Energy co-ops under pressure

These are difficult times for energy co-ops and they are set to get significantly worse.  It is not just that the Financial Conduct Authority is taking a tough line on energy co-ops, there are also major challenges for all renewable producers of energy because of market conditions.


As has been extensively reported in the News, the FCA has rejected applications for co-operative registration from potential societies producing renewable energy where members cannot demonstrate a close trading connection with the organisation.  Merely investing in a society is now insufficient for approval of registration.  The FCA is also simultaneously apparently moving to a position where rates of return for co-operatives and community benefits societies are capped and closely linked to the Bank of England base rate, which is currently a mere 0.5%.


A second hit against energy co-ops comes from the decision of the Treasury to bar renewable energy projects from the tax relief offered by the Enterprise Investment Scheme.  Some 62% of EIS applications in the 2013/14 tax year – worth more than £1bn – were for renewable energy projects, according to the Financial Times using research produced by the Tax Efficient Review.  However, most of these projects were for solar energy schemes, which have already been barred from the use of EIS since July.  In addition, cuts to feed-in tariffs for renewable energy have made financial returns less attractive.


It would seem that the Government has lost its enthusiasm for community-based renewable energy projects, despite repeated commitments to the schemes.  Indeed, energy secretary and Liberal Democrat MP Ed Davey has spoken of achieving “nothing short of a community energy revolution”.  However, Conservative back-benchers are opposed to many visually unattractive local energy projects – both wind turbines and solar farms.  And the Government is concerned that the use of EIS is not only reducing tax revenues, but also promoting market distortions.


Those market distortions are exacerbated by requirements on energy companies to source much of their electricity from renewable production and through the minimum tariffs in place for renewable energy production of electricity. It needs to be stressed that many people – including me – see nothing wrong with market manipulation in order to achieve desirable social and environmental outcomes.  Adopting market interventions to promote a substantial move away from carbon emitting energy sources to clear renewable sources is surely a justifiable objective.


Despite this, I do have sympathy for the position of the FCA in objecting to what in some instances are low risk, tax avoiding schemes in which investor groups provide funding to generate solid returns and for no other reason.  It is surely reasonable to require co-operative societies to prove their adherence to co-operative principles and practices.  However, the FCA has not yet achieved the right balance between protecting co-operative principles while supporting new projects that have genuine community engagement and are formulated as co-operatives.


But the biggest whammy of all hitting renewable energy projects is a much more global issue – the collapse in wholesale oil prices.  Brent Crude prices have fallen from $115 a barrel in July to less than $60 a barrel in January this year.


The main factor behind the fall in prices has been the production of shale oil in the United States, which has provided a very welcome economic boost to American businesses.  It has been one of the main reasons why the US economy has recovered and job creation has outstripped expectations.


In previous decades, this would not necessarily have led to a sharp fall in wholesale oil prices.  OPEC – the oil producing nations’ cartel – would normally have agreed to cut production in order to hold prices up.  But these are not normal times.


For several reasons, OPEC has an interest in allowing wholesale prices to fall.  Firstly, cheaper oil prices make it more difficult for energy companies to make a profit from the production of shale oil and shale gas, which are expensive to extract.  Allowing oil prices to fall therefore enables the main OPEC nations such as Saudi Arabia and the Gulf States to maintain market share.


It has become particularly important for those nations in the Middle East to hold onto market share because of their own problems.  Several of the Gulf States became over-stretched financially because of the global recession and would have difficulty in coping if they cut oil production.


But there are other political reasons for the OPEC nations, supported by the US and the European Union, to allow wholesale energy prices to fall.  With big reductions in energy revenues, several unpopular nations and rogue organisations are losing income they desperately need.


At the top of the list, of course, is Russia.  Following its invasion of the Crimean region of Ukraine, and its support for Russian separatists in the East of the country, Russia has been subject to swingeing and painful sanctions.  But the collapse in energy prices has hit Russia hardest of all.


Then there are various revolutionary groups that have seized oil fields in the Middle East and North Africa.  These include ISIS, which controls some oil fields in Iraq and Syria, and other Islamic fundamentalists in Libya, which have seized oil fields there.  Low oil prices is also badly damaging Venezuela, which the US regards as an enemy.


It is difficult to predict whether these factors are short-term or long-term.  We could be in the early stages of a new cold war, pitting the US and EU against Russia.  Similarly, we have no real idea whether ISIS will be destroyed and removed from Iraq and Syria, or whether it can sustain itself as a major force.


We do know, though, that the energy industry is committed to the production of shale gas and oil.  That will surely continue to keep wholesale prices lower than they were prior to the 2009 global crisis.  That in itself does not mean that renewable energy projects will be uncompetitive, but their financial sustainability may depend on the willingness of governments to support market interventions that promote clean energy at the expense of carbon emitting energy sources.


A Republican presidency in the US would be likely to provide a further boost to the shale energy sector, while opening up new oil pipelines and expanding the exploitation of tar sands for oil production.  Those actions would be likely to hold down prices.  In the UK, a Conservative government with a clear majority would presumably take a tougher line against renewable energy projects on the grounds both of visual impact and pro-market ideology.


Meanwhile, the EU seems increasingly controlled by neo-liberals who believe the market should be allowed to determine everything.  This is not just the influence of market ideologues, but also the painful squeeze felt by a block of nations that maintain welfare systems while competing globally against other nations with little or no safety net for the poorest and most vulnerable in society.


What does all mean in the long-term for energy co-operatives?  It is difficult to be certain.  But the good times may have ended.


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