Business and Financial Practices

Business and Financial Practices

Why Understanding Business and Financial Practices is important for Smart Local Energy Systems

The vision of smart local energy systems is to optimise the use of energy assets at a local scale, balance production and consumption of energy, and reduce whole system costs in the move to a zero carbon supply. Cleaner, decentralised energy systems are expected to improve local prosperity through new businesses, jobs and supply chains, creating better places to live.

The UK currently has very few smart local energy systems, and these are demonstrators or pilot projects with time limited funding. There is growing interest in developing smart systems at a local scale, building on the decreasing costs of small scale renewable energy technologies and storage, and digital platforms, as well as potential for local democratic participation and ownership.

Making these aspirations real depends on understanding how to move on from the present structure of local energy businesses to a thriving local energy sector, with businesses able to integrate clean heat, power, transport and storage locally, sell new services and make all this bankable.

High profile smart local energy system projects, such as the newly funded PFER Demonstrators, are attracting media interest. But we know surprisingly little about the day-to-day realities of current local energy businesses, or their steps towards integrated systems and services. We need to understand much more about what types of business these are, their assets and liabilities, the services they provide to customers, their finances, and the obstacles they face in a market geared to large scale generators and suppliers. Many of these local businesses will provide clues to advancing, supporting and enabling a transition to integrated smart local energy systems.

Creating this big picture of the sector as it exists now will enable us to develop viable pathways for future business innovations, with benefits to the whole energy system and to local livelihoods and economies.

Local energy businesses exist in many different forms – they can be co-ops, non-profits without shareholders, community companies, mutual enterprises, and wholly owned subsidiaries of bigger utility or multinational companies. This diversity is itself important to investigate, because it will reveal more about the different kinds of value created by local energy, and the common features of more, and less, successful businesses. It will give insights into the financial viability of different types of local energy businesses and prospects for growth in current markets.

Working with others in the Consortium, this big picture will enable us to identify the types of regulatory and policy framework that could be established to enable more, and more innovative, integrated local energy service companies. By understanding routes to innovation in business models and finance, we aim to support socio-technical innovation for new businesses joining the sector.

We can also examine the opportunity structures, and pitfalls, of clean energy subsidies, introduced since the Climate Change Act, such as Feed-In-Tariffs and Renewable Energy Obligations, for local energy businesses. We could then suggest how similar policy initiatives might boost local energy systems integration and innovation to open up energy markets to SMEs, and generate new value from whole system, as well as local, services.

How will EnergyREV deliver unique and useful insights?

The types and success of UK local energy systems’ businesses have not been analysed systematically until now. Decentralised energy supply has been limited since nationalisation and centralisation in the 1950s, followed by privatisation in the 1990s. Discovery of oil and gas in the North Sea also led to 1960s public development of the UK’s extensive gas grid, and a comprehensive programme for connecting most buildings. Centralising the energy sector created economies of scale, but neglected the opportunities for efficiencies from regional and local combined heat and power supply systems and energy service business models. The result is system and market structures geared towards big energy supply businesses.

Other European countries have far more continuity in local and regional energy systems, and a more mixed economy of energy. Nordic and Scandinavian countries such as Norway, Sweden and Denmark are using their local and regional systems as catalysts for integrated low carbon or renewable energy services, demonstrating that there is nothing inherently inefficient or uneconomic about more decentralised systems.

Local energy systems are however a new concept for the UK. Co-ops, non-profits and community energy businesses are typically being established by determined groups of people highly motivated to move the sector forward. These tend to be geared to locally-specific concerns and opportunities, whether in Orkney, Glasgow or London. Large energy businesses, notably the Distribution Network Operators, are however also testing energy service business opportunities associated with active management of local networks, greater digitalisation of systems, and more efficient use of the increasing local energy sources connected to the distribution network.

This research aims to establish the scale of the existing local energy business sector, its installed capacity, and market share. We will explore where local energy businesses have developed across different geographical areas of the UK, and why: is it for example because of local political will, local renewable resources, constrained distribution networks, financial opportunity or all of these and more? The analysis will support development of an innovative sector, with potential to scale up in more locations and thrive.

What will the business team deliver for EnergyREV?

A state-of-the-art review will investigate:

- The history and path followed by local energy businesses in the UK. How does this compare with smart local energy businesses in comparable European states?
- The different business, financial and ownership structures of 'local energy systems' in the UK. In what ways might these be ‘smart’?
- Who (energy utilities, digital businesses, LAs, English LEPS, devolved governments, City Regions, community groups, social enterprises) is active in developing UK local energy business propositions and why/what rationales/sources of finance?
- What do these businesses supply? Are they focusing on a single area - such as heat - or do they work across technologies such as integrating heat & power?
- What type of customers do they have?

- What valuation metrics including economic, social, environmental and financial are used in developing local energy business models? What indicators of societal value of smart local energy are used?
- What evidence, if any, is there of innovation in local energy business models? What triggers such innovations? How can we know/measure when such a business model is successful?
- What changes in non-technological elements of local energy business models (i.e. suppliers, partners, value propositions, customer interactions etc.) are required when a new energy technology is introduced?
- What typologies and taxonomies of business models already exist in other sectors that the local energy sector can learn from? How do business models interact with the local social, economic and political environments?

Information will be collected from over 1,000 companies involved in the UKs local energy business sector with the aim of characterising the sector, to get a clearer picture of current activities, resources and goals. This mapping of the types of local energy business successful now will provide lessons for developing, establishing and scaling up a future smart local energy systems’ sector.

The team also plans to engage with local business to explore new opportunities for adapting their business models. We will be co-designing new business models through collaborative workshops with business representatives. These cross-sector workshops will draw on the commercial Business Model Canvas widely used for business innovation. We will also do a detailed survey of the sector and then use statistical techniques such as cluster analysis to identify patterns and clusters in unstructured data to examine types of existing business models.