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Measuring the Local Economic Impact of Community-Owned Energy Projects

Executive Summary of Final Report

Measuring the Local Economic Impact of Community-Owned Energy Projects
 
Final Report 
 
1. Executive Summary
1.1 Gilmorton Rural Development and The James Hutton Institute were commissioned by 
Community Energy Scotland to prepare a framework for measuring the local economic impact of 
community-owned energy projects, working with alternative business models for raising finance 
and retailing energy which may increase local social and economic impacts. 
1.2 The framework focusses on communities of “place” rather than communities of “interest”. In 
particular, the focus is on community groups within a specific locality, involved in renewable 
energy projects in that locality, either working by themselves or within a Joint Venture with 
other parties. Community Benefit Funds and renewable developments by locally-owned 
businesses are not considered. The “place”, the locality, is considered to be the area community 
residents identify with most closely and have an immediate involvement with. This will include 
the area in which community residents live, socialise on a day-to-day basis and conveniently 
shop. 
1.3 In analysing economic impacts, the word ‘community’ is used in three distinct senses in this 
report:
 The community organisation which develops and owns the renewable energy project, or 
holds a stake in a project in the case of joint ventures with other partners. In Scotland 
this is typically a non-profit distributing organisation, usually with charitable status, 
whose primary purpose is to undertake activity for the collective benefit of a defined 
geographic community. A special purpose vehicle (SPV), usually a wholly owned trading 
subsidiary, is used to manage the project and transfer profits to the parent community 
organisation. Income received by the community organisation is typically used for 
‘common good’ causes, either through the distribution of grants or direct investment by 
the community organisation. 
 Local community investors in a project, where part of the finance required has been 
raised locally, either through a community share offer or bond issue.
 The totality of the local economic system within a community, which includes all 
economic activity within the defined geographic area.
1.4 The analysis focuses on case studies of community-owned onshore wind developments, 
although community hydro projects were also considered in our study. A standard case study 
example is developed, based on a 900kW wind turbine, using the most common form of 
ownership model in Scotland to date.
1.5 This assumes that the community organisation is non-profit distributing, and the finance for the 
capital costs of the project is raised by a ‘non-recourse’ commercial loan from a bank.
1.6 This shows that community income arises from five main sources:
 Pre-planning income. Generally very little income is received locally when most time is 
given voluntarily at little or no charge. 
 Construction impacts. The involvement of local contractors in on-site civil and electrical 
works is estimated to bring approximately £10,000 (with a 900kw turbine) into the 
locality at the beginning of the project 
 Impacts arising from the operation and maintenance of the project. These typically 
involve land rental and local management charges – estimated at £20,000 per annum
with a 900kW turbine. Local economic impacts – community energy
3
 Operational income from renewable energy generation and sale. This ranges from 
approximately £100,000 per annum (800kW turbine - Udny) with a good wind resource 
to around £250,000 per annum (900kW turbine - Tiree) in exceptional west 
coast/northern Isle cases. This approximates to £125,000 - £280,000 per MW of 
capacity. 
 This funding, in-turn, leverages in significant additional match-funding from a wide range 
of public and private sources, typically 1.5 – 3.0 times the value of the operational 
income alone.
1.7 Alternative business models which increase the income and associated economic activity 
retained within a community, are considered as:
 Accessing finance through a community Share Offer, or other local finance models 
involving, for example; Community Bonds or Debentures, such that the cost of capital 
for the community generator is reduced and/or a greater proportion of the finance costs 
associated with the project are retained within the local community.
 Selling electricity directly to local customers at retail prices, rather than the wholesale 
prices that are received for sale to licensed suppliers using a Power Purchase 
Agreement. Currently this is only possible using ‘private wire’ connections but new 
commercial and regulatory models are emerging which may increase the scope for 
direct supply.
1.8 Accessing finance through the offer of shares is becoming increasingly popular as the cost of 
capital using a community share offer may be less than commercial finance charges, and the cost 
of arranging a share offer for a small scale project is typically less than the due diligence costs of 
bank loans offered without asset-based security. For the purposes of this report, community 
share offers are estimated to provide finance at a 2% discount to bank loans and provide 
investors an approximate 2% premium over most comparable alternative investment 
opportunities. Share offers emphasising community benefit may be able to achieve greater 
benefits to the project with significantly lower interest charges.
Where local investors take-up 25% of a £1.0m Share Offer – representing a combined 
investment of £250,000 – with typically, a 2% premium offered over other locally available 
investment opportunities, an additional £5,000pa will accrue to local investors within the 
community, a portion of which will be spent on local goods and services.
Of more significance is the annual reduction in finance charges faced by the project. A 2% 
reduction in interest charges on a £1.0m loan will save the project around £20,000pa, adding to 
project net revenues within the community.
1.9 The sale of electricity at a premium to conventional wholesale rates has been shown to have the 
potential to significantly boost the income to both a project and therefore to the community,
making the whole project more economically feasible. While it may be difficult for most 
communities to install private wire infrastructure due to the distances between generators and 
consumers or the legal challenges of securing wayleaves and commercial agreements, , where 
opportunities can be identified, the financial performance of the project will be enhanced. 
For the purposes of this report, it is assumed that electricity supplied to local customers via 
private wire, represents an increase of approx. 80%/MWh (+4p/kWhr) for the community 
generator compared to standard PPA terms, and a saving of 26%/MWh (-4p/kWhr) for 
customers supplied by the community generator.Local economic impacts – community energy
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Community groups have generally been unable to reduce energy costs to local residents because 
of constraints to the supply and distribution of electricity. However, the UK energy industry is 
actively exploring systems involving relatively small volumes of electricity being conveniently 
matched between producers and consumers, allowing community groups to more closely 
approach the final consumer. We are aware that Community Energy Scotland is actively 
exploring these opportunities in collaboration with Highlands and Islands Enterprise and Scottish 
community groups through CARES Infrastructure and Innovation Funding and the Local Energy 
Economies Programme.
1.10 A review of methods of measuring the local impact of community-owned renewable energy 
projects concluded that the LM3 tool was the most appropriate method for measuring local 
economic impact with other approaches (input-output, Keynesian local multipliers) methods 
more appropriate to larger areas. The LM3 tool - developed by the New Economic Foundation 
(NEF) traces, with the support of community surveys, the first three rounds of spending within a 
community. This represents, in most cases, the vast majority of economic activity related to an 
economic injection. In the LM3 handbook, Sacks (2002) outlined two options (paths) depending 
on whether the starting point is an organisation, or a group of people, though the overall 
process is the same. 
1.11 Application of the LM3 model using the Tiree renewable energy project (900kW wind 
turbine) as a case study found the following:
 The local economic impact of community-owned wind turbines during the construction 
stage is fairly low. In this case, the local injection was estimated as £10,000 and it 
generated an estimated total impact of £13,330 after having allowed for multiplier 
effects.
 The local economic impact associated with the operation and maintenance of a 
development over its lifespan is larger but remains relatively small. In the Tiree case 
study, the annual impact was estimated as £25,691 with a NPV of £320,167 over a 20-
year period.
 The local economic impact of community projects funded by operational income from 
the wind turbine is far greater and generates higher multiplier effects. In particular, the 
overall multiplier effect in Tiree associated with projects funded through operational 
income (including funding leveraged from other sources) was 1.41, the (total) annual 
impact estimated at £684,909, resulting in a NPV of £8.535m when calculated over a 20-
life span of the development. 
 In relation to the alternative business models, the local economic impact of finance 
raised at preferential rates through a Share Offer is shown to give a NPV of £166,121 
when the additional income to individuals’ flows into the community is considered, 
through an estimated 25% involvement in the share offer. The additional income 
available through the project due to lower finance charges is more significant with a NPV 
of £2.972m.
 The local economic impact of reduced energy (electricity) costs within a community, 
while recognised as difficult to estimate, gives an estimated NPV of £842,434. More 
significantly, the additional income flowing into project activity derived from selling 
electricity at a premium to the wholesale price levels within most Power Purchase 
Agreements (PPAs) gives an estimated NPV of £3.769m.
1.12 The above results are specific to one case study area with a 900kW wind turbine. Varying 
returns to scale make it difficult to convert the results onto a MW basis. Moreover the returns Local economic impacts – community energy
5
will be highly dependent on local conditions and decisions made by communities in relation to 
expenditure. 
1.13 Given the current difficulties of arranging local electricity sales at preferential rates, the 
findings suggests that the local economic benefits from community renewables would be 
significantly enhanced by accessing local finance to support increased levels of community 
activity.
1.14 The analysis illustrates how the LM3 approach can be used by communities to differentiate 
between the local economic impacts of different types of activity and can thus help inform 
community decisions on project choices. It is recognised, however, that community action will
always be primarily determined by the needs of the particular locality and (when driven by 
volunteers) the enthusiasm’s of individual activists.
1.15 The analysis highlighted several uncertainties inherent to the process of estimating the local 
economic benefits of a renewable energy project. Some of the issues highlighted are 
methodological (for example the additionality of project funding and project activities; the 
extent to which new activity displaces other activities either in the locality or further afield), 
others are practical (for example assumptions on the appropriate discount rate to calculate the 
Net Present Value of future income flows). Given the number of assumptions required, it is 
suggested that sensitivity analysis should be conducted to provide a means of assessing the 
robustness of the findings. Alternatively, communities should be made aware of the 
assumptions implicit within the calculations. 
1.16 The findings complement those of previous studies which have shown that communities 
involved in the development of community-owned renewable energy projects are found to be 
more confident, resilient and have higher levels of wealth than they would otherwise with no 
involvement in renewables. These communities are widely recognised to be empowered to 
make things happen within their communities and, as part of the process of change, to improve 
the community’s skill base. 
1.17 Moving forward, Community Energy Scotland (CES) may wish to explore the systems 
currently under development by the UK energy industry which aims to match relatively low 
volumes of electricity generated with consumers to allow both parties to benefit from more 
favourable price levels.
1.18 It is also suggested that CES test the LM3 approach in both an ex ante and ex poste context 
with communities considering/operating a community-owned renewable energy facility to 
confirm this model’s acceptability as a measure of local economic impacts of renewable energy.




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