Financing community energy case studies: Gwent Energy

Commencing in 2016, the Financing Community Energy project provides a comprehensive quantitative and qualitative analysis of the role of finance in the evolution of the UK community energy sector.

This report presents the third of four case studies of UK community energy organisations, exploring how these organisations have sought to finance their projects against a backdrop of diminishing government support for grassroots sustainable development.

Overview of case study

Gwent Energy was formed in 2009 to deliver environmental benefit and cost savings to its local community. It aims to help local consumers save money on their energy bills through a combination of renewable energy, efficiency, storage and electric vehicle charging interventions, whilst simultaneously generating a surplus to fund local community initiatives.

Gwent Energy looks to help local organisations, companies and residents deliver energy system improvements that may otherwise not have taken place. Its customers include community organisations (e.g. churches, community centres, schools, and lifeboat stations), small and medium-sized enterprises (SMEs) such as farms and bed & breakfasts, and local residents. Together Gwent Energy currently owns 260 kW of energy assets – one 100 kW biomass boiler and 160 kW of solar PV, typically ranging from 5-30 kW and mostly roof-mounted.

More recently it has moved beyond straightforward generation to provide a variety of energy services, including generation system monitoring, onsite fault-checking and extended warranty services. This sits alongside the installation of energy storage and EV charging points, as well as provision of advice and interventions to reduce energy consumption.

Unlike our other cases, Gwent Energy operates as a Community Interest Company (CIC) and has relied much less on community shares. Instead, it has operated an Investor Club model that includes approximately 40 investors, who together have invested around £170,000 into the organisation by way of loans and bonds. However, like our other cases, it is still very reliant on price guarantees like the FiT and RHI, which provide it with around 40% of its income. Even so, its income streams are diversifying, typified by its move into installing and operating electric vehicle charging points.

Key lessons

• The withdrawal of the FiT has made business model innovation necessary, whilst legacy revenues from the FiT have made experimentation possible. The withdrawal of the FiT has meant that the CIC is unable to employ its existing revenue model for future projects, forcing it towards a more service-oriented approach. Interestingly, the 20-25 year long guaranteed revenue the FiT provides has also provided the CiC with the necessary capital and security for them to experiment with their business model.
• Community loans and bonds can be a viable alternative to community shares for delivering community energy projects. Instead of crowd-sourcing share finance from hundreds of shareholders, Gwent Energy has shown how raising community loans and bonds through a members-only Investor Club presents a different means of raising capital.
• Challenges of CIC legal structure have been overcome by an innovative finance model and a cooperative ethos. Whilst it has some advantages, the CIC legal structure suffers from the inability to raise community shares and the lack of an automatic democratic “one shareholder, one vote” system. These shortcomings have been overcome by legally incorporating these voting rights and raising finance through loans and bonds from community members only. In turn, these investors are invited to sit on committees to shape the CIC’s future.
• Heating business models present key challenges for community groups. Gwent Energy have thus far been unable to expand the heating side of its business, because of a combination of the poor rate of return from some low-carbon heating technologies (e.g. heat pumps), the rising cost of feedstock (e.g. biomass) and the difficulty of getting users to sign up for district heating.
• High dependency on individuals with appropriate levels of time, skill and commitment to generate social and environmental benefits. The establishment of the CIC would not have been possible without the involvement of one key individual. However, steps are being taken to overcome the dependency on the company’s chief architect.