Financing smart local energy systems in the British energy market: towards a framework
Smart Local Energy Systems (SLES) are expected to contribute to climate protection by providing efficiencies systems, local socio-economic benefits and reduced greenhouse gas emissions. Development of these systems in Great Britains market involves technical, regulatory and financial challenges. A potential route to resolving financial challenges is asset securitisation which enables diverse assets and associated cash flows to be pooled and aggregated for conversion into a security that is typically traded in a financial market as a means of raising funds. However, securitisation was a factor in the 2007/08 ‘subprime mortgage’ financial crisis. Consequently, a robust corporate governance and risk management framework is needed to reduce the risks of any future crises.
Seven elements are key to the organisation and operation of a securitisation mechanism. They are: Culture, Leadership, Structure, Localism, Cash-Flow-Lock, Smartness, and Alignment. To strengthen governance and risk management each of these elements five questions need to be addressed by a SLES board or senior management team. Our work has found that examples of robust governance practices are established in some local energy businesses and pilot projects, but there is scope for improvement. Uncertainties have been revealed that need to be addressed to enable use of securitisation as a financing mechanism for complex SLES that need to develop to support a Net Zero future.