Cornwall Insight have been commissioned by Energy Systems Catapult to provide support under Workstream 2 of the Unlocking Clean Energy in Greater Manchester (UCEGM) project.

The objective of UCEGM is to deliver additional clean energy capacity to supply local authority assets across Greater Manchester, and to demonstrate innovative and scalable energy business models. This report is the latest stage of that support and builds upon deliverables previously provided from late 2021 onwards.

In this report, we consider the two preferred routes identified from Phase I of Workstream 2 through which local authorities (LAs) may raise finance for renewable energy projects – Public Works Loan Board (PWLB) loans, and raising money through crowdfunding activities – and how well each of these aligns with the short term business models which ESC has proposed. We have also examined potential upcoming changes to the energy market which could arise from various sources, including fundamental market reform and impacts of the ongoing energy market and wider economic uncertainty.

Public Works Loan Board (PWLB)

In examining the potential use of the PWLB, we note the following:

• With low costs, high flexibility and easy access to finance, PWLB is and should remain the default option for LAs to finance their renewable energy ambitions 
• Securing PWLB money is a comparatively straightforward process, with the most challenging element likely to be obtaining consent from the relevant LA’s Section 151 officer and internal approvals. Providing education to this officer on the business model and level of revenue certainty may be crucial in getting their buy-in to the investment 
• LAs are increasingly – and are encouraged to – review the investment over its lifetime for net benefits (which might, for example for solar, by 25-30 years), rather than a commercial payback period of 8-12 years 
• Some LAs are nearing their capital adequacy limits and will not be able to borrow further funds through PWLB1 , although investments to reduce costs over time should still be viable and other routes to finance exist, for example, through ring-fenced special purpose vehicles 
• Though LAs have expressed concerns about PWLB rules on investing for yield and how this applies to renewable energy generation, the guidance from the PWLB states that these projects are not considered investment for yield by Treasury 
• The UK Infrastructure Bank is currently issuing money though the PWLB, at a discount of 0.2% to usual rates, and is keen to invest in projects of over £5mn in value 

Crowdfunding

 In examining the potential use of crowdfunding, we note the following:

• It is a viable option for investment proposals with a degree of innovation, and is commonly associated with projects that have environmental and social benefits, and which allow for community inclusion and/or low risk for investors
• For LAs, the most appropriate focus is recommended as debt-based crowdfunding, particularly where benefits will mostly accrue to the LA rather than the wider community 
• Where there are high levels of community or environmental benefit and a compelling narrative can be identified, a donation-based model where funding is not returned could be considered 
• There may be options for reward-based crowdfunding, where rewards could be based on providing lowcost EV charging, for example 
• The key risks around the crowdfunding route are generating investor interest through campaigns and investment proposal, choosing the right crowdfunding platform and capital realisation 
• Suitable project types are either relatively small scale or would need to include funding from other sources – in the latter case, crowdfunding could be seen as chiefly a method to engage the local community and build support, rather than provide significant funding 
• Of the various business models, considered from a financial viability and attractiveness perspective, a private wire (offering higher returns to meet the higher costs of money obtained through crowdfunding) or a solar EV carport (offering other benefits and rewards to the community) are most viable 

Municipal Bonds

 In examining the potential use of Municipal Bonds, we note the following:

• Very few municipal bonds have been successfully issued, and the current balance of interest rates does not favour issue of further bonds in the near-term as PWLB rates are in line with bond rates 
• The minimum size for bonds is less flexible than PWLB raises, at £250mn. Bonds are therefore more likely to be used to re-finance large sections of an LAs debt, rather than targeted specifically to funding renewable generation portfolios 
• The process for issuing a bond is 6-8 weeks minimum, or possibly 8-10 weeks or even longer, depending on requirements for credit ratings and engagement with lenders. There are also significant fees involved to set up credit ratings, as well as overheads to engage with investors
• The investment environment is currently changing, with a shift to higher interest rates following increases to the Bank of England base rate. While this affects both PWLB and municipal bond costs equally, it may impact investor confidence (and thus municipal bonds) to a greater extent; further, several LAs are currently experiencing financial difficulties which again may impact on investor confidence 

Regulatory change

Many potential or planned changes may affect future finance available and LA (and indeed wider investment) plans for decarbonisation. We have identified several key issues for discussion:

• Policy levy re-allocation –levies to support investment in low carbon generation historically made up 25%-30% of delivered electricity costs. There has been increasing discussion, including from potential incoming Prime Ministers, in recent months regarding the potential for some or all of these costs to be removed from electricity bills and moved to gas bills and/or general taxation, either temporarily or permanently. Should this occur, it will negatively affect behind-the-meter business models, with these being in part predicated on the avoidance of such levies 
• Network charging reviews – with elements of the Access Review recently completed, with impacts reducing network connection costs from April 2023. Further reviews of transmission and distribution charges are ongoing, though impacts are not yet clear 
• Contracts for Difference (CfD) – current UCEGM projects are under the 5MW threshold for the CfD. However, the recent allocation round (AR4) saw contracts awarded to solar arrays as small as 6MW and therefore this may represent a suitable future business model against which investment can be raised
  • We note that, to date, two LAs have secured a CfD – Cambridgeshire County Council secured £79.23/MWh in Allocation Round 1 (AR1) for its 12MW Triangle Farm Solar Park, and Orkney Islands Council secured £46.39/MWh for each of its two 28.8MW community wind projects in AR4, all in real 2012-13 terms 
• Network decarbonisation – LA policy aims for decarbonising electricity supply could be achieved by waiting until 2035, when the public grid is targeted to be fully decarbonised. Early decarbonisation and cost stabilisation may therefore be more important targets to avoid defaulting to this “do nothing” option 
• Locational Marginal Pricing (LMP) – BEIS’s Review of Electricity Market Arrangements (REMA) workstream launched in July 2022, and it is anticipated that this may lead to fundamental reforms to existing wholesale market structures, in this case to implement multiple regional wholesale power prices in place of the single national wholesale price which is the current paradigm. However, the direction of reform is currently not clear 
• • PWLB rate changes – rates have been increased previously for political reasons, and this could be reimplemented at any time. Monitoring other sources of finance, in order to switch to these at need, may be a useful back-up for this funding stream 

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