Policy paper

DECC Overview on co-operative societies and community benefit societies

Published 19 March 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

In response to the Financial Conduct Authority consultation on co-operative and community benefit societies, DECC has developed a short overview note on society models available to the community energy sector. This provides information to community groups who wish to develop their community energy projects through the mutual society form.

1. Table on co-operative society and community benefit society

Note: The purpose of this overview is to help organisations understand the main features of typical community energy business models. Please note that this is not intended to provide, or be a substitute for obtaining professional legal advice. Please also note that other legal forms may be appropriate for community energy groups in specific circumstances.

	Co-operative society	Community benefit society (CBS)
We want the community to be in control	CSs generally operate under the principles of open and voluntary membership, and one member, one vote. These combine to ensure democratic member control.	CBSs generally operate under the principles of open and voluntary membership, and one member, one vote. These combine to ensure democratic community control.
We want the project to benefit the community	While CSs can engage in activities that provide social, environmental or other benefits to a broad community, they are primarily set up to benefit their members. In a CS, members benefit through their participation in the business. This can, for instance, be demonstrated through a trading or transactional relationship between the co-operative and its members. In community energy generation projects, the sale of energy to members could constitute this relationship.	A community benefit society exists for community benefit, rather than the benefit of members. This is safeguarded through a legal requirement for community benefit societies to conduct their business for the benefit of the community.
We want to be able to sell energy to the community	While it is an appropriate use of the CS model to sell energy to their members, commonly known as “local energy supply”, there are currently technical, regulatory and other challenges which mean that most groups will sell electricity to the national grid, instead. Under these circumstances, it is difficult to demonstrate that members can participate in the business of the CS in the way that is described in the FCA guidance. Therefore, currently the CBS model may be a more appropriate model for community energy generation groups who are aiming to achieve sustainable revenue and provide long-term benefits to the community.	While it is an appropriate use of the CS model to sell energy to their members, commonly known as “local energy supply” there are currently technical, regulatory and other challenges which mean that most groups will sell electricity to the national grid instead. An appropriate use of the CBSs model is to sell electricity direct to the national grid, and reinvest the profits this generates for the benefit of the community. This model may be worth considering if you are aiming to achieve sustainable revenue for your group and provide long-term benefits to the community.
We want to be able to distribute profits	While CSs are allowed to distribute profits there are certain limitations that apply that restrict this being an option for community energy schemes, including those set as follows: *Members can receive dividends, provided they are distributed on the basis of their level of transactions with the CS. If there are no transactions between the CS and its members, this may suggest that the CS form is less likely to be an appropriate model for community energy generation groups. Interest on share capital should not be used as a substitute for dividends; *CSs have no statutory provision for an asset lock. Therefore assets can be distributed among members, although certain limitations may apply depending on the rules determined by the members. Interest on share capital is considered a pre-profit expense and as such is not considered a profit.	CBSs are not allowed to distribute profits, dividends or other surpluses to their members. Financial gain and other surpluses must be reinvested in the primary function of the business, or other activities that benefit the community. CBSs can give this legal force through a statutory asset lock that is set out in CBS legislation, which prevents the assets of a CBS, (including profits or other surpluses generated such as electricity) from being used other than for the benefit of the community. Not all CBSs have an asset lock. To be effective the asset lock must be included in the rules of the CBS.
We want to be able to raise share capital and provide a return to member investment over the long term	Issuing share capital is an important way for CSs to finance their projects. The FCA is supportive of access to this form of capital from CS members, provided that member participation, rather than interest on share capital, is the primary motivation for CS members. CSs cannot be used as investment vehicles and so are required to adhere to the following principles that limit financial returns for investors: *CSs can pay interest on share capital, though this must always be as a pre-profit expense and never as a form of profit distribution; *Any rate of interest on shares may be no more than is sufficient to attract and retain investment; *It has previously been suggested that interest rates that are typically provided on savings accounts may be sufficient to attract investment. However, if these are not sufficient, then higher interest rates may be provided by CSs, sufficient to attract and retain investment. Groups that wish to provide a higher return on investment to their members could consider setting up a Community Interest Company limited by shares	Issuing share capital is an important way for CBSs to finance their projects. The FCA is supportive of access to this form of capital from CBS members, provided that community benefit, rather than interest on share capital, is the primary motivation for CBS members. CBSs cannot be used as investment vehicles and so are required to adhere to the following principles that limit financial returns for investors: *CBSs can pay interest on share capital, though this must always be as a pre-profit expense and never as a form of profit distribution; *Any rate of interest on shares should be no more than is sufficient to attract and retain investment; *It has previously been suggested that interest rates that are typically provided on savings accounts may be sufficient to attract investment. However, if these are not sufficient, then higher interest rates may be provided by CBSs, sufficient to attract and retain investment. Groups that wish to provide a higher return on investment to their members could consider setting up a Community Interest Company limited by shares.