UK: Prospects For Energy Service Companies

Last Updated: 3 December 2008

By Stephen Cirell and Peter Walker

The area of climate change is of increasing importance to local authorities. Not only are there key issues such as compliance targets for emissions under the Climate Change Bill to address, but the wider context of energy procurement in a market where prices are likely to increase sharply over coming years.

In these circumstances, local authorities should be looking to the future and to finding solutions that will help them comply with these targets and dovetail with their Sustainable Community Strategy and other policies.

If it were possible to find solutions to those issues, which also ticked a wide variety of other boxes (such as Gershon efficiency and Best Value, Community Leadership, and Economic Regeneration, to name but a few) then local authorities would be very interested. We believe these solutions are now on the horizon.

The preferred model pivots around an ESCO - an Energy Services Company - which will be wholly owned by the Council. It is necessary for the company model to be used, as the operation will need to be based on a commercial footing in order to lever in appropriate funding. In addition long term operational contracts will need to be set up by the company to manage the energy infrastructure, perform metering and billing functions and set the price for renewable and low carbon energy supplied to the recipients.

The Council will, firstly, need to determine its needs in terms of energy usage. It will, of course, have to do this anyway as part of the new emissions targets under the Climate Change Bill. The magnitude of this task alone should not be underestimated.

This might include its own civic buildings (the Town Hall, libraries and office blocks) as well as district offices, schools and social housing. Knowing the amount and type of energy usage will allow the authority to calculate its renewable energy requirements and also its cost and carbon savings when those renewable sources come on line.

Taking the example of the Council's civic buildings, the Council can enter into a contract with its ESCO for future energy supply, although a procurement exercise will be required. On the back of the income stream, the ESCO can raise capital to fund the building of the infrastructure works (whether this be a biomass boiler, solar, wind or hydro power facilities). Once the funding has been secured, the design and construction of the facilities can be procured by the ESCO and then green energy will come on stream when they become operational.

This model could then develop further in an incremental fashion, once up and running. It would be relatively easy to expand the reach of the arrangements to other civic buildings, such as social housing, and to other public bodies such as hospitals or other government offices. Further, connections to the networks could be offered to both new build development sites (potentially increasing land value) and existing private sector developments who see low carbon and renewable energy sources as an essential feature to their own compliance with Climate Change policies.

Each time the energy needs are contractually secured, the ESCO will go through the same steps of determining how those needs are best met and then procuring the design and construction of the new or extended facilities.

Which direction the Council goes in will depend on its own needs, but two obvious areas of benefit are social housing and social care. Social housing targets for new homes by 2020 are very unlikely to be met. If funding could be secured to purchase housing or land, whilst prices are fairly low in the recession, retro fitting of green heating and energy facilities would dovetail perfectly with this to create an attractive scheme fulfilling number of key policy areas. As controller of the ESCO, both security of supply and protection of those in fuel poverty can be managed by the Council.

The proposals also offer the prospect of economic regeneration in an area. The Council could introduce land in its ownership and with planning permission for light industrial or similar uses into the scheme. The offer of completely "green" energy at a competitive price to tenants of the industrial estate might well be enough to attract new investment into the Council's area, thereby creating jobs and other economic benefits. APSE research has already shown that for every £1 spent in a Council's area, it gets £1.46 of benefit. With high energy costs such a focus for industry, a zone offering discounted low carbon energy could form the catalyst for economic stimulation.

Most local authorities seek practical manifestations of their 'community leadership' role. What better example could there be than facilitating the supply of green energy more widely to the public sector in a region, which benefits all users in both the pricing structures and ability to claim ROCs (Renewable Obligation Certificates) with a monetary value? This is the sort of good news that everyone will want to share in.

But the best part of this proposal is that the Council is creating valuable new 'family silver', which remains in its ownership, rather than transferring energy assets to the private sector. Perhaps the closest example of this type of approach would be the civic airports, where legislation in 1986 required them to be set up as companies and run commercially, but many still remain as valuable local authority assets, run at arms length, such as Manchester International Airport.

We believe that these proposals offer excellent benefits including the following:

  • secure sources of energy;
  • all renewable in nature;
  • considerable cost benefits in energy prices;
  • protection against fuel povety for the vulnerable
  • greater effectiveness;
  • economic development and regeneration;
  • significant carbon emissions reduction
  • community leadership; and
  • neutral funding.

That should be sufficient to win over even the most ardent of critics. Which will be the first local authority to take the plunge?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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