2409 fey esco rep 1-x (website)

The Low Carbon Economy: A delivery framework for local authorities

1 FOREWORD 4

2 EXECUTIVE SUMMARY 6

3 BACKGROUND 8

4 INTRODUCTION 10

5 ENERGY SERVICE COMPANIES 12 5.1 Southampton Council - Utilicom Partnership 14 5.2 Kirklees Energy Services 16 5.3 Mill Energy Services 18 5.4 Toronto Better Buildings Partnership 20

6 FRAMEWORK DEVELOPMENT 23

7 PROPOSED DELIVERY FRAMEWORK FOR LOCAL AUTHORITIES 25 - Local Strategic Body 26 - Energy Advice Centres 26 - Energy Efficiency Funding 26 - Renewable Energy Special Purpose Vehicles 26 - Strategic Body - Joint Ventures 26

8 ADDITIONAL CONTENT 27

This document is a summary version and does not contain the legal advice given by Brodies on establishing a delivery framework. However, access to the full report is available at www.fey.org.uk/escos

A summary of the Additional Content is shown on page 27.

FEY Future Energy Yorkshire

CERT Carbon Emissions Reduction Target

CHP Combined Heat and Power

CIC Community Interest Company

CRC Carbon Reduction Commitment

ESCo Energy Service Company

JV Joint Venture

LLP Limited Liability Partnership

RES Regional Economic Strategy

SPV Special Purpose Vehicle

TAP Technical Advisory Panel

Acronyms Contents

2 3

1 FOREWORD 4

2 EXECUTIVE SUMMARY 6

3 BACKGROUND 8

4 INTRODUCTION 10

5 ENERGY SERVICE COMPANIES 12 5.1 Southampton Council - Utilicom Partnership 14 5.2 Kirklees Energy Services 16 5.3 Mill Energy Services 18 5.4 Toronto Better Buildings Partnership 20

6 FRAMEWORK DEVELOPMENT 23

7 PROPOSED DELIVERY FRAMEWORK FOR LOCAL AUTHORITIES 25 - Local Strategic Body 26 - Energy Advice Centres 26 - Energy Efficiency Funding 26 - Renewable Energy Special Purpose Vehicles 26 - Strategic Body - Joint Ventures 26

8 ADDITIONAL CONTENT 27

This document is a summary version and does not contain the legal advice given by Brodies on establishing a delivery framework. However, access to the full report is available at www.fey.org.uk/escos

A summary of the Additional Content is shown on page 27.

FEY Future Energy Yorkshire

CERT Carbon Emissions Reduction Target

CHP Combined Heat and Power

CIC Community Interest Company

CRC Carbon Reduction Commitment

ESCo Energy Service Company

JV Joint Venture

LLP Limited Liability Partnership

RES Renewable Energy Strategy

SPV Special Purpose Vehicle

TAP Technical Advisory Panel

Acronyms Contents

2 3

As a nation, we are responding by setting challenging targets for renewable energy and carbon emissions reductions and backing these up with policies and measures to drive through a transformation in the way we generate and use our energy resources.

The Renewable Energy Strategy sets out an unprecedented challenge for the UK, stating that 15% of all the UK’s energy should come from renewable sources by 2020; in 2006 our capacity was believed to be 1.5%. If we are to meet our 2020 target, we require billions of pounds to be invested in new energy projects over the next 12 years. As a region, Yorkshire and Humber has set its own target of a 20-25% reduction in greenhouse gas emissions by 2016 and has identified minimum targets for renewable energy capacity at local authority (LA) level.

Local authorities are uniquely placed to provide vision and leadership in taking forward emission reduction projects. It is estimated that they directly contribute approximately 1% of national CO2 emissions and have influence over much greater levels of emissions in their communities from business, transport and householders. According to DEFRA, 100 out of 150 top tier authorities have set targets to reduce CO2 emissions from their communities by 4-15% as part of the new Local Area Agreements which apply from April 2009.

National Indicators 185 (percentage CO2 reduction from LA operations), 186 (per capita CO2 emissions in the LA area), 187 (tackling fuel poverty) and 188 (planning for climate change) are the key performance measures affecting authorities. LA’s are putting in place strategies and delivery plans to ensure success. This report draws on the experience of a number of LA’s and views from private sector businesses in developing a framework for the delivery of sustainable and renewable energy projects, key to delivering CO2 emission reductions and helping authorities to achieve their objectives under the indicators.

These new challenges may at first appear daunting and complex; however, there is a definite case for LA’s to see climate change and decentralised energy as opportunities for economic growth, in terms of new businesses, job creation and longer term stability.

Climate change has been described as the greatest ever threat to society.

Urgent action is needed if we are to reach our targets and deliver the maximum improvement to our communities. We believe that our proposals in this report represent a robust framework within which LA’s can bring forward projects for development, leverage private sector finance and ensure that LA’s and their communities can benefit from the investment in renewable energy over the coming decade.

Joanne PollardManaging DirectorThe Yorkshire and Humber Sustainable Futures Co. Ltd.

1 Foreword...

4 5

© Denzil Watson/BBC South Yorkshire

Brightside Lane, Sheffield, June 2007

The aim of this report is to provide guidance and advice to Yorkshire and Humber’s local authorities in establishing frameworks for the development and ownership of low carbon energy initiatives. It is designed to explain the reasons for and practicality of local authorities employing Special Purpose Vehicles, Joint Ventures and Energy Service Companies (ESCo’s) for delivering low carbon projects. The report presents a number of practical case studies as well as summarising the work undertaken by Future Energy Yorkshire (FEY) in partnership with the region’s local authorities, via an ESCo steering group. The purpose of this group was not only to encourage knowledge transfer but to determine common themes and aspirations, enabling the development of a LA framework for project delivery.

The findings of this research suggest that it is possible for LA’s to adopt delivery frameworks for project development and deployment. Given the importance of the energy/low carbon agenda, a focused vehicle for taking forward and implementing strategy and policy in those areas is seen as advantageous.

It was found that a strategic body should not implement all of its projects through a single procured private sector partner as it would be likely to result in a loss of control and ownership at local authority level. Also, relying too heavily on a preferred partner may restrict the variety of projects which might be proposed by the strategic body.

Findings suggest that the strategic body should be established as a private company limited by guarantee and with an asset lock to ensure that income generated by a strategic body will be ploughed back into further initiatives.

Public procurement law is likely to apply to a strategic body and probably also to special purpose vehicles (SPV’s) which it may establish for specific projects. Where the strategic body or SPV is providing utility services the utilities procurement rules may apply.

Expert advice has shown that the legal/corporate structures for any subsidiaries of a strategic body are for the strategic body to determine. However, funding considerations and relevant levels of expertise are likely to result in joint venture approaches, with the private sector being used for individual projects.

The practicality and legality of the proposed delivery framework is discussed under Additional Content (page 27) which is supplementary to this report.

While there are likely to be services which FEY may be able to provide to strategic bodies, its most important role may well be that of bringing together, coordinating and facilitating the region-wide panel. That panel should act as an interface between the various public sector strategic bodies and private sector partners in the region, so that that knowledge and expertise is shared about possible opportunities for the private sector.

Can you tell me whatan ESCo actually is?

Energy Service Companies (ESCo’s)An ESCo is a company that provides a customer with energy supply solutions (such as heating and lighting) rather than simply gas and electricity. An ESCo could provide a customer with a combination of energy-saving advice and equipment, renewable generation, planned maintenance, fuel and finance. The Government recognises that ESCo’s offer a useful model for market delivery of its energy objectives, as they can bring together different areas of expertise, skills and investment to facilitate the cost-effective development and implementation of distributed energy systems.

2 Executive Summary...

6 7

FEY is a business unit within the Yorkshire and Humber Sustainable Futures Company, a company limited by guarantee and a wholly owned subsidiary of Yorkshire Forward, the regional development agency.Future Energy Yorkshire has been established to secure the economic opportunities arising from new and renewable energy technologies and projects across the Yorkshire and Humber region and to deliver greenhouse gas emissions reductions to meet regional targets.

Future Energy Yorkshire establishes commercial partnerships with private and public sector organisations to fill knowledge gaps, bridge market failures and bring to fruition renewable energy projects that will deliver significant greenhouse gas savings and economic benefits to the region.

Brodies LLP is a commercial law firm which provides legal guidance to both public and private sector organisations. Brodies’ core business areas comprise of real estate, corporate, banking and finance, IT, employment, litigation and private client law.

Brodies won the tender to evaluate the legality of the proposed delivery framework for local authorities.

Brodies demonstrated extensive experience on the legality of public sector delivery vehicles, ESCo’s and public/private partnerships, some specific examples are as follows:

• London Energy Partnership;

• Renew Services Limited;

• Wycombe District Council;

• Nottingham Energy Partnership;

• Plymouth City and Southwark Borough Councils;

• Aberdeen Heat and Power Company.

3 Background...

8 9

The climate change and low carbon agenda is quickly gathering pace. The Government is keen to create local accountability for carbon emissions and encourage the deployment of renewable/low carbon technologies.The obligations and expectations placed upon LA’s can be found in greater detail in each of the following key strategy and policy documents:

• Climate Change Bill;

• Carbon Reduction Commitment;

• Energy White Paper;

• Local Government White Paper;

• Supplementary Planning Policy Statement 1;

• Building a Greener Future; and

• Code for Sustainable Homes.

As a region, Yorkshire and Humber has set its own challenging targets to reduce greenhouse gas by 20-25% by 2016 (Regional Economic Strategy, see diagram below) and has identified minimum targets for renewable energy at a local authority level.

The Climate Change Bill puts into statute the UK’s targets to reduce carbon dioxide emissions through domestic and international action by at least 80 per cent (once 60%) by 2050 and at least 26 per cent by 2020 (currently under revision), against a 1990 baseline. From January 2010 the Carbon Reduction Commitment (CRC) will apply mandatory emissions trading to large commercial and public sector organisations, including LA’s, with annual electricity use above 6,000MWh. The scheme will feature an introductory phase of three years, during which allowances will be sold at the fixed price of £12/tCO2.

In the Local Government White Paper, the Government committed to implementing a new streamlined performance framework. “The backbone of the new framework is the 198 indicators against which local government will begin to report its performance from April 2008. The national indicator set is designed to measure progress against agreed national priority outcomes in local area agreements. From 2008 this will become a much more powerful framework for devolved governance, with local areas better able to determine how to coordinate and deliver services in their area. Pooled funding, for example, will enable delivery partners to work together towards shared outcomes for their citizens.”

Action by LA’s will be critical to the achievement of the Government’s climate change objectives. Local authorities are uniquely placed to provide vision and leadership to local communities by raising awareness and influencing

behaviour change. In addition, through their powers and responsibilities (housing, planning, local transport and powers to promote well-being) and by working in partnership, LA’s can have significant influence over emissions in their local areas.

Local authorities and their communities have an opportunity to be sustainable energy pioneers, as set out in Planning Policy Statement 1. Local authorities are significant purchasers of energy services and can therefore act as a catalyst for energy projects. Leading by example LA’s also have the potential for their portfolio of buildings to provide long-term supply contracts, ensuring security for community energy projects.

More homes are needed to meet the rising demands of a population that is both increasing and ageing. The Government has set a target to provide three million more homes in England by 2020 which will include more affordable homes to rent or buy. The Government has stated that all new homes should be zero carbon by 2016; these targets cannot be delivered by energy efficiency improvements alone, constituting a huge challenge for both the developer and the local authority.

Local authorities are now at the forefront of the low carbon agenda; most are feeling the pressure to act strategically, deliver lower cost energy and reduce carbon emissions. The issues are complex and there is growing need for action. FEY invites LA’s to consider the use of locally based strategic bodies to interpret local and wider policy requirements and manage delivery mechanisms, such as Energy Service Companies (ESCo’s).

4 Introduction...

10 11

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Year

1990 2000 2010 2020 2030 2040 2050

Target

Emissions

RES Target20-25%

Reduction

NationalTarget 85%Reduction

National and Regional CO2 Targets

The climate change and low carbon agenda is quickly gathering pace. The Government is keen to create local accountability for carbon emissions and encourage the deployment of renewable/low carbon technologies.The obligations and expectations placed upon LA’s can be found in greater detail in each of the following key strategy and policy documents:

• Climate Change Bill;

• Carbon Reduction Commitment;

• Energy White Paper;

• Local Government White Paper;

• Supplementary Planning Policy Statement 1;

• Building a Greener Future; and

• Code for Sustainable Homes.

As a region, Yorkshire and Humber has set its own challenging targets to reduce greenhouse gas by 20-25% by 2016 (Regional Economic Strategy, see diagram below) and has identified minimum targets for renewable energy at a local authority level.

The Climate Change Bill puts into statute the UK’s targets to reduce carbon dioxide emissions through domestic and international action by at least 80 per cent (once 60%) by 2050 and at least 26 per cent by 2020 (currently under revision), against a 1990 baseline. From January 2010 the Carbon Reduction Commitment (CRC) will apply mandatory emissions trading to large commercial and public sector organisations, including LA’s, with annual electricity use above 6,000MWh. The scheme will feature an introductory phase of three years, during which allowances will be sold at the fixed price of £12/tCO2.

In the Local Government White Paper, the Government committed to implementing a new streamlined performance framework. “The backbone of the new framework is the 198 indicators against which local government will begin to report its performance from April 2008. The national indicator set is designed to measure progress against agreed national priority outcomes in local area agreements. From 2008 this will become a much more powerful framework for devolved governance, with local areas better able to determine how to coordinate and deliver services in their area. Pooled funding, for example, will enable delivery partners to work together towards shared outcomes for their citizens.”

Action by LA’s will be critical to the achievement of the Government’s climate change objectives. Local authorities are uniquely placed to provide vision and leadership to local communities by raising awareness and influencing

behaviour change. In addition, through their powers and responsibilities (housing, planning, local transport and powers to promote well-being) and by working in partnership, LA’s can have significant influence over emissions in their local areas.

Local authorities and their communities have an opportunity to be sustainable energy pioneers, as set out in Planning Policy Statement 1. Local authorities are significant purchasers of energy services and can therefore act as a catalyst for energy projects. Leading by example LA’s also have the potential for their portfolio of buildings to provide long-term supply contracts, ensuring security for community energy projects.

More homes are needed to meet the rising demands of a population that is both increasing and ageing. The Government has set a target to provide three million more homes in England by 2020 which will include more affordable homes to rent or buy. The Government has stated that all new homes should be zero carbon by 2016; these targets cannot be delivered by energy efficiency improvements alone, constituting a huge challenge for both the developer and the local authority.

Local authorities are now at the forefront of the low carbon agenda; most are feeling the pressure to act strategically, deliver lower cost energy and reduce carbon emissions. The issues are complex and there is growing need for action. FEY invites LA’s to consider the use of locally based strategic bodies to interpret local and wider policy requirements and manage delivery mechanisms, such as Energy Service Companies (ESCo’s).

4 Introduction...

10 11

100

90

80

70

60

50

40

30

20

10

0

Mill

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Tonn

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quiv

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Year

1990 2000 2010 2020 2030 2040 2050

Target

Emissions

RES Target20-25%

Reduction

NationalTarget 85%Reduction

National and Regional CO2 targets

The precise role and responsibilities of an ESCo are tailored to meet the needs of the specific project or initiative. In general, ESCo’s are used to deliver the following objectives:• CO2 reduction;• Renewable energy projects;• Energy savings;• Energy efficiency services;• Energy advice; or• Tackling fuel poverty.However, this list is not exhaustive and one of the main benefits of an ESCo is its flexibility.The use of the word ‘company’ in the title can sometimes be misleading. In fact the organisation need not be a company formed under the Companies Act. Usually an ESCo is a company limited by shares or by guarantee, but in some cases it may instead be an industrial and provident society or a trust.

ESCo’s may be used to oversee the financing, construction, operation and maintenance of the system. However the precise responsibilities of the ESCo will be tailored to meet the needs of the individual scheme.

An Energy Service Company (ESCo) is not a magic wand that makes an unviable project viable, however, an ESCo may take a different view on acceptable rates of return and risk than other companies.

The structure of an ESCo will depend on the specific details of the project or purpose, and/or be influenced by the attitudes towards funding and risk. As with most businesses, the organisation’s structure can also be influenced by the degree of experience and knowledge within the ESCo’s ownership or by the sheer scope of the project or service.

An ESCo may be 100% privately owned or 100% publicly owned, or a public/private partnership where shared funding, risk and expertise come together to present the best solution for all parties.

“Traditionally, energy companies have prioritised financial benefits over other objectives. Their need to deliver shareholder value obliges them to require financial returns that marginalise technical options which could provide lower carbon impacts and better energy services to end users.

Over the years various communities – either groups of residents, housing associations or local authorities, sometimes in partnership with energy companies – have sought to develop new models that re-balance these priorities in favour of the public good. Generically, these models have come to be known as Energy Service Companies (ESCo’s).”

Energy Service Companies...5

12 13

ESCo

When deliveringtechnically

complex solutions

Project not mainstream

businessLack of skills

and resources

Project requires rapid delivery

Project may require operational

responsibilities

Returns may be long term

Project may be capital intense

Why use an ESCo?

Michael King

Associate Director, CHPA Chairman, Aberdeen Combined Heat & Power Co.

5.1

Aim...A competitive price for businesses and an affordable price for householders, whilst making significant reductions in the city’s carbon emissions. Southampton City Council intends to advocate sustainable development, through demonstrating its commitment to energy efficient services and sustainable energy solutions.

Structure...

Mechanism...Southampton Geothermal Heating Company Ltd was created through a co-operation agreement between Southampton City Council and Utilicom (a specialist energy management company). The ESCo is solely owned by Utilicom so as to minimise risk for the local authority. Utilicom’s obligation was to finance, construct and operate the scheme’s initial development, and it had a reciprocal obligation to co-operate with the Council in later, wider development. For its part, the Council made available very valuable city centre land for a well, wellhead equipment and a sizeable heat station building. It granted licences and wayleaves for laying distribution mains and assisted with the planning processes. It also established a multi-disciplinary project team to assist in the development, and made bids to the European Union for financial support for the scheme.

Outcome...A geothermal well is used alongside a CHP generator to provide energy to local residents and businesses. 11,000 tonnes of carbon emissions are avoided annually and the council benefits from a profit share arrangement which is reinvested into other energy programmes.

Southampton Council andUtilicom Partnership...

14 15

ESCoSouthampton

Geothermal HeatingCompany Ltd.

Gas CHP

Finance

EnergyEfficiency

GeothermalEnergy

SouthamptonCity Council

PrivateSector Partner

ESCoCustomers

Heating, Cooling& Electricity

West YorkshireHousing

Partnership

Other Local

Authorities

Aim...The key areas of work are housing, small businesses and renewable energy. The principal objectives are: reducing greenhouse gas emissions, alleviating fuel poverty, raising awareness of energy and environmental issues and creating local employment opportunities.

Mechanism...Kirklees Energy Services (KES) was established in May 2000 by Kirklees Council to deliver quality services to local households as part of the European Union SAVE II programme. Kirklees Energy Services is a not for profit company limited by guarantee, in effect a social enterprise. During its initial years KES has successfully delivered a wide range of initiatives and projects on behalf of the public sector, equating to over £10 million spend.

In July 2008 KES was successful in obtaining the prestigious Energy Saving Trust Advice Centre contract to provide independent and impartial energy advice to households in South and West Yorkshire over the next three years.

Outcome...The approach of Kirklees Council demonstrates that a proactive local authority can support the development of fledging companies for the benefit of the local community. This approach has proven to be such a success that KES was awarded the EU ManagEnergy award for 2008. Kirklees Energy Services are strong advocates for the partnership approach, minimising risk to public sector organisations, whilst focussing on delivering the most cost effective solutions for a low carbon society.

Kirklees Energy Services...

16 17

Structure...

ESCoKirklees

Energy Services

CORE SERVICES• Project management• Advice centre• Information maps• Energy surveys• Energy certificates

KirkleesMetropolitan

Council

ApprovedContractors

“Hard toheat”

Free insulation, gas connection, solar thermal,

ground source.

“Warmzone”

Free loft and/or cavity insulation.

“Affordablewarmth”

Free central heating for households in fuel poverty,

free gas connection.

“Energyloans”

Interest free loans for energy efficiency

improvements.

HOUSEHOLDERSHOUSEHOLDERS HOUSEHOLDERS HOUSEHOLDERS

The diagram below shows only a fraction of the current programmes KES is delivering, for more information please visit the KES website www.energy-help.org.uk

5.2

LowryRenaissance

Ltd

Aim...To meet the commitment of the developer to ensure that the refurbished apartments are net zero carbon and that carbon emissions from ground floor commercial properties are minimised.

Mechanism...Lowry Renaissance created an ESCo (wholly owned by the residents and tenants of the building) to operate and maintain the renewable energy assets and to create revenue to cover ongoing costs including plant replacement. Lowry partnered with ESD (a specialist energy consultancy) to determine the most cost effective solution. European grants support the installation of solar PV and UK grants support the biomass CHP project; however the majority of investment risk is borne by Lowry Renaissance.

Outcome...All occupants are currently served by a 50kWp photovoltaic system, a private wire grid connection, communal gas boilers and water from an on-site borehole. Biomass CHP is due to come online in the near future to provide heating and electricity. This will result in approximately a 600 tonne reduction in CO2 emissions annually. Various energy saving measures, including high specification windows, insulation and mechanical ventilation heat recovery were also installed. ESD have gone on to develop subsequent ESCo schemes principally in the residential market.

Mill Energy Services...

Structure...

ESCoMill EnergyServices Ltd

Solar PVBiomassCHP

BoreholeWater Supply

Finance

EnergyEfficiency

Titanic MillManagement

Company

ESCoCustomers

Heating, Drinking Water & Electricity

5.3

18 19

EnergyEfficiency

OfficeVestar

BESTo Group

AmerescoCanada

Aim...The City of Toronto, Canada’s largest municipality, was committed to promoting and implementing energy efficiency, building renewal programmes and other initiatives in order to address the challenge of global warming and its climate change impact. In January 1990 an official commitment was made to reduce the city’s net CO2 emissions by 20 per cent, relative to 1988 levels, by the year 2005. The newly amalgamated City of Toronto reaffirmed its goal, readjusting the base year to 1990 to align itself with the Kyoto Protocol.

Mechanism...In 1996 the city authority and two Canadian energy supply companies formed the Toronto Better Buildings Partnership. The partnership employed several contractors to install new technology (boilers, air conditioning, lighting etc.), renovate buildings, increase energy efficiency and provide training. The City of Toronto began by retrofitting its own buildings. In 1996 the first non-government building of the BBP pilot project (Metro Toronto YMCA) was retrofitted with these new technologies. The first major private sector building - First CanadianPlace - was retrofitted in 1997. The full-scale BBP project began in 1999, with the participation of the Toronto Dominion Centre. • Interest-free loans were offered to public and non-profit

building owners; • The programme incorporated innovative financial strategies

beyond traditional energy service financing to enhance the attractiveness of the programme to building owners, the energy service community and the financial community;

• Prequalifying of energy management firms facilitated the process;

• Loan repayment insurance removed a barrier to obtaining financing;

• Participation was also encouraged by guaranteeing savings.

Outcome...636 existing buildings are now part of the scheme, which has led to operational savings (energy use etc.) of $19 million per year. The measures implemented have resulted in reducing carbon dioxide emissions by 200,500 tonnes per year.

Structure...

Toronto Better Buildings Partnership...

20 21

Finance

CanadaInfrastructure

Works Programme

ESCoCustomers

10 Year Energy Contract,Ventilation, Glazing

& Insulation Training

EnergyEfficiency

RenewableFuel Use

BuildingRenovations

Atmospheric Fund

PrivateSectorPartner

PrivateSectorPartner

ESCoBetter Building

Partnership

5.4

6 Framework Development“In my opinion delivering a district energy scheme does not require a

partner or a partnership, however, it does make life a lot easier and the

probability of success, I think, is much greater.

Delivery can be complex and the partnership route is one that works

and works particularly well.”

In autumn 2007, FEY conducted a series of workshops for local authorities within the region and subsequently formed the regional ESCo steering group. In running the workshops and forming the steering group it became clear that different local authority members have different drivers for the development of strategic bodies and see differing ownership structures and roles for strategic bodies.

The main aims of the ESCo steering group are as follows:

• Development of model(s) to deliver the functions required of ESCo’s by LA’s. This may include models for the ownership of other energy assets (e.g. wind developments) that deliver revenues to support ESCo operations;

• Development of appropriate structures for delivering ESCo’s, ensuring integration with other related activities of LA’s;

• Identification of services and support required by LA’s to bring forward projects and development thereof;

• Development of a procurement strategy for ESCo services.

The group discussed developing a common approach to developing legal frameworks and it was recognised that there were benefits in authorities working together even when local priorities differed. A generic structure was soon developed, however a number of legal and practical questions remained unanswered and required the appointment of a specialist service.

Acting on behalf of the steering group members, FEY tendered legal support services and appointed Brodies LLP.

Consultation...Brodies attended an ESCo steering group to identify and address each authority’s key questions in adopting a delivery framework, common topics included:

• their views on the establishment of an arm’s length strategic body;

• their respective level of participation in that entity;

• any concerns about on/off balance sheet treatment;

• any issues in relation to possible trading activities;

• attitude to risk; and

• the potential role of FEY in delivery.

Mike Smith

Commercial Director, UtilicomFormer Executive Director for Southampton City Council

22 23

Further consultation with the steering group identified some specific issues for local authorities, these are listed below:

• There was general agreement with the concept of establishing a local authority strategic body, but one concern was expressed that this body should not be given a remit which could put it at odds with council policy and activities;

• There was general agreement, on the local authority level of participation, that substance rather than form should prevail in terms of the level of local authority influence, control and financing;

• There was an even split of views on whether membership should be restricted to the local authority alone or extended to other public and voluntary sector bodies;

• There was no view that the impact of the introduction of International Financial Reporting Standards to the public sector would necessarily impact on preferred structures;

• When considering SPV’s, risk and the apportionment of risk as between the public and private sector would be assessed on a case by case basis;

• On the possibility that certain projects might involve the local authority in commercial trading, the view again was that this would be assessed on a case by case basis;

Continued...

• If a portfolio of activities and projects were built up over time underneath the strategic body, there would be concerns about these projects potentially being on the balance sheet of the local authority. There were views that this could not be assessed at this stage, that off/on balance sheet issues would be only a secondary consideration or that they would be only one consideration;

• There were a number of differences in the nature of officer (as opposed to elected member) buy-in that would be required for the setting up of a strategic body, but nothing that was considered unachievable;

• On the role of FEY, all agreed that it is a potential source of technical and commercial support and that it could have a role in sharing information and best practice across strategic bodies on a regional basis, while there was an even split on whether FEY should be a member of an individual local authority strategic body.

These concerns are discussed by Brodies in some depth within the Additional Content (see page 27).

24 25

EnergyAdviceCentres

EnergyEfficiency

ProgrammeFunding

RenewableEnergyProject

(SPV) (POSSIBLE JV’S)

ESCoJV

RegionalPanel

LA Strategic Bodies Board, Steering Group,

FEY, TAP Members

Technical Advisory

PanelLA Strategic Bodies

Board, FEY, Private Sector

LocalAuthority

Other PublicSector

Stakeholders

SPV - Special Purpose Vehicle. JV - Joint Venture

RECYCLING REVENUE£££££££ £££££££££ £££££££££ £££££££

£££

£££

£

£££

£££

£

Private SectorPartner

LocalStrategic

Body(SPV)

7 Proposed Delivery Framework for Local Authorities

Further consultation with the steering group identified some specific issues for local authorities, these are listed below:

• There was general agreement with the concept of establishing a local authority strategic body, but one concern was expressed that this body should not be given a remit which could put it at odds with council policy and activities;

• There was general agreement, on the local authority level of participation, that substance rather than form should prevail in terms of the level of local authority influence, control and financing;

• There was an even split of views on whether membership should be restricted to the local authority alone or extended to other public and voluntary sector bodies;

• There was no view that the impact of the introduction of International Financial Reporting Standards to the public sector would necessarily impact on preferred structures;

• When considering SPV’s, risk and the apportionment of risk as between the public and private sector would be assessed on a case by case basis;

• On the possibility that certain projects might involve the local authority in commercial trading, the view again was that this would be assessed on a case by case basis;

Continued...

• If a portfolio of activities and projects were built up over time underneath the strategic body, there would be concerns about these projects potentially being on the balance sheet of the local authority. There were views that this could not be assessed at this stage, that off/on balance sheet issues would be only a secondary consideration or that they would be only one consideration;

• There were a number of differences in the nature of officer (as opposed to elected member) buy-in that would be required for the setting up of a strategic body, but nothing that was considered unachievable;

• On the role of FEY, all agreed that it is a potential source of technical and commercial support and that it could have a role in sharing information and best practice across strategic bodies on a regional basis, while there was an even split on whether FEY should be a member of an individual local authority strategic body.

These concerns are discussed by Brodies in some depth within in the Additional Content (see page 27).

24 25

EnergyAdviceCentres

EnergyEfficiency

ProgrammeFunding

RenewableEnergyProject

(SPV) (POSSIBLE JV’S)

ESCoJV

RegionalPanel

LA Strategic Bodies Board, Steering Group,

FEY, TAP Members

Technical Advisory

PanelLA Strategic Bodies

Board, FEY, Private Sector

LocalAuthority

Other PublicSector

Stakeholders

SPV - Special Purpose Vehicle. JV - Joint Venture

RECYCLING REVENUE£££££££ £££££££££ £££££££££ £££££££

£££

£££

£

£££

£££

£

Private SectorPartner

LocalStrategic

Body(SPV)

7 Proposed Delivery Framework for Local Authorities

Local Strategic Body...FEY proposes that the main purpose of a strategic body will be to provide the local authority with a focused vehicle for interpreting, prioritising and overseeing the delivery of local authority low carbon energy policies.

The strategic body’s main objective would be providing a mechanism by which funds can be invested in economically attractive low-carbon energy projects, with revenues recycled to support less attractive projects and to assist in funding the development of future projects.

It is proposed by FEY that each participating local authority establishes a strategic body, responsible for the delivery of energy related activities.

Additionally, FEY also hopes that by establishing a common vehicle, private sector partners will be encouraged to partner local authorities in individual project development. FEY also believes that there may be possible procurement benefits through the establishment of framework agreements with strategic private sector partners.

Energy Advice Centres...Some steering group members have indicated they wish to operate Energy Advice Centres and FEY believes that these could be managed and funded by the related strategic body. However, FEY considers that such services do not fall within its support activities remit.

Energy Efficiency Funding...FEY considers that the strategic body could provide the management support for the delivery of energy efficiency funding support. FEY believes that the existence of the strategic body would provide a useful focus for establishing relationships with energy suppliers required to deliver energy saving and micro-generation solutions in terms of their Carbon Emission Reduction Targets as regulated by OFGEM.

FEY considers that its remit does not currently extend to energy efficiency but it sees a potential role for itself in developing relationships between strategic bodies (and the steering group) and supplier partners for the delivery of such measures.

Renewable Energy Special Purpose Vehicles...FEY anticipates that the strategic body may wish to develop stand-alone renewable energy projects. These projects may require the establishment of a separate SPV or ESCo in order to obtain any necessary project financing from lenders.

Strategic Body -Joint Ventures...The strategic body may also wish to create joint venture (JV) companies with renewable energy project developers, for example, in the development of heat networks and the supply of heat. Such operations invariably require long term contracts, with the local authority entering into a related off-take contract in order that finance can be secured for the development of the network.

8 BRODIES PRACTICAL AND LEGAL OVERVIEW 8.1 Introduction 8.2 Local authority strategic body 8.3 Possible alternative structures 8.4 Objectives of LA strategic body 8.5 Legal form of the strategic body 8.6 Companies limited by shares 8.7 Companies limited by guarantee 8.8 Limited Liability Partnerships (LLP’s) 8.9 Community interest companies 8.10 Industrial and provident societies 8.11 Trusts 8.12 Unincorporated associations 8.13 Recommendation

9 STATE AID 9.1 Introduction 9.2 De minimis exemption 9.3 Other exemptions 9.4 Commission guidelines on state aid and environmental protection 9.5 Private investor test 9.6 Practical considerations

10 PUBLIC PROCUREMENT LAW 10.1 Introduction 10.2 Would the strategic body be subject to public procurement law? 10.3 Impact of public procurement law 10.4 Frameworks 10.5 Service provision 10.6 Procurement – utilities

11 PARTICIPATION BY LOCAL AUTHORITIES IN ESCo’s

12 LEGAL/CORPORATE STRUCTURES FOR STRATEGIC BODY SUBSIDIARIES

13 CONTRACTUAL ARRANGEMENT WITH PRIVATE SECTOR PARTNER

14 THE ROLE OF FEY

15 SUMMARY

APPENDICES

Appendix 1 - Useful links

Appendix 2 - Questionnaire on ESCo structuring, local authority participation and finance issues

26 27

Local Strategic Body...FEY proposes that the main purpose of a strategic body will be to provide the local authority with a focused vehicle for interpreting, prioritising and overseeing the delivery of local authority low carbon energy policies.

The strategic body’s main objective would be providing a mechanism by which funds can be invested in economically attractive low-carbon energy projects, with revenues recycled to support less attractive projects and to assist in funding the development of future projects.

It is proposed by FEY that each participating local authority establishes a strategic body, responsible for the delivery of energy related activities.

Additionally, FEY also hopes that by establishing a common vehicle, private sector partners will be encouraged to partner local authorities in individual project development. FEY also believes that there may be possible procurement benefits through the establishment of framework agreements with strategic private sector partners.

Energy Advice Centres...Some steering group members have indicated they wish to operate Energy Advice Centres and FEY believes that these could be managed and funded by the related strategic body. However, FEY considers that such services do not fall within its support activities remit.

Energy Efficiency Funding...FEY considers that the strategic body could provide the management support for the delivery of energy efficiency funding support. FEY believes that the existence of the strategic body would provide a useful focus for establishing relationships with energy suppliers required to deliver energy saving and micro-generation solutions in terms of their Carbon Emission Reduction Targets as regulated by OFGEM.

FEY considers that its remit does not currently extend to energy efficiency but it sees a potential role for itself in developing relationships between strategic bodies (and the steering group) and supplier partners for the delivery of such measures.

Renewable Energy Special Purpose Vehicles...FEY anticipates that the strategic body may wish to develop stand-alone renewable energy projects. These projects may require the establishment of a separate SPV or ESCo in order to obtain any necessary project financing from lenders.

Strategic Body -Joint Ventures...The strategic body may also wish to create joint venture (JV) companies with renewable energy project developers, for example, in the development of heat networks and the supply of heat. Such operations invariably require long term contracts, with the local authority entering into a related off-take contract in order that finance can be secured for the development of the network.

8 BRODIES PRACTICAL AND LEGAL OVERVIEW 8.1 Introduction 8.2 Local authority strategic body 8.3 Possible alternative structures 8.4 Objectives of LA strategic body 8.5 Legal form of the strategic body 8.6 Companies limited by shares 8.7 Companies limited by guarantee 8.8 Limited Liability Partnerships (LLP’s) 8.9 Community interest companies 8.10 Industrial and provident societies 8.11 Trusts 8.12 Unincorporated associations 8.13 Recommendation

9 STATE AID 9.1 Introduction 9.2 De minimis exemption 9.3 Other exemptions 9.4 Commission guidelines on state aid and environmental protection 9.5 Private investor test 9.6 Practical considerations

10 PUBLIC PROCUREMENT LAW 10.1 Introduction 10.2 Would the strategic body be subject to public procurement law? 10.3 Impact of public procurement law 10.4 Frameworks 10.5 Service provision 10.6 Procurement – utilities

11 PARTICIPATION BY LOCAL AUTHORITIES IN ESCo’s

12 LEGAL/CORPORATE STRUCTURES FOR STRATEGIC BODY SUBSIDIARIES

13 CONTRACTUAL ARRANGEMENT WITH PRIVATE SECTOR PARTNER

14 THE ROLE OF FEY

15 SUMMARY

APPENDICES

Appendix 1 - Useful links

Appendix 2 - Questionnaire on ESCo structuring, local authority participation and finance issues

26 27

8 Additional Content

To download this additional content visit www.fey.org.uk/escos

Future Energy YorkshireVictoria House, 2 Victoria Place, Leeds, LS11 5AE

t 0113 237 8436 e [email protected] www.fey.org.uk

2409 fey esco rep 1-x (website)

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