves) etc.

The model for Private Wire is expected to change following the announcement of the results of National Grid’s recent Targeted Charge Review. This consultation proposes to level out distribution charges so these are split fairly between those projects feeding the national grid directly and those that remain behind the meter.

As such, the economics are likely to improve for straight PPA and Sleeving projects but reduce for Private Wire projects. However, given the benefit of offsetting the retail cost of electricity, for many, Private Wire will still remain the most attractive development option where this is available.

Clare Davey is the associate energy specialist within the infrastructure & energy team at Carter Jonas.

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