Investment in renewables working group: report

This finance working group was set up following the recommendation from the renewable energy deep dive, with terms of reference to:

• Explore different models for financing and seeking investment in renewable energy, this should prioritise but not be limited to investment in community enterprises.
• Identify financing models that support scaling up of renewable energy projects in a way that retains wealth and value in Wales. 
• Explore the opportunities private investment in Welsh renewable energy generation might present.
• Identify how existing financing schemes could be adapted to support our vision for renewable generation in Wales

The working group was established from individuals with expertise in finance and investment in the private, public and community energy sectors. A full list of members can be found at Annex A.

This report summarises the main discussions from the group and the recommendations looking at private, public and community finance.

The private finance market for renewable energy in the UK is well established. In Wales, there is considerable private investment in renewable energy projects across a number of sectors. The group concluded that there are no general market failures in the supply of private finance for renewable energy sector in Wales – if there are projects deemed to provide sufficient commercially acceptable returns then capital investment is generally available from private markets. While there are no general market failures, some technologies, such as hydropower and marine energy technologies, can struggle to draw private finance.

The main identified barriers to renewable energy projects relate to infrastructure and planning issues, and to considerations around the investment characteristics of some projects in Wales. These barriers have been explored by the deep dive group with infrastructure, particularly grid, being identified as a specific challenge in Wales.

Consequently, the group has focussed on the opportunities to maximise the benefit of private investment to support economic and social value in Wales, resulting in the identification of several potential actions. The group recognised there may be merit in a partnership between Welsh Government and commercial renewable energy developers, as this would provide clarity for the developer and a clear steer on the benefits Welsh Government wanted to realise in return.

Recommendation 1

The Welsh Government should explore developing a partnership initiative/Charter with the commercial renewable energy sector: the sector committing to standards on local and community benefits, supply chain benefits; and the Welsh Government committing to supporting the vision for Wales to be a net exporter of renewable energy, publishing updated renewable targets and clarity on community ownership requirements.  

As the group considered the range of sources of investment in Wales the role of pensions funds was discussed. The group recognised that those responsible for managing public sector pension investments must operate and make decisions within the legal framework set in place by the UK Government. Although the Pension Authorities are accountable to their employers and members for these decisions and their effects, they must be mindful of their legal requirements to manage risks. The group concluded that such a requirement means the potential for pension funds’ investment in renewable energy projects in Wales is significant. Securing a greater share of Welsh pension investment in renewable energy developments in Wales would help support wider climate change commitments.

Recommendation 2

As Welsh pension funds look to implement their legal requirements to manage their funds and supervise risks, including protecting the pension funds from financial risks relating to climate change, Welsh Ministers will continue engaging on the opportunities for investment in renewable energy project in Wales through existing mechanisms such as the Partnership Council. The renewable energy sector also has an important role in promoting opportunities to invest in renewables in Wales. The Welsh Government will facilitate investment, for instance by bringing pension fund managers and renewables developers together to explore these opportunities further.  

The public sector in Wales is active in supporting the development of renewable energy projects, providing direct finance to support developments and associated infrastructure and funding advice and support.

The Welsh Government Energy Service (WGES) provides technical and commercial support to develop viable community led and public sector projects in Wales.

The WGES offers community enterprises in Wales a range of financial support. This includes grants for early project development, capital grants and grants for internal resource and access to development loans and capital loans to construct projects via the Development Bank of Wales (DBW). Community enterprise also have access to a dedicated development manager to provide technical support throughout project development. The Welsh Government also grant fund Community Energy Wales (CEW), a not-for-profit membership organisation that supports and represents community groups working on energy projects in Wales.

Over the last 5 years, £150m has been invested in WGES projects which have reached financial close, of which £90m has come from the Welsh Government. WGES financial support has been in the form of grants and interest free loans to public bodies for energy efficiency and renewable energy projects.

This support for local and community owned energy schemes has contributed to 825MW of generation being locally owned, against a target of 1 Gigawatt by 2030.

There is the opportunity for the Welsh Government to use public money to support greater value and benefit retention in Wales, particularly in the use of public assets. The commitment from the Welsh Government to set up a public Renewable Energy Developer to take forward development on public land offers a good example of how public finance can help deliver on the ambition to scale up renewable energy in a way that supports economic and social value in Wales. As the scope of this development function is defined, the Welsh Government should seek opportunities to work in partnership with the private and community sectors.

The group concluded that public finances need to be targeted at specific gaps and market failures, for example, community enterprises’ issues accessing finance for projects adopting a shared revenue model. In addressing these gaps there is an opportunity for Welsh public resources to secure greater benefit for Wales. Specifically, the group supported the work of DBW in scoping out options for using the Bank’s financing models for supporting renewable energy in Wales (see Annex B).

The group supported DBW’s intention to develop a business case to invest in projects that support Net Zero. The group specifically saw a positive role for DBW to be a public investor on behalf of communities for large scale renewable projects in Wales. The Welsh Government has set the ambition for all new energy developments to have at least an element of local ownership. However, taking a share of a large development is complex and requires a good understanding of the risks and benefits, as well as access to finance at scale. The group highlighted the potential for DBW to invest on behalf of communities in Wales, with the returns from investment supporting projects in local communities.

Additionally, the Welsh Government should continue to discuss the potential for the UK Investment Bank (UKIB) to support renewable energy investment in Wales and the wider role the bank can have in support decarbonisation priorities in Wales.

Recommendation 3

DBW should continue to develop the business case for investing in renewable energy developments. Investment by DBW should plug identified gaps where the existing models for local and community ownership is not possible. Returns from investments should support economic and social investment in local communities. 
 

The group identified access to grid as a key barrier to renewable energy in Wales. There was support for progressing the implementation of the grid recommendations from the deep dive.

Given its prominence as a barrier to the scaling up of renewable energy in Wales, the group support any additional action the Welsh Government can take to bring forward the necessary investment in Wales, acknowledging the work already underway to map future grid need which should help unlock anticipatory investment. The scale of costs involved in funding grid infrastructure mean that the general or economic case for Welsh Government to financially contribute to this was extremely difficult to justify. However, the group encourage the Welsh Government to keep open the option of reviewing any funding mechanisms that might be available to make funding investment in localised grid solutions a more realistic option.  

Announcements from NG-ESO on their Holistic Network Design project, made subsequent to the last meeting of the group, has the potential to offer solutions to a number of persistent grid barriers, including their enabling of delivery of grid infrastructure in mid-Wales. Additionally, other measures such as an amnesty on no-longer needed existing grid connection agreements and improvements to the queue management arrangements should have a beneficial effect in reducing grid as a barrier to development.

Recommendation 4

The Welsh Government should review progress in implementing the grid recommendations from the deep dive and wider UK reforms. If, following that review, the scale and pace of change remains insufficient to meet Wales’ needs, it should review and seek to make use of all the practical levers that Welsh Government can exercise to encourage direct investment in the grid infrastructure in Wales.

The group welcomes the focus from the deep dive on the opportunities to support the scaling up of resources for the community energy sector in Wales.

The positive direction that community energy was taking in Wales has been supported by Welsh Government policy and funding. This has led to a thriving community energy sector in Wales with several innovative projects. The challenge was to accelerate that momentum, especially in light of reduced support from the UK Government which has noticeably slowed the number of new projects coming forward. The UK Government’s removal of the Feed-in-Tariff (FIT) and Export Tariff had done much harm to the continued growth of the sector and its replacement, the Smart Export Guarantee (SEG), offers a lower rate which has consequently proved attractive for small scale (household) projects instead. The group debated how to create viable community energy projects that are attractive investments.

In response to recommendation 14 of the deep dive into renewable energy, the Welsh Government has committed approximately £750k over the next three financial years to support CEW’s work, raise awareness of investment opportunities in the community energy sector and supporting WGES to work with community energy projects in Wales. This additional support is welcome, and the Welsh Government needs to ensure sufficient resources are available to promote opportunities to leverage in investment into the community energy sector.

CEW’s research, from early 2022, suggests that there is a pipeline of 54MW of community owned renewable energy in Wales, demonstrating that renewable energy is still viable without the FIT and export tariff. However, the research also suggests that it is currently only viable at a scale much larger than traditional community energy schemes. Consequently, the competition for sites and opportunities is more challenging than ever and it is difficult for communities to be able to move quickly enough to compete with the larger developers. 

There are emerging opportunities for communities that offer different approaches from ‘traditional’ schemes. To ensure that these schemes are successful we need to consider greater flexibility in public finance to respond to community sector innovation and recognise the wide array of local and community benefits that such projects can deliver.

The Ripple model, which uses a co-operative model to fund the development of renewable energy generation was generally agreed to be very positive. There are huge economies of scale when it comes to energy projects, with large scale assets able to produce electricity at a much lower unit cost than small scale ones. The Ripple model allows consumers to access these economies of scale and renewable electricity more cheaply through cooperative ownership than would be possible as individuals.

Although the sector in Wales has a variety of operational models, the take up of community share offers is lower than across the UK as a whole. With a higher take-up of investment opportunities, the group consider it possible to scale up community led generation in Wales, supporting Welsh Government targets on community ownership but also generating economic and social benefits to investors.

While active promotion is key, there may be a role for the public sector to go further and match fund community share offers. DBW could utilise their expertise to lead this on behalf of the public sector.

Recommendation 4

With additional funding provided to CEW to promote community share offers, work needs to be completed to understand why take up in Wales is lower than the UK average.  CEW needs to be able to demonstrate the positive impact of their activity and ensure people have adequate protection when considering an investment. CEW should report back to the Welsh Government on the effectiveness of the additional funding and report any funding gaps, should there be any. 

Throughout the discussions of the group the benefits of Power Purchase Agreements as a contractual arrangement for securing a return for developers and a fixed costs for customers were highlighted. Noting the recommendation from the deep dive on PPAs, members of the group expressed an interest in working as a task and finish group on PPAs to prioritise implementing that recommendation.