Smart Local Energy Systems (SLES) are projects that implement a varied and complex set of solutions using local assets to potentially provide resilience, network services, better consumer experiences and local network constraint management.

This report examines the investment landscape for SLES. It considers the range of potential types of investment and defines, in outline, their main investment criteria. This has been considered across the SLES development lifecycle, at different stages of maturity, and with different amounts of investment at different rates of return.
For this report, SLES projects have been broadly categorised using four groups:

1. Long-term assets

• These are projects that utilise assets that will have a long operational life. This includes projects such as heat or electricity networks, which are installed and operated for decades.
• Traditional utilities and oil and gas companies are most likely to invest in these types of projects.

2. Short to medium-term assets

• These are projects that utilise assets that have a short operational life before needing to be replaced. For example, a battery asset where the cells will need replacing every 7-10 years.
• Private equity, utility companies, peer-to-peer and venture capital are most likely to invest in these types of projects.

3. Software packages and platforms

• These are projects that utilise some form of proprietary software package or platform. This can include peer-to-peer energy trading, energy optimisation and aggregation.
• Private equity, venture capital, utilities, peer-to-peer are most likely to invest in these types of projects.

4. Service offering

• This refers to the service provided by SLES developers and projects to customers. In practice all SLES projects will have some form of service offering. A key challenge for any SLES will be to provide a service offering that is comparable if not better to the established approach.
• As all SLES will involve a service offering anyone investing in SLES will be investing in service offering based projects.

Note these categories are not discrete and SLES will often fall into multiple groups. For example, a heat network may require long-term assets (the pipes), short term assets (boilers), a software package (optimisation algorithm) and a service offering to provide the heat to a customer.

Key points

This report concludes the two most important criteria in relation to SLES are risk appetite and minimum investment threshold. Due to their small scale, SLES will likely require relatively small levels of capital relative to other energy investments. Given their relatively unproven nature, there is a greater risk from an investor’s point of view in investing in SLES when compared to other energy investments.

A summary of the positives and negatives of each investment type for SLES is provided in a Table 1 in the Executive Summary of the report. This offers a current view and a potential future view of their suitability to invest in SLES.

• SLES will appeal to an investment vehicle with a high-risk appetite that allows small amounts of capital to be deployed.
• Private equity and venture capital investors may currently be interested in investing in SLES developers.
• Some peer-to-peer investors will also be interested as there is a wide range of risk appetite amongst this type of investor, ranging from very low to very high.
• Utilities and traditional oil and gas companies may look to invest in SLES strategically, in order to operate in different parts of the energy industry, and may be willing to take more risk or invest lower levels of capital.
• Local organisations and community groups may find it difficult to source funding to be able to own and operate a SLES for their own use. We have proposed a few options that would help address these issues. There is no “silver bullet” solution and a combination of options would be needed to promote the deployment of SLES.

The broad recommendations identified by this analysis are:

• Improve and promote the existing innovation funding process.
• This will allow SLES developers to more easily secure initial funding to get their ideas off the ground. Once an idea or technology has been proven it becomes much easier to secure investment as it appeals to a broader range of investment types.
• Foster a clear and supportive policy environment for SLES and the wider energy industry.
• This will be vital because if any potential investor is going to invest in SLES developers they will want some form of confidence that the developer’s business model will work and endure within the future energy market.