Photo: East Hampshire District Council (EHDC)
Whitehill Bordon
Energy Infrastructure & Services Delivery Study September 2011
Index Summary 4
5.0 Project Developers
30
Introduction to the Study Energy infrastructure, services and the delivery process Project developers New business models Funding the energy strategy Leadership and coordination of the energy strategy Initial option evaluation Conclusions and recommendations
4 4 6 6 7 8 9 11
Current industry structure The energy suppliers of the future New business models
30 33 35
1.0 Introduction
16
2.0 Whitehill Bordon
The town today The draft masterplan
18 18 20
6.0 Funding the Energy Strategy
36
Evaluating viability Sources of funding Financial modelling Risk management
36 40 49 50
7.0 Leadership and Coordination of the Energy Strategy
56
8.0 Initial Option Evaluation
62 62 64 66
68
3.0 Energy Infrastructure and Services
22
Measuring success Strengths and weaknesses of the delivery scenarios Strengths and weaknesses of the ownership and governance models
Likely projects Potential major projects
23 26
9.0 Conclusions and Recommendations
28
Conclusions 68 Delivery Recommendations 70
4.0 Delivery Process
Appendix 1 Appendix 2 Endnotes
2
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
73 81 84
Photo: East Hampshire District Council (EHDC)
3
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Summary
Introduction to the Study
Photo: Rupert Fleetingly Photomontage: LDA Design
Whitehill Bordon is one of the four original Eco-towns. It aims to improve the environment and provide a better quality of life for its residents while almost doubling the size of the town and giving it a new economic focus. The report examines and draws conclusions on how the Ecotown should deliver, finance and manage the energy infrastructure and services that it will need in future. It should be read alongside the Energy Feasibility Study, which looks at how energy demand will change over the years and explores the options for supplying energy in a way that supports the carbon neutral target and the wider vision for Whitehill Bordon.
4
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Energy infrastructure, services and the delivery process
Whitehill Bordon needs an energy strategy that presents an effective local response to a series of global challenges, including climate change and security and affordability of energy supply. The Energy Feasibility Study and this report provide an evidence base and framework for the energy strategy, from which detailed proposals can be developed for future investment in the town’s infrastructure and services. Although some work can be done in advance to prepare the town to meet these challenges, the energy strategy is likely to evolve over time. It will be shaped by various forces that will continue to evolve, including national policy, economic conditions and technological developments. It will also be determined, to
Photo: Scotia Gas Networks
some extent, by the decisions made by residents, businesses, landowners and developers within the framework that the masterplan provides.
• Microgeneration: - Solar photovoltaic (PV) panels - Solar thermal - Biomass boilers
Likely energy projects in the Eco-town The following projects are likely to be implemented in the town in future. The speed, scale and location of implementation will depend on the range of factors described above.
• Smart grid
• Energy efficiency in new and existing buildings
Potential major energy projects in the Eco-town The following projects could potentially also play a major role in the town’s energy strategy, if their feasibility and viability are demonstrated by further work.
• Electric heating • Electric vehicles: - Private transport - Public transport - Charging infrastructure
• Wood gasification, methanation and biomethane grid injection plant • Anaerobic digestion • Energy crops
• Smart grid components in consumer properties
• Organic waste supply chain
• Upgrades to the gas grid
• Wind farm
• Wood fuel supply chain
• Solar photovoltaic (PV) farm For each of these projects, it will be necessary to go through a process to define and specify it in more detail, build up a more accurate picture of technical feasibility and financial viability on specific sites, understand and address constraints that arise and obtain the necessary permissions before the project can be delivered.
• Combined heat and power (CHP) and a district heating network
5
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Project developers
Currently, energy is supplied to consumers in the UK via a privatised market, regulated by Ofgem. Consumers pay for the generation, transmission, distribution and supply of the electricity or fuel that they use through energy bills from their chosen supplier.
providers • Property developers • Landowners • Other public sector organisations
New business models
The challenge of delivering increasingly bespoke, decentralised energy infrastructure and services, and the increasing interest of potential new players, has resulted in new business models emerging over the last decade.
• Businesses Changes to policy and regulation, together with recent financial incentives like the Feed-in-Tariff (FIT) and Renewable Heat Incentive (RHI)i, are opening up opportunities for many more organisations and individuals to be involved in generating and supplying energy, including: • Local authorities • Community groups • Affordable housing
6
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• Individual householders
• Energy Services Companies (ESCos) provide one or more of a range of services, from the design, installation, operation and maintenance of plant and infrastructure through to management and retail services • Multi Utility Services Companies (MUSCos) are an extension of the ESCo model, with a broader scope that may include communications, water and wastewater management, or public transport services
•
ESCos or MUSCos can be established as local special purpose vehicles, with varying ownership and governance structures created to suit local needs and circumstances.
Funding the energy strategy
A range of costs will be incurred at different stages of the Eco-town project. Multiple project developers will be involved in delivering individual, separately funded projects, from householders paying to improve their own properties through to private companies investing in large scale generation or infrastructure provision. The energy strategy for Whitehill Bordon will be delivered using a mix of equity, debt, grants and other forms of subsidy and developer contributions. The choice will depend on the type of project or programme of works. The availability and source of funding will depend on a range of factors including the type of asset, the return that it could offer on the initial investment, the risk associated,
and the individual or organisation that will deliver, own and operate it. The balance of costs and revenues will be different for each element of the energy strategy. A separate financial model should be prepared for each discrete project to assess viability. At the smaller end, this may be straightforward. For large projects, or programmes of work which combine the delivery of multiple small projects, more complex financial modelling will be required to map out the various costs and revenues and manage risk.
affect access to insurance and the cost of premiums. Risk can be associated with technical issues, planning and permitting, variability in costs and revenues, operational issues, environmental impacts, or health and safety. Other risks include policy or fiscal changes, legal negotiations, land ownership issues (rights of way, wayleaves, easements), and changes to development phasing and construction schedules.
The level of risk involved in a project will influence its ability to attract funding from investors and lenders, and the terms attached to any funding that is obtained. It will also
7
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Leadership and coordination of the energy strategy
The complexity of implementing an energy strategy for the Ecotown makes the approach to delivery all the more important. To ensure that the Eco-town’s ambitious objectives are achieved, it may be necessary to take a more active role in delivery, with leadership and coordination from a central body to help to drive the process and provide support to elements of the energy strategy which may not come forwards on a purely commercial basis.
•
Incumbent-led, whereby local stakeholders encourage the incumbent energy companies to deliver and fund the energy infrastructure and services
•
ESCo-led, whereby local stakeholders encourage and enable the establishment of a new ESCo to deliver key elements of the energy strategy
• This central body could also take responsibility for the ongoing management of some of the infrastructure and services provided. An ESCo or MUSCo could take on this role. Three overall delivery scenarios have been explored:
8
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
MUSCo-led, whereby local stakeholders establish an ESCo but then encourage and enable that vehicle to extend its scope into delivering other infrastructure and services
A correctly designed and implemented ESCo or MUSCo can add significant value to
all involved. It can reduce developer capital costs, improve plot marketing (as the plots can be fully serviced with infrastructure), provide revenue opportunities for the organisations involved and provide the best opportunity for the introduction of external finance for energy infrastructure and services. There are a number of models including asset or cash flow finance but also innovative products which look at creating robust long term revenue that can be leveraged.
Setting up a MUSCo to deliver a wider range of infrastructure and services could offer additional revenue opportunities, facilitate cross subsidy, mitigate risk through diversification and encourage wider community involvement. In this case, the ESCo would become a subsidiary of some form of strategic MUSCo which has separate business divisions or companies to operate each distinctive service. The strategic MUSCo entity ensures management oversight and continuity across all projects associated with the conception, design, finance and implementation of energy or other infrastructure and services. Each of the projects can have their own distinct business model and funding. This
structure allows individual projects to be packaged up as stand-alone investments and matched to appropriate investors or lenders, while allowing profits to be redistributed via the strategic MUSCo to support lower revenue generating projects. The ESCo and MUSCo models both offer the opportunity to choose from very different ownership and governance forms, including: •
Privately owned (or publically quoted), forprofit enterprises or joint ventures
•
Publically owned by one or more public sector organisations
•
A combination of both the above in some form
of partnership, usually an SPV, to pool assets and other capital and to share risk and reward •
•
A social enterprise forprofit or not-for-profit where consumers or citizens and other investors own the enterprise to deliver an economic, social and/or environmental return on investment A hybrid of one or more of the above forms
Initial option evaluation
In light of the conclusions from the consultation workshop, there follows an initial view of the strategic strengths and weaknesses of each of the three scenarios: Incumbent-led The main strength of this scenario is that the key players are known, have tried and tested business models and operations developed over many years. Riskaverse developers procuring infrastructure and services for new schemes will therefore favour this scenario in the short term. The utility companies have wellestablished means of servicing new development sites and are obliged by government to innovate in offering energy efficiency services to existing communities. Whether or not
the level of innovation will be sufficient to meet the needs and ambitions of the Ecotown is difficult to ascertain at this stage. Certainly, many elements of the energy strategy can be provided by the incumbents. But, it is doubtful that the mere provision of this infrastructure and these services will be enough to deliver the step change in environmental performance and consumer behaviour required. Herein lies the most significant weakness in the incumbentled scenario. Although these companies have invested considerable sums post privatisation in building distinctive brands, at present, most consumers show little interest in, or loyalty to, these brands and are encouraged to switch by the regulator to demonstrate a successful,
9
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
competitive market. That said, consumers are relatively passive and there is a degree of trust in brands people know and consider ‘safe’ in supplying their energy needs. If the Eco-town project and its partners can build a strong partnership with the local incumbents then this scenario, which is how business is done right now, may be plausible. ESCo-led The real strength of this option is that its business model and operations can be tuned to meet the specific needs of the Eco-town, rather than relying on the current or future offerings from the incumbents. The ESCo could invest in and operate new energy generation capacity and provide energy services as
10
described above. Not only can this model enable the specification of each element of the energy strategy to suit the Eco-town’s circumstances, but it can also coordinate and phase financing, delivery and operation of the range of energy infrastructure and services to avoid unhelpful competition for resources and customers. It also allows for the Ecotown to capture and re-invest commercial value resulting from infrastructure and service delivery, rather than see that return accrue to the external shareholders of the incumbent companies. Not only can developers contract with an ESCo to outsource the responsibility for delivering new energy infrastructure and services, this retained value will accrue to the ESCo
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
investors, which may include developers. As a result, there are new ESCo businesses now operating in the UK seeking to win contracts with developers requiring these services. The key weakness with the ESCo model is that it remains a solution with little precedent at this scale in the UK and therefore the perception of investors, suppliers and customers of its business credibility. This could lead to conventional investors requiring premium returns to reflect the higher risk. MUSCo-led The potential strengths of this model are much the same as the ESCo model in that its business model and operations could be defined to provide infrastructure and services specially designed for Whitehill
Bordon. Its main difference being that it can provide more than just energy. Again, it will enable commercial value to be captured and reinvested in the Eco-town as determined by its governance structure. This model can lead to greater economies of scope by crossselling services across its full range of activities and spreading the overhead costs of separate business units. It may enable sub-optimal infrastructure or services to come forward and be retained under its remit through initial and cross-subsidy. Its retailed services (e.g. bus ticketing) may have bespoke pricing tariffs that incentivise positive environmental behaviours.
And its portfolio of activities, each with a likely different investment and revenue profile, can enable it to spread financial risk across business and economic cycles. If measured over the long term, say twenty years or more, this model is likely to lead to lower total costs of ownership and operation and higher environmental performance achievement. There are three key weaknesses with the MUSCo model, of which some are common to the ESCo model: •
Diversity of responsibility
•
Dependence on a single organisation
•
Lack of precedent in this sector
Photo: Hoval Ltd.
In the incumbent-led scenario, ownership and governance issues are straightforward. The Eco-town’s developers, residents, businesses and other organisations are customers of the incumbents, which are publically quoted, often multinational companies. A privately-owned governance model may increase the risk of placing too much responsibility with one, albeit diversified, organisation as decisions on investment, service specification and pricing across the service mix will be made by a company whose primary objective is to maximise shareholder value, which may be remote from Whitehill Bordon. A social enterprise model, however, may enable a perceived weakness of dependency on the MUSCo to be turned into
a strength if local stakeholders control the enterprise. At this stage, a socialenterprise controlled MUSCo has the greatest fit with the stated Eco-town aspirations. Not only does this option have considerable strengths in creating bespoke, consumer oriented services that offer local people the opportunity to secure an economic stake in the enterprise, it will also address one of the key MUSCo model weaknesses in allaying fears that the Eco-town will be too dependent on a single enterprise entity that it cannot control and secure for the long term.
between providers and by planning services over the long term to meet the needs of the local community.
Conclusions and recommendations
More generally, the MUSCo model will enable far greater co-ordination of infrastructure and service delivery by removing unhelpful competition
11
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Enough is already known to draw some key conclusions for the revision of the draft masterplan and of the other strategic components: 1. The range of energy projects that could form part of the energy strategy could be delivered by the incumbent companies for the most part, but this option will not be the most effective at meeting the Eco-town’s ambitions and needs, nor co-ordinate investment most effectively 2. There may be a limit to the extent to which households and businesses will be willing to change their energy use behaviours within the current consumer retail model
12
3. Alternative delivery models to the incumbents have no precedent in the UK at this scale as the barriers to new entrants to the energy generation, supply and retail sector are high for a variety of structural, competitive and regulatory reasons 4. That said, the drivers of alternatives are increasing in their combined force and in the next few years the constraints of the current industry structure will have to change to facilitate a low carbon economy – somewhere along the line, the UK will need ambitious and realisable alternative structures
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
5. Some elements of ESCo and MUSCo models have been around for many years in the form of private district heating networks and have been tested more recently in smaller development schemes – there are no technical or operational barriers but the costs of capital and economies of scale have been real constraints 6. In order to secure the full benefits of an ESCo or MUSCo (and to avoid some weaknesses), the choice of governance model will be crucial. A standard private sector-led approach may lower costs and public sector risk but will not be able to match the revenues or wider social performance of an approach based on local ownership
7. To ensure that the Ecotown’s ambitious objectives are achieved, it may be necessary for the public sector to take a more active role in delivery, with leadership and coordination from a central body to help to drive the process and provide support to elements of the energy strategy which may not come forwards on a purely commercial basis 8. Establishing an ESCo/ MUSCo as a separate company or SPV to deliver the energy strategy allows energy assets to be considered separately from other core Council services or business. This enables targeted financing from investors whose requirements for returns, timescale of investment and
attitudes to risk are more appropriately matched to the energy infrastructure or services being proposed 9. No matter which business and governance models are chosen to structure future energy investments, there will need to be a greater integration in the planning and delivery of the Eco-town across a variety of supporting infrastructures and services, especially other utilities like telecommunications and water management, but also public transport and community services
Photo: LDA Design
10. A MUSCo that took responsibility for managing green assets may be able to use cross-subsidy from its profitable activities to fund or endow management costs and bring its entrepreneurial skills to realising commercial value through appropriate ecosystem services, e.g. local food, biomass etc. This issue should be considered carefully within the development process 11. Responsibility for managing the process of developing and delivering the energy strategy and projects would best be handled by a dedicated member of staff with the expertise to coordinate stakeholders and partners and drive the forward delivery
12. To encourage and facilitate the delivery process for existing buildings, an advice service could be provided to residents and businesses in Whitehill Bordon. This could provide information on the costs and financial benefits of the different options available to them, help in interpreting quotes from suppliers, and advice on securing funding These conclusions point to a preferred direction of travel for the energy and other strategies to pursue in due course. Some form of locally-controlled MUSCo solution appears most able to serve the Eco-town’s future needs and ambitions and is one that can enable it to capture, retain and invest economic value created by future development.
The ESCo model shares similar characteristics but is most likely to be only the starting point for a MUSCo in the longer term. The incumbent model is one that will work but will have increasing limitations for the Eco-town and will not enable local differentiation of service offering or local value capture. Accepting that this conclusion represents the most challenging option to pursue, the Eco-town project and its key partners – East Hampshire District Council, Hampshire County Council, the MOD, Annington Properties and representatives of the local community – should quickly determine their collective appetite to pursue this option and then ensure that all future masterplanning and delivery work tests the practicality of the model.
13
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
In doing so, the new masterplan and its component strategies will be able to develop spatial and delivery plans that take the shared control of a series of crucial community assets into full account in setting their objectives and targets. It is recommended that the Delivery Board: a) Appoints a dedicated, suitably qualified person within the Eco-town team or Eco-town delivery SPV to manage the process of developing and delivering the energy strategy and projects. This would be a long term and broad role, seeing the energy strategy through the next couple of years of development and overseeing delivery, for example by representing
14
the Eco-town delivery SPV on the board of the ESCo/ MUSCo joint venture, coordinating stakeholders and partners b) Establishes an advice service for residents and businesses in Whitehill Bordon, such as a telephone helpline or helpdesk at the EcoStation to encourage and facilitate the delivery process for retrofitting energy efficiency and microgeneration measures to existing buildings c) Comes to an early view on the appetite of the Council and local stakeholders to take managed risks in pursuing its energy and other ambitions and this view is communicated to inform the refreshed
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
masterplan and the iteration of its component strategies d) Commissions further work at the appropriate time that will include an outline business plan for an ESCo (see Appendix 2 as an example) that allows for its diversification into other infrastructure and service provision in the form of a MUSCo e) Invites each of its relevant Specialist Groups to fully explore the infrastructure and service opportunities and implications for their respective remits of a new ESCo, the scope of which may be extended to become a MUSCo
f) Gives the responsibility of co-ordinating a report on the potential benefits of an appropriate form of MUSCo to the relevant Specialist Group, to be decided by the Delivery Board. It is recommended that this resposibility is given to the Infrastructure, Transport and Education Specialist Group g) Commissions a report that examines in detail the potential for a social enterprise governance model for one or more of the delivery vehicles, including an ESCo or MUSCo, once the specification of energy, transport and other infrastructure is more clearly defined
Photo: Radian Housing
15
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
1.0 Introduction
Photo: East Hampshire District Council (EHDC)
Whitehill Bordon is one of the four original Eco-towns. It aims to improve the environment and provide a better quality of life for its residents while almost doubling the size of the town and giving it a new economic focus. The town’s vision includes an ambitious target to be carbon neutral by 2036. While much will be achieved by changing people’s behaviour, designing new development to be energy efficient and improving the existing areas of the town, new low carbon supplies of heat and power will also be needed.
Photo: East Hampshire District Council (EHDC)
The Energy Infrastructure & Services Delivery Study examines how the Ecotown should deliver, finance and manage the energy infrastructure and services that it will need in future. In doing so, it explores the potential role for an energy services company (ESCo) in the implementation of the town’s energy strategy. It also looks at the implications of establishing a multi-utility services company (MUSCo), with a wider remit that includes other utilities and services, such as public transport, information and communications technology (ICT) and water services. This report should be read in association with the Energy Feasibility Study, which looks at how energy demand will
16
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
change over the years and explores the options for supplying energy in a way that supports the carbon neutral target and the wider vision for Whitehill Bordon. This work was commissioned by East Hampshire District Council and produced by LDA Design and Peter Walker, with support from Addison & Associates.It was also the subject of a workshop with invited stakeholders held in Whitehill Bordon on 12 May 2011, a summary of which is included in Appendix 1.
Photo: East Hampshire District Council (EHDC)
17
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
2.0 Whitehill Bordon The town today
The town encompasses the existing settlements of Whitehill, Bordon and Lindford. It is set in a landscape of woodland, heath and farmland on the edge of the South Downs National Park. The army training facilities at Bordon Garrison have been the focal point of the town throughout its development since the late 19th century. Today there are around 6,000 homes. Some were built in the early 20th century at the same time as the original barracks, followed by larger areas of housing during the second half of the century. Many of the homes are terraced or semidetached, with some flats and detached houses.
18
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: LDA Design
Other than the Ministry of Defence (MOD) facilities, employment areas in the town include the Woolmer trading estate near the town centre and Bordon trading estate on the north western edge of town. Shops are located in the Forest Centre and the Chalet Hill area. There are several schools including Mill Chase Community Technical College and cultural facilities include the Phoenix Theatre.
Photo: East Hampshire District Council (EHDC)
19
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
The draft masterplan Major change is proposed for the town over the next 25 years, arising from the anticipated departure of the MOD. The town has seized the opportunity to reinvent itself, with a vision for new development and improvement of the existing settlements to create the Whitehill Bordon Eco-town. A draft masterplan for the town was published in June 2010 along with a suite of supporting strategies.ii This set out a strategic framework for the development of the town in line with these objectives. The development proposals include:
20
•
4,000 new homes by 2028 and up to a further 1,300 in the longer term
•
A new eco-business park
•
A new mixed-use town centre
•
A new building for Mill Chase Community Technical College and three new primary schools
•
A new sports hub with a leisure centre
•
Large areas of new parks, gardens and space for biodiversity
•
New public transport services and improvements to the environment for walking and cycling
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
The majority of land proposed for development in the town is owned by the MOD. Hampshire County Council, East Hampshire District Council and Annington Properties Ltd are the other major landowners with an interest in the masterplan. The masterplan is in draft at this stage and will be revised once the MOD’s operational and land disposal intentions are made known. It is expected that development proposals will evolve further, on a site by site basis, as developers and house builders bring individual parcels of land forward for development. The draft masterplan was accompanied by a Draft Energy, Waste and Climate Change Adaptation Strategy. Along with energy efficient
design, the strategy proposed a central biomass CHP plant serving the higher density and mixed use areas of the new development and smaller biomass boilers in other parts of the town, using locally sourced wood fuel. It also suggested widespread use of photovoltaic (PV) panels and limited application of ground source heat pumps and solar thermal systems. The emerging Transport Strategy for the draft masterplan set out ways that public transport could be improved, including new bus services and potential re-opening of the railway line. It also identified how walking and cycling could be promoted. The use of electric vehicles or other alternative fuels, either for public or
private transport could have major implications for the demand and supply of energy in the town. Since the draft masterplan was published, further work has been completed including a public consultation. Other studies that have been commissioned include: • • • • • •
Water Cycle Study Green Infrastructure Strategy Habitats Regulations Appropriate Assessment One Planet Living Strategy Rail Feasibility Study Transport Model
Where available, these studies have been reviewed and taken into account in the preparation of this study.
Draft Masterplan Whitehill Bordon Eco-town Policy Zone Framework Draft Masterplan proposals Mixed use town centre core Employment Employment & Commercial leisure mix Community and education Residential Character Areas: Green roots Green streets Green views Housing & Employment mix Forest Centre Green infrastructure: Natural and Informal open space, parks and recreation areas Sports School Pitches Wildlife corridors Indicative locations for allotments Railway (set aside)
21
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
3.0 Energy Infrastructure and Services Whitehill Bordon needs an energy strategy that is an effective local response to a series of global challenges, including climate change and security and affordability of energy supply. The Energy Feasibility Study and this report provide an evidence base and framework for the energy strategy, from which detailed proposals can be developed for future investment in the town’s infrastructure and services. Although some work can be done in advance to prepare the town to meet these challenges, the energy strategy is likely to evolve over time. It will be shaped by various forces that will continue to evolve, including national policy, economic conditions and technological developments. It will also be determined, to
22
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
some extent, by the decisions made by residents, businesses, landowners and developers within the framework that the masterplan provides. This section provides an overview of the types of energy infrastructure and service that may have a role to play in the town in future. The projects described here are not fixed and they could change or be dropped if they prove unfeasible or unviable or are not selected as preferred options for the town. Details of each of the energy projects described below are provided in the Energy Feasibility Study, together with specific recommendations about what should be done next to progress each one.
The following items of infrastructure or renewable and low carbon energy generation equipment may form part of the energy strategy for the town in future.
Photo: DCLG
Likely projects
Photo: East Hampshire District Council (EHDC)
standards where technically feasible and cost effective. The energy efficiency strategy being prepared for the Eco-town should set out the extent of what can be delivered across the existing building stock and the associated costs.
The following projects are likely to be implemented in the town in future. The speed, scale and location of implementation will depend on the range of factors described above, however recommendations are provided below to encourage and facilitate the process.
Energy efficiency: •
•
New build housing: building fabric will need to meet the minimum standards set in the Building Regulations and the Code for Sustainable Homes. Retrofit to existing buildings: likely to be to good practice energy efficiency standards across the majority of the building stock. Homes to be retrofitted to Passivhaus
Electric heating: • This could be used in all new and existing buildings in the town in future. Choices of technology include storage heaters, immersion heaters or heat pumps. Air source or ground source heat pumps are the most energy efficient of these options, although they may not be suitable for all existing buildings.
Typical cost for an air source heat pump is £4,500 and a ground source heat pump is around £6,000. There may not be a financial payback for domestic systems, when compared to a gas boiler, but the comparison is more favourable with electric, oil or coal fired heating. Heat pumps are more cost effective for commercial buildings, due to economies of scale and the RHI rates available, with a payback period of around 8 years.
Electric vehicles: •
Private transport: up to 37% of cars could be electric by 2030 and 50% by 2035, according to national projections. Electric light vans and
other vehicles could be used for commercial and public sector purposes, although suitability for heavy duty uses is limited. Electric cars tend to be more expensive than petrol or diesel, but grants and lower running costs should mean that this investment pays off. •
Public transport: electric buses are already available, and could be used for the services proposed in Whitehill Bordon. These currently pay back the additional purchase cost in about 10 years. Electric cars could also be used for taxis and a car club.
23
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Charging infrastructure: •
24
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Electric vehicle charging points will be required across the town, linked into the smart grid. This should include access to a suitable charging point for all new homes with off-street parking and all business premises. Existing homes can install charging points as required. Rapid charging infrastructure should be installed for buses, taxis and private vehicles in car parks and public places. Standard charging points cost £3,500 to £5,000 each, while rapid charging points cost £25,000 to £50,000.
Microgeneration: • The following technologies are all likely to have some role to play in the energy strategy for the town, either being specified as part of new development or retrofitted to existing buildings. In theory, one or more of them could be fitted to the majority of buildings in the town. In practice the logistics, costs and wider impacts of doing this will limit total potential and consumer choice will determine what is actually installed. •
PV panels could be installed on around half to three quarters of existing buildings in the town, and most new development if designed appropriately. South east to south west
facing, unshaded roof space is needed. Around 2kW could be installed on a typical home, or 14m2 of panel, costing around £6,000 for new build or £8,000 for an existing home. The FIT has created a strong financial case for them, offering a payback of around 10 years currently. •
Solar thermal could supply around 60% of the hot water needed in many existing and new homes. For existing properties, solar thermal is best suited to homes where a hot water tank is already used. Around 4m2 of south east to south west facing, unshaded roof space is needed to install solar collectors. The cost is around £2,500 per home,
Photo: LDA Design
Photo: East Hampshire District Council (EHDC)
with a payback of about 18 years where installed with a gas boiler. The financial case is better for properties off the gas grid where the main fuel is oil or coal. Performance can be improved by coupling solar thermal with an interseasonal heat store and heat pump, but costs also increase significantly for this option. •
Biomass boilers, using wood pellets as the fuel, could be installed in both new and some existing properties across the town. Individual boilers could be installed in detached and semi-detached homes and non-residential buildings, while shared boilers might be preferred for terraces and blocks of flats. Space limitations and the cost
and complexity of retrofit may limit potential in some existing properties.
both in terms of financial viability and the logistics of installation and operation.
The cost for a domestic biomass boiler is around £4,000. The financial savings and incentives may not be sufficient to pay back this investment if replacing a gas boiler. Viability is significantly improved if biomass boilers are considered as an alternative to oil or coal fired heating.
• Smart grid: A smart grid in the town will be essential to support the energy strategy for the town, by balancing supply and demand, controlling flows to and from the national grid, managing peak loads, storing power to meet peak demands and providing better information for billing and payments. This will be a major infrastructure change across the town, with cable upgrades, energy storage at the community and individual property scale, control systems and potentially a new substation. Specifications and costs for these are not yet available.
This makes them particularly well suited to properties in the villages which are off the gas grid. Biomass boilers can be more attractive for larger commercial properties, schools and other nonresidential buildings compared to homes,
• Smart grid components in consumer properties: smart meters and some form of energy storage such as batteries, heat stores or other devices. Specifications and costs for these are not yet available. • Upgrades to the gas grid: Improvements may be needed to the low pressure mains on and around new development sites, if they are to have a gas supply. These could be implemented on a site-by-site basis as part of the normal process. Smart gas meters are also due to be installed in every property with a gas connection, as part of a national programme.
within 20km of the town centre is substantial, at up to 84,000 oven dried tonnes of fuel per year. A central storage and processing site could take wood from various farmers and landowners in the area, providing shared facilities and reducing individual overhead costs. These facilities could include a wood chipper and delivery vehicles. A brokering service could also be provided to enable long term contracts to be agreed for supply to major customers.
• Wood fuel supply chain: The potential resource from woodlands
25
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: LDA Design
Photo: Jo Peattie
Potential major projects
The following projects could potentially play a major role in the town’s energy strategy, if their feasibility and viability are demonstrated by further work. • CHP and district heating network: This would serve mainly new areas of town (employment, swimming pool, hotel, town centre, higher density residential). It could use solid biomass or biogas to supply heating, hot water and cooling where required.
26
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Heat distribution network and energy centre needed. Ongoing management and operational support required, including heat metering, billing, and fuel purchasing. Cost of network serving these areas around £12.7
million. Two leading options have emerged for the energy centre: •
•
1.75MWe CHP engine with solid wood gasification. 2,000m2 energy centre required. Cost around £4.8 million. 2.4MWe CHP engine with anaerobic digestion of organic waste. 2,000m2 energy centre plus 3,000m2 anaerobic digestion plant. Cost around £9 million. The above options include the gasification or anaerobic digestion facilities, assuming they are located in the energy centre. Biogas could also be produced elsewhere and piped to the energy centre. Viability appears
marginal due to the high capital costs of the energy centre and heat network, and payback period could be at least 20 years for either option. • Wood gasification, methanation and biomethane grid injection plant: Large facility, injecting gas into the grid for distribution across town. Up to 55,000 tonnes of wood per year to meet all of town’s gas demand. No other facilities have yet been developed in this country, and the planning and development process is likely to be complex. Ongoing operational requirements. Around 6,000m2 required. Wood and gas storage required. Rough cost of £26 million estimated. Viability
is not yet proven and the payback period, if any, is unknown. • Anaerobic digestion: One large plant or possibly several smaller facilities closer to source of organic waste or other feedstock to reduce transport costs. Around 120,000 tonnes of wet organic waste required, based on food waste. A mix of food waste, animal manure and maize may be preferred. A large facility would require around 4,000m2. Organic waste, digestate and gas storage required. There is also potential to install a facility at the sewage works, although feasibility and scale of this are yet to be determined. Planning and development process could be complex. Ongoing
operational requirements. Cost around £16 million for a large anaerobic digestion facility, additional cost of gas injection equipment not known. Viability should be supported by the RHI for gas grid injection, but payback period depends on operating costs which could not be quantified at this stage. • Energy crops: There are significant areas of grade 3 and 4 agricultural land in East Hampshire which could be suitable for cultivating energy crops, including short rotation coppice willow, miscanthus or maize. In total, this land could yield up to 28,750 tonnes of wood (willow or miscanthus) or 92,000 tonnes of maize silage. While these may not be
a priority for the Eco-town energy strategy, farmers may decide to use some of this land for this purpose as the economics become more favourable. This could supplement the biomass supply chain for the town. • Organic waste supply chain: Animal manure and food waste could be collected from the surrounding area for anaerobic digestion. The potential contribution to the energy strategy is less than could be obtained from wood or energy crops. There is an economic opportunity there, although viability is likely to be marginal.
• Wind farm: There is potential for a commercialscale wind farm north of Headley, based on initial investigations. This could comprise around 10 large wind turbines totalling 25MW, laid out across an area of around 300ha. Several other sites may be able to support one or two turbines. Planning and development process could be complex, but operation relatively straightforward. Capital cost around £32.3 million for 25MW wind farm, £680,000 for a 330kW wind turbine at Standford Grange Farm or £123,000 for a 50kW turbine at Louisburg Barracks employment area. Payback period around 5 to 7 years for each option.
• Solar PV farm: Potential sites for a number of solar farms identified, each up to 5MW, occupying up to 10 ha per site. Planning and development process simpler than wind farm, operation very straightforward. Cost around £11.8 million per 5MW solar farm. Viability marginal currently, with payback period around 18 years, but viability improving.
27
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
4.0 Delivery Process The diverse range of energy projects described in the previous chapter can be considered in three broad categories: • Building-integrated measures including energy efficient building fabric and services, microgeneration technologies, and components of the distribution network that may be housed in consumer properties, such as smart meters. These can be further differentiated into new build projects and improvements retrofitted to existing buildings.
Photo: LDA Design
28
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• Communal infrastructure such as the smart grid, on-street electric vehicle charging points or a district heating network with
an energy centre, which are integrated into the communities that they serve. • Stand-alone projects which could come forward independently of developments in the town, like a wind or solar farm or the establishment of the wood fuel supply chain.
feasibility and financial viability on specific sites, understand and address constraints that arise and obtain the necessary permissions before the project can be commissioned.
The delivery process will differ somewhat between these categories, and to some extent within them, depending on the scale and the precise nature of the project.
Figure 1 provides an overview of the delivery process for major projects. As progress is made through the stages, project risk reduces as more certainty and information becomes available. At the same time total expenditure increases, due for example to fees spent on professional services.
For each of the larger communal infrastructure or stand-alone projects identified, it will be necessary to go through a rigorous process to define and specify it in more detail, build up a more accurate picture of technical
After each stage, a decision should be taken as to whether to proceed or redefine the project. Further detail on the delivery process, using district heating as an example, is provided in a guide published by Town and Country Planning
Association, Combined Heat and Power Association and LDA Design.iii The development process will be different for buildingintegrated measures. These can be implemented more quickly and, in many cases, do not require such rigorous analysis or the same permissions: • New build: As plots come forwards for development, the developer should prepare an energy strategy to accompany the planning application. At this point, initial decisions will be made about energy efficiency and choice of renewable or low carbon energy supply, taking into account policy and regulation. The strategy may be refined through detailed design and construction.
• Existing buildings: Energy efficiency improvements or microgeneration projects for existing buildings may be delivered ad-hoc across the town as individual property owners or occupiers decide to invest in one or more technology. In many cases, once the property owner or occupier has decided on which technologies they are interested in, the technology suppliers may do much of the work to confirm feasibility on site and manage design and construction. They could also come forward as a coordinated programme of works across a whole portfolio of existing buildings, requiring a more strategic approach to
Figure 1: Energy project development process delivery. In addition to the recommendations set out in the Energy Feasibility Study, further work is underway to develop a strategy for retrofitting all existing properties in the town. To encourage and facilitate the delivery process for
existing buildings, it is recommended that an advice service is provided to residents and businesses in Whitehill Bordon, such as a telephone helpline or helpdesk at the Eco-Station.
29
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
5.0 Project Developers Current industry structure
Energy is supplied to consumers in the UK via a privatised market, regulated by Ofgem. An overview of the electricity supply chain is shown in Figure 2; the gas supply chain has a similar structure. Consumers pay for the generation, transmission, distribution and supply of the electricity or fuel that they use through energy bills from their chosen supplier, with each part of the process regulated by Ofgem. The electricity market in the UK is currently dominated by the ‘Big Six’ energy companies, EDF, British Gas, E.ON,
Photo: LDA Design
RWE npower, Scottish and Southern Energy, and Scottish Power. All of them are involved at various levels of the supply chain, including generation, distribution and supply to consumers. Ofgem has raised concerns about limited competition in the market, which it says makes it difficult for smaller suppliers to operate and prevents consumers from getting the best possible deal on their energy bills. Various policies and regulations are being implemented to address these concerns. Most of the new generation capacity in the UK is delivered by these energy companies when an opportunity is identified to add value for their shareholders. To date, the majority of their investment
30
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
has been in large scale, centralised fossil fuel or nuclear power generation. They are increasingly diversifying into other types of generating capacity such as wind farms, CHP and district heating schemes and even supply of microgeneration equipment to their customers, although these are currently a relatively small part of their business. Other companies are also emerging as major players in the renewable and low carbon energy generation sector. The services that the major energy companies offer to customers on the supply side have tended to be limited to metering and billing of consumption and boiler servicing. More recently they have introduced schemes to encourage energy efficiency and address fuel poverty,
which have been encouraged in part through licence conditions or mechanisms such as the Carbon Emissions Reduction Target (CERT)iv or the new Energy Company Obligation (ECO). Distribution networks for electricity and gas are regional monopolies. The electricity Distribution Network Operator (DNO) for Whitehill Bordon and the surrounding area is Southern Electric Power Distribution, owned by Scottish and Southern Energy. The town is on the Southern Gas Network, owned by Scotia Gas Networks, also part of Scottish and Southern Energy. There are equivalent ‘incumbent’ infrastructure providers for telecoms (BT Openreach) and water management (in this case, South East Water for water supply and Thames
Water for wastewater). The distribution networks are currently upgraded to meet changing demands, as the need emerges and the DNOs have tended not to take a long term, proactive approach to planning improvements. Upgrades are planned when an application is made to connect a new load to the network, for example a property development or generator, and there is insufficient capacity in the existing infrastructure to accommodate the new load. Charges for connecting new loads or generators to the network are determined according to a published charging statement, agreed between the DNO and Ofgem. The standard procedures
for connecting new sites to the distribution networks are described in the Energy Feasibility Study, together with recommendations on the next steps to take in establishing the requirements for electricity and gas distribution network upgrades for Whitehill Bordon. Responsibilities for making upgrades, extensions and connections to the electricity distribution network are as follows. A similar process applies for changes to the gas distribution network. Some of the work required to connect a new site to the network must be carried out by the DNO or its appointed agents, known as non-contestable works. These include reinforcements or diversions to its existing network assets, deciding the point of connection between
Figure 2: Overview of the electricity market. Source: Ofgem, Securing Britain’s Electricity Supply Factsheet (2005)
31
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: LDA Design
proposed extensions and the existing network, establishing agreements with third party landowners, specifying all plant and materials to be used, approving designs, completing the connection between the existing network and any new extensions to the network, and commissioning and inspecting these extensions. All other works are contestable and can be carried out by an Independent Connections Provider (ICP) instead of the DNO, if the developer chooses. These include installation of onsite distribution networks and the infrastructure between the site and the existing network.
32
An ICP may also take on the role of managing the interface with the DNO on behalf of the developer. Following completion, any on-site distribution infrastructure and extension works installed by an ICP may be operated as an embedded network by an Independent DNO (IDNO) or adopted by the incumbent DNO. In addition to liaising with the DNO to connect to the electricity and gas distribution networks, the owner or occupier of a site has to make a separate agreement with an energy supplier and ensure that appropriate meters are installed before the supply can commence to the site.
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
This traditional approach to delivering distribution networks has the following key features: •
A per-building or site application and connection
•
Services procured during construction and costed directly to the construction budget
•
All revenues from the delivery of services accrue to the DNO
Following completion, operation of the infrastructure up to and including the meter or main connection valve is the responsibility of the DNO or IDNO and does not require any involvement from the occupier.
The grid owners gain revenue through transportation or use of system charges paid by the generators and energy supply companies. This has advantages in terms of supporting maintenance and replacement of the distribution infrastructure but has not encouraged the grid owners to make improvements in efficiency or support the incorporation of decentralised, renewable and low carbon technologies into the system.
There are no governance issues with this traditional approach to delivering utilities. The consumer is protected by the conditions of contract, which in turn are enforceable as part of the license conditions the utility company has to abide by, which are regulated by Ofgem.
Photo: Refgas
The energy suppliers of the future
Changes to policy and regulation, together with recent financial incentives like the Feed-in-Tariff (FIT) and Renewable Heat Incentive (RHI)v, are opening up opportunities for many more organisations and individuals to be involved in generating and supplying energy. Local authorities may have an important role in delivering the energy infrastructure of the future, with the government keen to promote localism and stripping away intervention at the national level. These new responsibilities will need to be delivered alongside existing services. The current limitations on public sector spending and increasing costs (such as the recently introduced Carbon Reduction Commitment) may prevent some local authorities
Photo: LDA Design
from investing directly in energy projects in the short term, but in the medium to longer term these constraints could ease. At the same time, councils now have powers to sell electricity through the National Grid at retail prices and to set up energy companies. This together with their eligibility for the FIT and RHI presents a significant opportunity to generate income. A study by the New Local Government Network reviews the opportunities for local authorities, with case studies of some early movers.vi
locations, helping property developers to meet Building Regulations or planning requirements for low carbon buildings. A contribution towards such investment may be obtained over time from developers through the Community Infrastructure Levy (CIL) or the allowable solutions payments which may emerge as part of the Building Regulations. Where the council owns development sites, it may also cover some of the investment through increasing land values, or be able to use the value of its assets to raise finance for energy infrastructure.
Councils can unlock the viability of development sites by leading and co-ordinating the installation of strategic energy infrastructure such as district heating in suitable
The New Homes Bonus is another potential source of funds for investment, particularly in areas expecting significant growth like Whitehill Bordon. Councils also have
access to low cost finance through Prudential Borrowing, with the likely prospect of Tax Increment Financing (i.e. the ability of a local authority to borrow capital against predicted future business rate revenues) and Business Rate Retention (i.e. local authorities being able to retain a proportion of business rate revenue) becoming available within the next three years. Whitehill Bordon has already benefited from some councilled projects, including wood fuelled boilers installed by Hampshire County Council and East Hampshire District Council in two local schools. The councils should have an important role in defining and delivering the energy strategy for the rest of the town going forwards in terms of specifying
33
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: East Hampshire District Council (EHDC)
their own demand for energy services and in using their statutory powers to shape the proposals of developers and other providers through planning consents for example. Community groups are already investing in renewable and low carbon energy projects across the country. A well-organised community project, possibly overseen by an incorporated company such as a co-operative or Community Interest Company, could generate income for the community to reinvest in further energy projects or any other local projects it sees fit. Community Energy Online provides advice to communities on developing their own projectsvii and case studies of places across the country where communities have already taken action.
34
There are many examples of community-owned renewable energy assets, ranging from wind farmsviii (either alone or in partnership with developers), hydro schemesix and anaerobic digestionx to PV schemesxi. Their business models and funding sources vary and many single purpose organisations have since looked to expand their scope into other projects.
to residents. Through these programmes, some Registered Social Landlords are also developing new retrofitting and installation skills in-house, which generate another line of income. Radian Housing for example has spent ÂŁ750,000 on rooftop PV systems in the last year, and is planning to increase the budget for the next year to ÂŁ3.5 million.
Affordable housing providers are taking the opportunity to install renewable and low carbon energy systems in their existing stock as well as new developments they are involved in, supported by the various subsidies and incentives that are available.
Property developers have a challenging set of obligations with the introduction of the zero carbon requirements through the Building Regulations. Current economic conditions make the question of development viability an even greater priority for many. Property developers and construction companies have the opportunity to turn obligations into opportunities: low carbon energy can
These schemes can provide a financial return as well as enabling some savings in energy bills to be passed on
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
generate new revenue streams. A number of companies have begun evolving their business models to take advantage of this. Landowners are increasingly interested in realising the income potential from land or assets afforded by the FIT, RHI and Renewables Obligation. Despite the recent changes to the FIT for large scale PV there remain significant opportunities across most of the technologies from farm-scale anaerobic digestion or biomass heating through to wind, hydro and smaller PV systems. Other public sector organisations will find themselves faced with a large and growing Carbon Reduction Commitment bill at the same time as budget cuts are placing an additional strain
on resources. Low carbon energy provides an opportunity to generate new sources of revenue. Businesses: The low carbon economy is an opportunity for existing businesses, just as it is for new businesses established to serve the emerging markets. This is recognised in the Economic & Employment Strategy for Whitehill Bordon, which emphasises the importance of enabling existing businesses to take advantage of these opportunities and attracting companies involved in the renewable and low carbon energy supply chain to the town. Individual householders with access to capital are also taking advantage of the incentives on offer to invest in installing equipment in
Image: Stephen George & Partners
their homes. Providing a greater number of households in the town with access to affordable up-front capital will be important to delivering renewable and low carbon energy to the existing areas of Whitehill Bordon.
New business models The challenge of delivering increasingly bespoke, decentralised energy infrastructure and services, and the increasing interest of potential new players, has resulted in new business models being formulated in the UK over the last decade. Although this is a growing sector, in practice there are few established, working precedents in the UK.
Energy Services Companies (ESCos) provide one or more of a range of services, from the design, installation, operation and maintenance of plant and infrastructure through to management and retail services. Retail services can include marketing, customer relations, metering and billing, while management may include responsibility for specialised activities such as fuel procurement, supply contracts, trading on the electricity markets, handling incentives such as FITs and Renewables Obligation Certificates (ROCs), or regulatory compliance. ESCo can also attract third party investment or borrow against projected revenues from the sales of energy services to fund up-front capital expenditure on infrastructure.
This approach is more flexible than the traditional utility model, allowing for more localised community energy initiatives and a wider range of energy infrastructure and services. An ESCo that operates as an energy supplier may invest in energy efficiency measures in properties, as it has the opportunity to recover the costs through the bills paid by its customers. A number of companies have established themselves as ESCos in recent years, often focused on the delivery of CHP and district heating schemes on behalf of local authorities or developers. Companies currently promoting their ESCo services include Cofely, Dalkia, Vital Energi, Metropolitan, and Ener-G. All of the Big Six energy companies have started to develop their own ESCo
offer, broadening out their products and services beyond the traditional core business. ESCos have also been established by local authorities, either acting alone or in partnership with the private sector, notably Thameswey which is owned by Woking Borough Council. Mutil Utility Services Companies (MUSCos) are an extension of the ESCo model, with a broader scope that includes other utilities, infrastructure and services, such as communications, water and wastewater management, or public transport services.
Some of the companies promoting their services as ESCos also offer a wider range of utilities. ESCos or MUSCos can be established as local special purpose vehicles, with varying ownership and governance structures created to suit local needs and circumstances. Later chapters of this report explore the potential role for an ESCo or MUSCo in delivering the energy strategy for Whitehill Bordon, the options available,and their implications.
Their features and benefits are much the same as those of an ESCo, with the added potential of using income from more profitable parts of the business to cross-subsidise other areas.
35
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
6.0 Funding the Energy Strategy A range of costs will be incurred at different stages of the Eco-town project, for a variety of energy generation and distribution assets. Multiple project developers will be involved in delivering individual, separately funded projects, from householders paying to improve their own properties through to private companies investing in large scale generation or infrastructure provision. An ESCo or MUSCo may take a lead role in delivering a number of different elements of the energy strategy, to provide more centralised coordination of the investment required.
Photo: Scotia Gas Networks
36
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
The availability and source of funding will depend on a range of factors including the type of asset, the return that it could offer on the initial
investment, the risk associated, and the individual or organisation that will deliver, own and operate it.
Evaluating viability The general approach to evaluating viability of elements of the energy strategy and securing funding will be similar to the approach taken for other kinds of public or private sector project. Guidance on project finance is available from a variety of sources including the Treasury, the Local Government Association, and the Chartered Institute of Public Finance Accountants amongst others. The Energy Saving Trust has published guidance on funding for community projects.xii
This chapter sets out how the financial viability of each element of the energy strategy can be determined, describes the different costs and revenues, provides an overview of the various funding sources and explains the process for developing a detailed financial model. The balance between the capital costs, operating costs and revenue will determine whether each element of the energy strategy is financially viable. Figure 3 shows cumulative cash flow for a project. Cumulative cash flow is the sum of the capital costs, operating costs and revenues over time. Viability will depend on the difference between the operating costs and revenues, and whether the surplus made
each year is sufficient to pay for the initial capital investment over time: • If the revenue over the lifetime of the project adds up to more than the sum of the capital costs and the operating costs, with a comfortable margin, then the project is viable and could be financed as an investment through debt or equity. • If the revenue is roughly equal to or a bit less than the sum of the capital costs and operating costs, an extra financial contribution might be required, such as through developer contributions. If the revenue is less than the operating costs, an ongoing subsidy would also be required.
• If the revenue is substantially less than the sum of the costs, and would require more subsidy than can be afforded, the project is likely to be deemed not viable. The payback period, rate of return and net present value are measures of the financial viability of a project, which will influence the types of funding that are available and the terms attached. The project described in Figure 3 would have a payback period of five years. The rate of return is a measure of net income compared to the initial capital investment, which can be calculated for the total lifetime of the asset or a fixed period within this and is expressed as a percentage. The net present value of a project is a measure of how much it is worth over a given
Figure 3: Project cash flow (Source: LDA Design)
time period, taking into account all future costs and revenues and discounting them to present-day values to take account of inflation and the opportunity cost of investing in the project. Expectations for a viable project will depend on the investor or funding body.
For example, commercial investors may expect returns of around 12 to 15% on their investment whereas the public sector may accept returns of as low as 8% if a project provides wider social, economic or environmental benefits. xiii
37
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: LDA Design
For each of the projects in the energy strategy it will be necessary to estimate costs and revenues over the lifetime of the asset, so that viability can be assessed and investment secured. For householders or others considering small scale projects for their own properties, this should be a relatively simple decision to make, based quotes and information on the expected costs and returns from equipment suppliers, their electricity or fuel supply company and independent third party advisers such as the Energy Saving Trust. The advice service recommended for residents and businesses in Whitehill Bordon, such as a telephone helpline or helpdesk at the Eco-Station, could provide information on
38
the costs and financial benefits of the different options, help in interpreting quotes from suppliers, and advice on securing funding. For more complex projects, the phasing of costs and revenues, and their impact on cash flow, will require careful consideration. To ensure viability, it may be necessary to implement some projects in stages to match demand and obtain some income before implementation of the full scheme. For example, if a district heating project is taken forwards, it may be necessary to install smaller sub-networks on individual development sites, supplied by temporary boilers, before investing in the main energy centre and the larger heat mains to connect the sites together.
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Capital costs could include equipment costs, land purchase or leasing, site preparation, construction and installation costs, and grid connection. Up-front costs may also include professional and legal fees, and the costs associated with obtaining planning permission and other permits where required. The professional support required will be more substantial for larger, complex projects requiring more indepth technical feasibility studies, detailed design work, environmental impact assessment or other studies to inform the planning process, and legal and financial advice. As a general rule of thumb, development costs for district heating projects will amount to around 10% of capital
expenditure, according to a recent study published by the Homes and Communities Agency.xiii Careful planning and project management can lead to savings in a number of these areas. Sites should be selected to minimise costs where possible, prioritising those that have easy access for construction, good proximity to the grid and enable an efficient design and layout. For example, for district heating the layout should be designed to minimise lengths of pipe runs and maximise heat loads that are accessible along the route. The energy centre location will also affect costs, as it may need to be in an accessible, central location in an early phase of development, where space is at a premium.
Competitive tendering should be used to get the best possible price for goods and services, although in some areas such as district heating network construction, a lack of competition in the supply chain may limit potential. It may be possible to use bulk purchasing to reduce the cost of some measures such as PV or energy efficiency for homes, while taking a whole street or community approach to retrofitting buildings could increase uptake as well as enabling some financial savings to be made in installation. Suitable mechanisms for collective purchasing and installation have been researched for the Greater Manchester area, with some useful findings that would be
applicable to Whitehill Bordon. xiv Combining installation with other construction works, improving the local supply chain and skills, and enabling more competition should also deliver efficiencies. The Energy Feasibility Study provides estimated installed capital costs for most elements of the energy strategy using benchmark data. More detailed site-specific estimates should be obtained from suppliers as part of the development of the energy strategy. Operating costs will vary significantly depending on the scale and type of project in question. Some, such as energy efficiency improvements to the fabric of buildings, will have no on-going costs. Others such as building-integrated PV may
require limited maintenance. More complex projects such as a CHP scheme would have staff costs and overheads for operating equipment, maintenance and management. In addition, there may be insurance, rates and taxes to pay. On top of this, there may be costs associated with the method of financing, such as interest payments on loans. Some savings in staff costs and overheads could be achieved by sharing support services such as maintenance or management activities. The availability of suitable staff for maintenance and operational activities could affect on-going costs. Providing local training and offering apprenticeships will help to build up a skilled workforce, while contributing to the economic objectives for the town. Fuel costs, for
example for a CHP plant, could be managed to some extent by establishing long term contracts for supply. Typical figures for operation and maintenance costs are provided in the Energy Feasibility Study where available, generally based on a percentage of capital costs. Fuel costs are based on an estimate of the quantity required and typical current prices for electricity, gas and biomass. Projections of future energy prices are published by the government.xv Revenues will either be obtained directly from selling the electricity and heat generated, or indirectly as savings on energy bills obtained by reducing the amount that has to be imported from elsewhere. In addition,
energy generating schemes may be able to access income from the feed-in-tariff, renewable heat incentive, or sales of tradable certificates including Renewables Obligation Certificates. The value of energy generated will be relatively fixed as it will need to be competitive with market prices to secure customers and ensure that energy is affordable. Fluctuation in market energy prices is therefore one of the key risks to financial viability. It may be important to maximise local use of electricity generated. This will avoid the need to export it to the grid and enable its value to be captured at retail prices, which can be more than double wholesale prices. Where the energy generated
is being sold to customers, the charges may comprise a price per unit of energy used as well as standing charges or maintenance charges for any kit installed in customer properties. These will need to be set at a level which ensures that the net cost of the energy supply is affordable and competitive with the market alternatives. Potential revenues have been calculated in the Energy Feasibility Study where possible, based on current energy prices and the financial incentives likely to be available for each project.
39
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Sources of funding
The energy strategy for Whitehill Bordon will be delivered using a mix of the following sources of funding: • Equity • Debt • Grants and other forms of subsidy • Developer contributions Equity refers to the provision of capital in exchange for a share of ownership and the long term revenues associated with this. It could be provided as cash, a valuable asset such as land or an in-kind contribution such as professional services.
40
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Depending on the project, financial institutions, energy companies or ESCos, other businesses, individuals, communities or the public sector could contribute on an equity basis. For example, a business may be willing to invest some capital in an energy centre and district heating network, in exchange for a share of ownership and the on-going revenues from electricity and heat sales. In the case of the electricity or gas distribution network, the DNO will cover some of the costs of installing or extending the network and retain ownership, using the regulated use of system charges as long-term annuity cash flow. Building owners or occupiers with access to capital may choose to invest in installing microgeneration equipment on their property. As an
alternative, a third party may be willing to install and own microgeneration equipment on properties, taking the revenues and offering a lease or savings on energy bills to the building owners in return, as in the “rent-a-roof” schemes for PV which have emerged recently. As an alternative to commercial banks and other financial institutions, the Green Investment Bank is expected to offer equity investment to some projects where the capital available from other sources is limited. Its investment is expected to be targeted at priority infrastructure projects, which could include renewable energy schemes. It may act as a co-investor for projects which use new technologies, where other investors are not willing to provide all of the capital required.xvi Big Society
Capital (initially known as the Big Society Bank) may also be able to offer equity investment to communityled projects, although its objectives are more focused on addressing social needs than environmental concerns.xvii The European Investment Bank provides support to high technology small and medium enterprises on an equity basis through the European Investment Fund. It supports technology transfer and makes investments via venture capital and private equity funds and other financial intermediaries. xviii
Recently there has been considerable interest in the use of tax incentives to encourage investment in renewable and low carbon energy projects. A Venture Capital Trust (VCT)
or Enterprise Investment Scheme (EIS) can provide low cost finance as their investors benefit from tax relief on the income and capital gains they receive and are generally prepared to accept a lower rate of return as a result compared to what they might expect from conventional investment vehicles such as private equity.xix,xx Individuals can invest in the energy strategy in a number of ways. They may pay for improvements to their own home or business property, invest directly in renewable or low carbon energy generation, or set up or purchase shares in a business which has a role in the supply chain for the energy strategy.
Individuals can also invest through financial institutions that hold shares in organisations and projects in the renewable and low carbon energy sector, such as an investment fund or private equity company. To ensure targeted investment in the energy strategy for the town and retain the benefits in the local community, individuals could also buy shares in a cooperative, such as an industrial and provident society or community interest company, established specifically for this purpose. Energy4All assists in the establishment of communityowned renewable energy co-operatives, building on the success of co-operatives like Baywind and Westmill Wind Farm.viii
Some organisations may provide funding for energy efficiency improvements to a building in exchange for a share of the equity in the property. For example, the London Rebuilding Society is a social enterprise which runs a Home Improvement Scheme targeted at low or no-income home-owners in the capital.xxi Debt financing refers to the provision of a loan which must be repaid over time, usually with interest. Loans may be secured against an asset such as a property, which could be repossessed if the borrower defaults on repayments, or unsecured. Banks or building societies may provide loans at commercial rates of interest. During the “credit crunch� of recent years, debt has been particularly
Small scale biomass boiler: Hoval Ltd.
41
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Photo: East Hampshire District Council (EHDC)
difficult to access. Credit Unions can provide lower cost loans than the commercial banking sector. People living or working in and around Whitehill Bordon can access loans from Hampshire Credit Union, which trades as United Savings & Loans Ltd.xxii The Green Investment Bank is expected to offer a range of loans to infrastructure projects, with the terms and target projects again selected to address a funding gap in the market. Initial proposals for the operation of the Green Investment Bank have been published, with details to follow on funding criteria and the application process for different types of project.xvi Big Society Capital is also intended to offer loans to community groups.xvii
42
The European Investment Bank offers low cost loans of up to 50% of the project cost directly to public and private sector organisations for major projects costing over €25 million. Eligible projects must contribute to the EU’s policy objectives, which include addressing climate change and providing sustainable, competitive and secure energy supplies. It also supports banks and other financial institutions in providing loans for smaller projects, including support for small and medium enterprises and microfinance. xxiii “Green bonds” offer a mechanism for smaller investors to provide debt financing for renewable and low carbon energy infrastructure, with a fixed return over an agreed period. The bond issue is usually handled by a finance
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
house but could be marketed through community groups and even the local authority if the funds raised are to be used locally. Green bonds are one of the financial products that may be offered by the Green Investment Bank as a way of raising funds for its investments.xxiv East Hampshire District Council or Hampshire County Council may be able to borrow money at relatively low cost to fund capital investment in fixed assets, in line with the Prudential Code for Capital Finance in Local Authorities. Local authorities and parish councils are able to borrow from the Public Works Loans Board at low interest rates. xxv Tax Increment Financing will also be available to local authorities, allowing them to borrow against future increases
in business rates resulting from new development.xxvi They are also able to issue bonds through the capital markets, either independently or jointly with other local authorities through an SPV. Wandsworth Borough Council in London is proposing a bond issue to raise funds to improve its housing stock, claiming that this is more cost-effective than borrowing from the Public Works Loans Board.xxvii Rather than financing projects directly, East Hampshire District Council or another organisation could offer lowinterest loans to local residents and businesses for renewable and low carbon energy projects. A loan scheme can be set up as a fixed fund or a revolving fund which uses the repayments to offer further loans. This approach is ideally
suited to low risk projects with predictable returns that will be sufficient to repay the initial investment within the lifetime of the project. A revolving loan scheme has already been set up in Whitehill Bordon, offering low interest Eco-fit loans of up to £10,000 to householders to fund energy efficiency and renewable energy projects, using a grant from the Low Carbon Communities Challenge. If a community co-operative is established, this could also offer loans or establish a revolving loan fund. Forum for the Future has published guidance on how this can be done.xxi The Green Deal,xxviii available from 2012, will offer up front loan funding for energy efficiency improvements to properties. It may also be
extended to renewable or low carbon energy generation installations, if they can meet the criteria for an eligible Green Deal measure. Repayments will be taken as instalments added to the energy bills for that property. The amount repaid will be less than or equal to the expected savings on the energy bills as a result of the improvements; known as the ‘Golden Rule’. This means that only improvements which can pay for themselves within an agreed period of time will be available under the Green Deal. The responsibility for repayments will remain with the property even if it changes hands, so the person who lives there when the improvements are made will not have to
keep paying for them if they move house. This should be of particular benefit those who own their own home or rent but do not have access to the capital to invest in these measures. The scheme is also expected to be available for non-domestic buildings. The government is currently working through proposals for how the scheme will be implemented and which organisations will be involved in administering and delivering it. Local authorities and energy companies may both have a role to play. In advance of the Green Deal being launched, British Gas is offering its customers a Home Energy Plan. This offers similar benefits by providing a survey of the property, recommended energy efficiency improvements and generation measures from
insulation to solar panels, installation with no upfront costs and repayment over up to 15 years.xxix Other organisations are offering loans that are specially tailored to support energy efficiency and renewable and low carbon energy projects. They include: • The Carbon Trust offer of flexible finance to enable all types of organisations to invest in measures that will save carbon and reduce their energy costs, including local authorities and businesses. The measures that may be eligible for financing include insulation, more efficient building services and renewable or low carbon energy generation. xxx The Carbon Trust’s Salix
scheme offers interest free loans for investment in energy efficiency for the public sector and can be used to set up a revolving fund. Loans are awarded for individual projects which should be able to repay the loans through savings in energy bills over 3 to 4 years.xxxi • Finance South East and the National Energy Foundation Community Generation Fund loans for feasibility and planning work, equipment purchase and installation and construction costs for projects where “primary economic ownership of the project remains within the community”.xxxii • National Energy Foundation Communities Fund provides low-interest loans for
the earliest stages of a community project to lead to it being “investment-ready” for larger capital flows from other sources. The Fund may support more than one of the stages in a project with sums of up to £50,000 for each stage up to a total of £250,000 in each project. The Fund may also take small equity stakes where appropriate and where there is a dividend payable.xxxiii • South East Sustainability Loan Fund (SESLF) provides match funding loans of £20,000 to £200,000, available alongside existing publically funded loans for small to medium enterprises in new and emerging ecologically driven market sectors.xxxiv
43
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• The PURE Community Energy Fund provides low-interest loans to charities, community groups and non-profit organisations to cover up to 50% of the cost of small scale renewable energy projects which are eligible for the FIT and RHI, up to a maximum of £50,000.xxxv • Community Development Finance Institutions (CDFIs) lend money to businesses, social enterprises and individuals who struggle to get finance from high street banks and loan companies at an affordable rate. This could be a useful source of funding for businesses in Whitehill Bordon to assist in establishing a local supply chain for goods and services associated with the delivery of the energy strategy. Some CDFIs also provide loans
44
for home improvements, providing a potential alternative to the Green Deal and other schemes looking to bridge this gap. They will usually only lend money where finance has been refused by other lenders. xxxvi
Golden Rule. The level of grant funding will be designed to reduce the repayment period to 20 to 25 years. Lower income and vulnerable households and hard-to-treat properties are expected to be targeted for ECO funding.
Grants and other forms of subsidy may be available to plug the gap, where projects would otherwise be unviable or unable to attract sufficient funding to proceed.
The FITxxxviii and RHIxxxix are another form of subsidy for renewable and low carbon energy generation schemes of up to 5MW capacity. They are paid over time, per unit of energy generated, rather than as an upfront lump sum. The initial phase of the RHI is offering a Renewable Heat Premium Payment for householders, which is an initial upfront grant, prior to launching regular incentive payments linked to each unit generated some time next year. Social housing providers will be able to bid for a share of up
The Green Deal will be accompanied by a new Energy Company Obligation (ECO), replacing CERT and CESP.xxxvii The ECO scheme will provide additional grant funding to top-up Green Deal finance and enable more expensive measures, such as solid wall insulation, to be included in the scheme without breaking the
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
to £3 million of the £15 million set aside for the Renewable Heat Premium Payment to make home heating improvements to their tenants’ homes. The FIT or RHI are expected to be available where installation of the equipment has been financed by the Green Deal, although installations that have been funded with a direct grant cannot register for the FIT or RHI. Eligible renewable and low carbon electricity generation projects are able to register for Renewables Obligation Certificates (ROCs),xl which are awarded for each unit of output. These can be traded, providing an on-going income stream. Due to the relatively lower value and greater complexity of ROCs, they tend to be claimed for schemes larger than 5MW which are
not able to register for the FIT. The government is proposing to gradually phase out ROCs and replace them with a Feedin Tariff with Contracts for Difference. This will establish a long-term contract with the generators, guaranteeing them a fixed price per unit of electricity generated, known as the strike price. Variable FIT payments will be made to generators to make up the difference between the market price at which the electricity is sold and the strike price. The Energy Feasibility Study provides further information on the level of FIT, RHI and ROCs subsidy currently available and the types of generation that are eligible.
Businesses can claim an Enhanced Capital Allowance (ECA) for an investment renewable and low carbon heating systems and other energy saving products, allowing them to claim 100% tax relief on purchase price. If the business is paying corporation tax at 26%, it will receive 26p tax relief for every £1 invested, including capital expenditure and installation costs. DECC’s guidance does not refer how the ECA scheme will operate alongside the new RHI, so it would appear that projects will be able to benefit from both incentives.xli A number of organisations offer grants to support investment in renewable and low carbon energy generation and energy efficiency measures. Many grants are
only available to householders, communities, and the public sector or non-profit making organisations, while others are less restricted. They include: • Carbon Trust free technical advice and feasibility studies for public bodies.xlii The Carbon Trust also runs an Entrepreneurs Fast Track scheme, which provides free commercial and technical advice and grants for research and development of renewable and low carbon technologies.xliii • European Local Energy Assistance (ELENA) funding from the EU Intelligent Energy Europe programme, run by the European Commission and European Investment Bank, for local and regional authorities or other public bodies. This will
cover a share of the cost for technical support to prepare, implement and finance the investment programme, such as feasibility and market studies, business plans, and preparation for tendering - in short, everything necessary to make cities’ and regions’ sustainable energy projects ready for EIB funding.xliv • Other EU programmes provide grants, generally on a match funding basis. Relevant programmes include: Eco-Innovation, which aims to remove obstacles to the development and commercialisation of innovative products such as sustainable building products and approaches to greening businessesxlv; Intelligent Energy Europe, which aims to address
Photo: LDA Design
45
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
legislative, behavioural and market-based barriers to energy efficiency and use of renewable energy sourcesxlvi; Energy Efficient Buildings European Initiative (E2B EI) for research into methods and technologies for reducing energy use and carbon emissions from new and renovated buildingsxlvii; 7th Framework Programme support for research and demonstration of innovative energy generation, distribution and efficiency technologies and policiesxlviii; European Industrial Initiative (EII) to support industry-led projects for research, demonstration and deployment of priority energy technologies by encouraging risk sharing, pooling of public and private financing, and development of public-private partnerships.xlix
46
• Grants and special offers from energy companies for energy efficiency and some microgeneration technologies for households, including the CERT and CESP (until replaced) and Warm Frontl programmes. Householders, local authorities, and registered social landlords are eligible to apply. Low income areas are targeted in particular to address fuel poverty. The Energy Saving Trust website has a database of grants and offers available by area.li • Big Lottery Fund Awards for All small grants of up to £10,000 for public sector and non-profit organisations to support feasibility and planning work, training or investment in installing equipment, repairs or
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
conservation work. Reaching Communities grants of up to £500,000 are also available for capital projects, particularly those which promote stronger communities, skills and training, and improved rural and urban environments.lii • Naturesave Trust ‘seedcorn’ community renewable energy grants for feasibility work, equipment purchase, installation and construction costs.liii • Energyshare Fund grants of up to £100,000 for community led energy efficiency, demand reduction or low carbon energy generation projects.liv • Co-operative Bank’s Enterprise Hub offer of up to four days professional
support to community groups on how to set up, run and grow a sustainable co-operative business, including business planning, financial, staffing, legal and governance advice. Grants of up to £5,000 can also be applied for, but only in conjunction with an application for a loan from the Co-operative.lv • EDF Green Fund grants of up to £30,000 on a match funding basis for community, non-profit, charitable and educational organisations to purchase and install renewable and low carbon energy sources for buildings.lvi • Energy Crops Scheme provides grants of up to 50% of the costs for establishing short rotation coppice and
miscanthus plantations in appropriate locations. Natural England administers the scheme, which is part of the EU-funded Rural Development Programme for England (RDPE).lvii • English Woodland Grant Scheme grants of up to 100% of the costs for the planning, planting, creation, and management of woodland. The Forestry Commission administers the scheme, which is also part of the RDPE.lviii • Electric car grants of up to £5,000 from central government towards the purchase cost for qualifying models.lix
Whitehill Bordon has already benefited from a number of government grants, including Low Carbon Communities Challenge and Eco-town funding. The Eco-town team is actively seeking other grant funding, including applying to be involved in European projects and other research and demonstration programmes. It is important to note that there may be restrictions applied to grant funding and other incentives. For example, projects are currently not able to register for the FIT or RHI if they have already received other grants or subsidies. Some organisations have managed to get around this restriction where the grant funding is received by one central organisation and
then loaned to third parties who install and own the generating equipment and use the revenues and FIT or RHI payments to help pay back the loan. This loophole may be closed in future, but potentially the rules may be relaxed for community organisations. This limitation, and other restrictions on the various funding streams, should be taken into account when developing the financial model for each of the elements of the energy strategy to ensure that the most appropriate sources of funding are obtained in each case.
Developer contributions may pay for some equipment and infrastructure associated with the energy strategy directly, such as more energy efficient materials and construction methods, energy distribution networks within the development site boundary or microgeneration installed on-site. Unless property values are enhanced as a result or other ways are found to recoup these costs, the additional expenditure may either be deducted from the developer’s profits or the land value. Some aspects of the energy strategy may even be perceived to have a negative impact on value or marketability of a property, for example if no gas supply is provided to a site, householders will have to use electricity for cooking.
It might be possible to offset cost increases associated with the energy strategy by making savings in other areas of the construction budget, such as using cheaper, offsite construction methods or avoiding the need to install conventional gas boilers in all properties. In addition, as many of the measures associated with the energy strategy will deliver on-going financial benefits through cheaper energy bills to occupants and the value of energy generated, developers should be able to find ways of capitalising on these long term revenues to reduce the net cost to the construction budget or even deliver a positive financial return. For example, developers may retain long term ownership of some of the energy assets and infrastructure
and recover their investment through on-going revenues and service charges or obtain third party investment in some of the equipment or infrastructure upfront. It may also be possible to use the planning and Building Regulations compliance processes in East Hampshire to secure contributions from developers to the elements of the energy strategy which will be delivered beyond the boundary of individual development sites. Such measures could include a district heating network or large scale renewable energy project. Section 106 contributions can be obtained where there is a clear and direct link between the development and the works being funded, though
47
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
the introduction of CIL will expected to limit it to paying for on-site works and affordable housing. CIL has the potential to be more flexible than Section 106, however it will still be necessary to demonstrate that the energy infrastructure it funds in some way enables or mitigates the impacts of the development which pays for it. Whether or not Section 106 or CIL charges to support energy infrastructure can be justified, the total contributions available from developers will be limited in practice by the impact on viability and competing spending priorities. It is possible that in Whitehill Bordon, as in many other areas, developer contributions will fall short of the funds needed to fill the funding gap
48
for the range of infrastructure investment required. East Hampshire District Council may therefore need to prioritise projects for CIL funding, setting the energy strategy against other needs such as green infrastructure and transport improvements. Allowable Solutions payments could potentially fund elements of the Eco-town energy strategy, attracting payments from the developers of sites affected by the Building Regulations zero carbon requirement, both within Whitehill Bordon and further afield. Under proposals currently being considered by government, local authorities, companies or other organisations will be able to sell Allowable Solutions. To
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
maximise the local benefits, East Hampshire District Council or another organisations operating locally, such as an ESCo, are likely to need to set themselves up as an Allowable Solutions provider. The Allowable Solutions offered to developers will need to deliver certifiable carbon savings which are competitive on a cost per tonne basis with the alternative solutions offered by other providers such as developers of onshore wind farms. The Eco-town will need to have a clear, comprehensive understanding of the energy projects that could be funded in this way and be able to market them effectively, with the confidence that they can be delivered once the cash comes through.lx
The MOD, Hampshire County Council, East Hampshire District Council and Whitehill Town Council could potentially also be in a position to contribute to the funding of the energy strategy directly in their roles as landowners and developers for the initial stages of the Eco-town project. For example, they may be able to deliver some of the upfront investment and provide serviced plots in appropriate locations, or accept lower land receipts where this is consistent with Best Value requirements and government guidelines on disposal of public sector assets.lxi Other local authority income streams associated with new development, including the New Homes Bonus and the proposed Business Rates Retention, could help to
offset some of costs incurred during the early stages of the development. Assumptions about the costs incurred directly by developers and any other contributions they will be expected to make to the energy strategy will need to be taken into account in development viability models. Viability models should also take into account any potential benefits to developers, such as predicted uplift in property values, resulting from the energy strategy.
Financial modelling
The balance of costs and revenues will be different for each element of the energy strategy. A separate financial model should be prepared for each discrete project to assess viability. At the smaller end, this may be straightforward. For large projects, or programmes of work which combine the delivery of multiple small projects, more complex financial modelling will be required to map out the various costs and revenues and provide assurance to potential funders that the risks can be managed sufficiently to deliver an attractive return.
Sensitivity analysis of the financial model should be undertaken to assess the impact on viability of changes to the main variables of cost and revenue, such as fuel and electricity prices. This should also take into account sensitivity of cash flow and viability to the timing of investments, interest or debt repayments, and the phasing in of operating costs and returns. Where some elements of the strategy are not viable based on the balance between the costs and income over the lifetime of the project, it will be necessary to determine the extent of capital or operating subsidy that would be required to deliver a positive return. Once this is understood for the range of energy projects on the table, a decision can be made
as to the availability of funds or assets which could be used as a subsidy and the priority of the projects which would need a share of this to go ahead. As capacity to provide grants and capital contributions is likely to be limited, energy projects will effectively need to compete with other types of assets and infrastructure such as roads, public realm and affordable housing, for a share of the available funding. When deciding whether to incorporate grants or other forms of subsidy in the funding model for an element of the energy strategy, it will be essential to ensure that the implications for availability of other funding sources such as the FIT or RHI are understood and that there are no issues Photo: LDA Design in terms of compliance with
State Aid rules and other legal requirements. Different elements of the energy strategy, and the wider development of the Eco-town, may be brought together under one overall programme of investment. In this way, more profitable schemes may be able to cross-subsidise others where this is justified by the wider benefits they offer. For example, a community microgeneration or energy efficiency loan fund could be supported by a share of the proceeds from a large scale renewable energy project like a wind farm. Viability should still be considered individually to inform investment decisions. Projects may also need to be packaged up and presented separately where external investment is sought, to allow
49
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
each project, with its own mix of rate of return, risk profile and duration, to be matched to an appropriate type of investor. The sources of funding available and the conditions attached to this funding will differ depending on the business model for delivery of the energy strategy or individual projects within it. In particular, the level of public and private sector involvement will have significant implications.
Detailed financial modelling is recommended as part of the next stage in the development of the energy strategy. A suggested specification for the financial modelling and business planning work required is provided in Appendix 2.
Financial modelling for the Whitehill Bordon energy strategy and its constituent projects should consider several scenarios for the business model to take into account these variations and their impacts on viability.
50
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Risk management
The level of risk involved in a project will influence its ability to attract funding from investors and lenders, and the terms attached to any funding that is obtained. It will also affect access to insurance and the cost of premiums. Risk can be associated with technical issues, planning and permitting, variability in costs and revenues, operational issues, environmental impacts, or health and safety. Other risks include policy or fiscal changes, legal negotiations, land ownership issues (rights of way, wayleaves, easements), and changes to development phasing and construction schedules. The Energy Feasibility Study lists some of the risks associated with the various potential projects.
The business plan accompanying an investment proposal or funding application needs to demonstrate that the risks are understood and that steps have been taken to manage them to an acceptable level, known as “de-risking�. For example, one of the main risks with a district heating network is the ability to secure demand for the heat produced over the duration of the investment. A business plan for a heat network may therefore need to be accompanied by long term contracts with several large heat customers, together with clear plans for attracting and retaining smaller customers. Guarantees of connections for new development sites can also be obtained through land sale agreements, planning conditions supported by
planning policy, or section 106 agreements. The business model for delivery of any elements of the energy strategy involving more than one party also needs to deal with allocation of risk. For example, a PV installation on a domestic property may involve the householder, the equipment supplier and an installation contractor. A CHP and district heating project on a new development site may involve an ESCo, the property developer, equipment suppliers, contractors, the local authority and future customers. The allocation of risk should be set out in contractual agreements, so that it is clear who is responsible and who deals with the consequences and costs in the event of any incidents or changes to the project. In general, risk should
be allocated to the party best able to manage it. During the financial modelling and business planning process, it may be necessary to consider several options for allocation of risk to determine which one offers the best returns. For example, in the case of a district heating system being installed on a new development site, an important factor for the project’s success will be its ability to grow the customer base as quickly as possible to ensure that it can start to pay off the upfront investment costs. This will depend on the rate of construction and occupation of new properties, over which the ESCo investing in the energy centre and heat distribution infrastructure will have no control. The ESCo would expect the developer
to manage the risk in this case. As a further example, to reduce risk to project revenues, an ESCo might prefer to target large public sector or commercial heat customers willing to sign long term contracts and may be reluctant to invest in a heat network extended to existing residential areas where it might take significantly more effort to sign up a sufficient number of customers. If the local authority or other stakeholders see this as an important element of the project, they may need to accept a share of the risk to ensure it goes ahead. Some useful guidance on allocation of risk is provided in the District Heating Good Practice guide recently published by the HCA.xiii
Photo: East Hampshire District Council (EHDC)
51
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Case Study: Budenberg Haus Projeckte, Altrincham This 290 unit residential development by Urban Splash has been operational since February 2005. The energy infrastructure includes turbine based CHP and modular boiler plant in a central energy centre providing all power, hot water and heating to the development. The CHP provides over 60% of the power required by the development over the course of a year. At times of high demand and overnight the demand is met by imported electricity from the national grid. The heating system includes a thermal store to act as a buffer against demand. Each apartment is fitted with a heat exchanger
52
and includes a heat meter, electricity meter and water meter. All meters are remotely read through connections to a data network and therefore billing is both accurate and real time. Heating bills are 10% below market price for comparable heat production from gas. Heating costs are 40% below the costs for the equivalent using electric heating. Water is also metered by the data network and the charges included on monthly bills although this is on a pass through basis as the water regulations do not allow a profit margin on the water authorities’ published charges. Further, a range of data services is delivered to each dwelling including Broadband, voice over internet telephony and digital television. This also includes an entry phone
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Consumers
EcoCentroGen (SPV) Ltd
Developer
Funders
Construction Contractor
M & E Contractor
Gas / Electricity /Water / Telecoms / TV Suppliers
O & M Contractors
camera to display images on the TV and remote door opening through the TV remote control. The data services are billed on a subscription basis against option packages. These charges are included on the monthly bill for the heat, power and water. Through the agreement of a contract between Urban
Splash and at that time, EcoCentroGen Ltd, the MUSCo SPV was set up for 34 years in exchange for a capital contribution against the infrastructure of ÂŁ1.4m. Financing was provided by Mountgrange Ltd as shareholder in EcoCentroGen and secured against the future revenue generated by the delivery of services.
The SPV is responsible for all consumer contact, customer services, metering and billing and the investment is returned through the sale of the services over the concession term. The development has won awards for its sustainability performance.
Case Study: Greenwich Peninsula The development to be built out over the next 20 years will comprise over 10,000 dwellings and almost 400,000 m2 of office, retail, and education accommodation. Further adjoining developments include the existing and emerging Anshutz Entertainment Group (AEG) leisure and hotel accommodation including the O2 and Greenwich Millennium Village. With ambitious aspirations to reduce environmental impact, Greenwich Peninsula Regeneration Ltd (GPRL) propose to install a community energy solution based around a central district heating (DH) network. Heat will be supplied into this network from a
number of gas and renewable fuelled boilers and Combined Heat and Power generators located either in a large single Energy Centre or distributed in a number of smaller Energy Centres. Other renewable energy options are being appraised. GPRL have established an Energy Services business to operate the energy plant and infrastructure and supply heat to the Greenwich Peninsula development. Such a business is modelled on heat being retailed to the residential and commercial consumers and electricity being exported to grid. It is anticipated that the revenues produced by the energy services can be used to support some of the capital cost of the installation of the
energy plant and infrastructure. Initial business case modelling suggests over ÂŁ15m of capital funding could be raised against income under a long annuity cash flow model. A Special Purpose Vehicle (SPV) Company has been set up to allow participation of various stakeholders now and in the future. The scheme has benefitted from a grant aid contribution for the Homes and Communities Agency (HCA) and their interests in the project are currently reflected in a shareholding in the SPV. This allows them to ensure that their aims for low carbon infrastructure are maintained throughout the development timeline.
53
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
As the scheme develops it will also be possible for other parties to join the SPV including the operator of the network and equipment, for example, as well as community participation. The operator’s involvement will ensure high quality service levels and a vested interest in ensuring both consumer satisfaction but also successful financial return for all stakeholders. Community participation could be on a stewardship basis but could equally include a financial stake to the benefit of the local community. This could include a gift of equity for the benefit of community groups and it is also possible for investment from the community to be collected at the SPV level (akin to a green bond).
54
The SPV governance will include developers initially too so that a cohesive delivery of infrastructure is maintained over what is a very long development timeline.
Element Cost
Gas / MWh
£27.60
The SPV will control and set all tariffs and charges against the energy delivered from the equipment and infrastructure. Primary information below will be used to set tariffs and to review them on an annual basis.
Biomass / MWh
£35.00
Biodiesel / MWh
£59.30
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Connection Charges / plot
ESCo Rates, Tariffs and Charges £229,000
Residential Heat £/MWh + £/yr
£59 + £245
Commercial Heat £/MWh + £/yr
£40 + £615
Electricity Export £ / MWh Renewable Generation ROCs
£69.25 2.0
Inflation
2.5%
NPV Discount Rate
12%
The GPRL SPV will capture all the legal agreements required including:
Commercial agreements will include:
•
Input for sales and marketing collateral and welcome pack
•
Input for homeowner manual and consumer guide
Billing format and direct debit notifications
•
Customer relations management set up
•
Credit control cycle and reminder forms
•
Call management system scripts and consumer registration process set up
•
Insurance proposal information
•
Business model and cash flow forecast
Form of lease
•
Tariff calculations
Energy services agreements between ESCo SPV and Developer or stakeholder
•
Metering and billing platform setup
•
•
Confidentiality agreements
• •
•
Form of warranties
•
Consumer agreements
•
Codes of practice
•
Fuel purchase agreements
•
Service agreements
Consumer agreements will include:
55
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
7.0 Leadership and Coordination of the Energy Strategy Role of an ESCo or MUSCo As demonstrated above, implementing the energy strategy for Whitehill Bordon will be a complex process, involving a wide range of projects, multiple project developers and a variety of funding sources.
To ensure that the Eco-town’s ambitious objectives are achieved, it may be necessary to take a more active role in delivery, with leadership and coordination from a central body to help to drive the process and provide support to elements of the energy strategy which may not come forwards on a purely commercial basis.
Delivery scenarios This leads to three overall scenarios for the delivery of energy infrastructure and services in the Eco-town: • Incumbent-led • ESCo-led • MUSCo-led
A passive approach could be taken to delivery, whereby the incumbent energy companies, private sector and individuals are allowed to select and take forwards the most attractive projects and those mandated or encouraged at a national level.
56
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
This central body could also take responsibility for the ongoing management of some of the infrastructure and services provided. An ESCo or MUSCo could take on this leadership, coordination and management role.
Each of these scenarios is described in outline so that their relative strengths and weaknesses can be identified. Incumbent-led In this first scenario, local stakeholders encourage the incumbent energy companies to deliver and fund the energy infrastructure and services to both the new developments and to existing households, businesses and other
organisations. ESCo-led In this second scenario, local stakeholders encourage and enable the establishment of a new ESCo for the town and its surrounding area. The ESCo would be involved in implementing key elements of the energy strategy, particularly those where extra support is required to be sure of delivery. Projects taken forwards by the ESCo might include, for example: • A CHP scheme and district heating network, where the ESCo has some stake in the investment and ownership of the assets and responsibility for on-going management and billing. • Extensions and some upgrades to the electricity
distribution network, and the interface with Scottish and Southern Energy to connect new networks to the grid, recovering costs over time through use of systems charges. • Energy efficiency improvements for existing buildings, either by providing loans to occupiers or investing directly and recovering the costs savings on the energy bills. • Installation of microgeneration on buildings where the occupiers are less able to invest directly, either by providing loans or investing directly, retaining ownership and collecting the FIT or RHI in return. It is likely that one or more
of the incumbent energy companies will continue to have a role to play in delivery of the energy strategy and the ESCo, due to the specialist expertise and resources they can contribute. For example, cost and complexity of the process of becoming a licensed electricity supplier may mean that it is more practical to engage an established energy supplier who is already licensed to provide these services. Energy companies may be joint venture partners in the ESCo, have commercial relationships with it or continue to deliver elements of the energy strategy which fall outside of the ESCo’s remit.
MUSCo-led In this third scenario, local stakeholders establish an ESCo but then encourage and enable that vehicle to quickly extend its scope into delivering other infrastructure and services, such as: • Information and communications technology (ICT): The MUSCo could enable an extension of the BT Openreach plans to roll out its ‘fibre to the cabinet’ programme from the Bordon exchange by the end of 2011. Whilst BT Openreach’s plans will be of great benefit to most existing and new households and businesses in the Eco-town, the surrounding communities are not likely to benefit, resulting in a great disparity in broadband services in the area. A MUSCo could take responsibility for investing
in extending services to these communities with a similar super-fast broadband product, generating revenue from these new subscribers and from service providers using that extended network. • Water: The Water Cycle Study for the Eco-town has highlighted the issue of disjointed responsibilities for water cycle management in the area, which may be a barrier to the town achieving some of its environmental goals. It recognises the strengths that the individual incumbent water companies have in dealing with their own specific remit but draws a conclusion that the complexities of these companies working together to deliver better integrated services in future will prove problematic. The study
57
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
then goes on to explore the possibility of creating a ‘town water company’. Were a MUSCo model to be pursued, or an ESCo established then extended to cover other appropriate services, then this may make the task of setting up a town water company (using ‘inset’ arrangements) easier and more cost effective. Leveraging consumer and more general community relations from other services to cover water services is likely to lead to greater success.
Transport: Similarly, the Eco-town’s transport strategy sets out the modal share goal to achieve 17% of all trips by bus by 2036. This will require a series of investments in bespoke infrastructure and services in the town that the incumbents – private bus operators and Hampshire County Council – may not be able to deliver within their operating model. It also proposes local cycle sharing and car club initiatives managed by a Town Transport Manager reporting to the Ecotown Project Team. The strategy has not yet taken this further but, like the water cycle study, it is possible that some form of new local public transport enterprise may be seen as the most effective means of integrating and
58
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
investing in the town. This approach may also enable other special community transport services to be offered, such as health services, elderly care, school buses, large goods delivery. And like the town water company idea, such an enterprise would likely benefit from a MUSCo model being pursued for other purposes in the town in spreading costs and enabling cross-selling. Green infrastructure: The MUSCo model may provide an opportunity for the long term control and management of the significant green infrastructure assets that will be enhanced and created by the Eco-town plans. The green infrastructure strategy for the Eco-town acknowledges
that management and maintenance are important issues.
Business model, ownership and governance
A MUSCo that took responsibility for managing green assets may be able to use cross-subsidy from its profitable activities to fund or endow management costs and bring its entrepreneurial skills to realising commercial value through appropriate eco-system services, e.g. local food, biomass etc. This issue should be considered carefully within the development process.
An ESCo or MUSCo which is correctly designed and implemented can add significant value to all involved. It can reduce developer capital costs, improve plot marketing (as the plots can be fully serviced with infrastructure) and provide revenue opportunities for the organisations involved. An ESCo or MUSCo can also provide the best opportunity for the introduction of external finance for renewable and low carbon energy infrastructure and services. There are a number of models including asset or cash flow finance but also innovative products which look at creating
robust long term revenue that can be leveraged. Establishing an ESCo as a separate company or SPV to deliver the energy strategy allows energy assets to be considered separately from other core services or business, such as investment in other aspects of the development of the town. This enables targeted financing from investors whose requirements for returns, timescale of investment and attitudes to risk are more appropriately matched to the energy infrastructure or services being proposed. Setting up a MUSCo to deliver a wider range of infrastructure and services could offer additional revenue opportunities, facilitate cross
subsidy, mitigate risk through diversification and encourage wider community involvement. In this case, the ESCo would become a subsidiary of some form of strategic MUSCo which has separate business divisions or companies to operate each distinctive service, as shown in Figure 4. The strategic MUSCo entity ensures management oversight and continuity across all projects associated with the conception, design, finance and implementation of energy or other infrastructure and services. Each of the projects can have their own distinct business model and funding. This structure allows individual projects to be packaged up as stand-alone investments and matched to appropriate investors or lenders, while allowing profits to be
redistributed via the strategic MUSCo to support lower revenue generating projects. Although this model has no known precedent in the UK at any scale for this specific purpose, its structure is similar to a traditional holding company comprising a portfolio of distinct business units (or ‘profit centres’). Each business unit operates in effect as an independent business but will benefit from parent financing and support services for example. In the UK, the Co-operative Group is one successful example of this type of structure, with its portfolio consisting of food retail, financial services, funeral care, childcare, travel services and farming supported by central services. In this case,
Strategic ESCo/MUSCo
Project Enterprise
Project Enterprise
Project Enterprise
Project Enterprise
Project Enterprise
Energy generation + services
Telecoms + services
Potable + green water supply
Transport
Green infrast.
Figure 4: a strategic-project ESCo/ MUSCo model although each business is semi-autonomous, the structure encourages and enables collaboration and crossselling to a wider customer base, using a shared brand proposition. The Virgin Group operates in a similar way.
and its units is a financial one, with each unit maximising its contribution to the holding company in return for access to capital and services.
More often, the relationship between the parent business
59
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
The ESCo business may be the first operating division of the MUSCo, which then branches out to the other areas of operation over time. This will be possible if the ESCo adopts a legal form and financial plan that can accommodate this option as the delivery plans for the other services progress. One of the advantages of an ESCo or MUSCo is that it can be owned and controlled by multiple stakeholders. Various organisations or individuals could take a shareholding, commensurate with the level of investment and an agreed governance charter. This could capture local authority involvement, community stewardship, or indeed both. Operator and funder participation can also be accommodated.
60
It is possible for full private sector, public sector or community ownership of the umbrella ESCo or MUSCo. Alternatively it may be formed as a JV or PPP, bringing together the financial strengths, assets and expertise of the private and public sectors. This would provide a robust entity structure for the attraction of external finance with commercialisation being provided by the private sector and security by the public sector. The public sector stake in the ESCo or strategic MUSCo could be through a holding controlled by the SPV established to deliver the overall Eco-town project. In respect of private sector input to the operation of the ESCo or MUSCo, the companies best qualified to
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
provide it are established, multidisciplinary firms with good balance sheets, experience and the infrastructure and licences required to manage the delivery of services to domestic and commercial end users. They will need to have established smart metering and billing platforms, consumer payment management solutions, customer services resource, engineering capabilities (operation and maintenance) and good supply chains. There are a number of candidates who would be interested in bidding for participation in this entity. These would be capable of providing the management role but also to bring finance into the project.
The ESCo and MUSCo models both offer the opportunity to choose from very different ownership and governance forms, including: • Privately owned (or publically quoted), for-profit enterprises or joint ventures • Publically owned by one or more public sector organisations • A combination of both the above in some form of partnership, usually an SPV, to pool assets and other capital and to share risk and reward • A social enterprise forprofit or not-for-profit where consumers or citizens and other investors own the enterprise to deliver an economic, social and/
or environmental return on investment • A hybrid of one or more of the above forms There are potential advantages to involving the community more directly in the delivery of strategic infrastructure and services for the town, other than investing as individuals in their own projects such as energy efficiency or microgeneration for their own homes. This level of involvement could be obtained by establishing a local cooperative, which either delivers its own projects or takes a stake in the ESCo or strategic MUSCo. This would facilitate engagement of local people in the Eco-town project, provide a formal process for community stewardship, offer an additional route for fundraising
and allow some of the financial benefits to be retained locally. Types of co-operative include consumer co-operatives, which are owned by their customers such as the Phone Co-op, worker co-operatives owned by their employees such as the John Lewis Partnership, and community co-operatives, which are owned by members of a community that is defined geographically or by a shared interest. In Whitehill Bordon, either a consumer or community co-operative could be appropriate as far as the energy strategy is concerned. In terms of the legal structures available, a co-operative can currently be incorporated as:lxii • An industrial and provident society, which is permitted to issue shares to the public
and provides statutory protection of the co-operative principles, for example one member one vote. • A private company limited by guarantee or limited by shares, which is a widely used and well understood legal form, but does not offer any protection of the co-operative principles. A company limited by shares is prohibited from offering shares to the public, so this may not be an appropriate legal form if there is an intention to raise finance by offering shares to the local community. • A community interest company (CIC) limited by guarantee or shares. If limited by shares, CICs are also prohibited from making public share offers.
If a co-operative were established, it would be advisable to incorporate it in one of these legal forms, as it limits the liability of its members to a fixed sum, usually the value of their share. Procurement of energy company involvement in an ESCo or MUSCo can be achieved in a number of ways. Early engagement has the advantage of getting design input and commercial modelling in the formative stages of the Ecotown development. Many developers in recent years have not fully understood the implications of compliance with current planning and building regulations with respect to long term operation and risk. They understandably focus on planning consent, cost and delivery and many
only consider contractual involvement of an energy company once it is too late and a traditional approach is left as the only option. However, early involvement would preclude competition as the energy company is unlikely to be prepared to invest resource and intellectual property unless under an exclusivity agreement. The alternative is to have the ESCo or MUSCo structure designed and the financial modelling carried out before engaging with the market. This then allows the different options for ESCo or MUSCo models to be included in a competitive tender process. The main expertise required once the structure is actually designed and financed is the operation of the infrastructure and this may be the focus of procurement. There are a
number of large infrastructure operators who would competitively bid to run the services over a long term contract. The advantage here is that the stall can be set out (stakeholder participation, commercial and environmental returns, stewardship and financial performance) before bringing in an energy company as the operator. The HCA guide includes some useful lessons learned by local authorities about the ESCo design and procurement process, and guidance on the State Aid and public sector procurement issues, with specific reference to district heating schemes.xiii A sample outline business plan structure for establishing an ESCo or MUSCo, using an SPV governance model, is provided in Appendix 2.
61
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
8.0 Initial Option Evaluation Measuring success
The Eco-town proposals combine environmental, social and economic goals. Although often complementary, these goals can also be in conflict.
• Great places to live
A balance will therefore have to be struck in the energy strategy between these goals in the light of the availability of resources and of local stakeholders’ attitudes to risk.
• Transport and connections
The draft Eco-town masterplan contains a number of overall economic, social and environmental aspirations in support of the Green Town Vision:
Photo: East Hampshire District Council (EHDC)
62
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• Supporting the community • A new economic role
• Making it easier to go green All three energy infrastructure and services delivery scenarios could contribute to each of these objectives but it is likely that some will do so more than others. For example, a local ESCo or MUSCo offering tailored services to the town’s residents and businesses may prove better at persuading consumers to change their behaviour in using energy than the incumbent utility companies.
It is therefore important for local stakeholders to consider, from an energy perspective, the relative importance of these objectives. It is also important that the scenarios are considered in the light of their relative financial and risk profiles and local stakeholders’ ability to resource a preferred energy strategy and attitudes to risk. These issues were discussed with some local stakeholders at a consultation workshop in Bordon, the summary notes of which are included in Appendix 1. In the workshop, stakeholders considered the relationship between these objectives and the likely ‘tradeoffs’ that would be necessary to achieve an energy strategy in due course that fitted best with the Eco-town objectives and took account of the availability
of private and public funding and of the local public sector partners’ means of managing risk. In summary, the early conclusions were that: • The perfect environmental outcome will not be achievable without significant trade-offs with other objectives, greater public sector funding and high risks • Social goals of transforming the lives of local people and future residents are as important as the Ecotown’s direct environmental outcomes and success in social actions will drive those future environmental outcomes
• The Eco-town vision is for the whole future town, not just those areas of new development; the existing communities must benefit from this vision • The Eco-town objective of finding a new economic role for the town is crucial and failure will likely hinder any social or environmental success
• Local stakeholders, and the local authorities and MOD in particular, will have to manage effectively the inherent financial and operating risks of doing things very differently from the norm on this scale
• Local stakeholders must be realistic about the limited availability of public funding over the next decade and should therefore look to an energy strategy that focuses on maximising value from private sector investors and other sources of funding for both capital and revenue expenditure
63
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Strengths and weaknesses of the delivery scenarios
In light of the conclusions from the consultation workshop, there follows an initial view of the strategic strengths and weaknesses of each of the three scenarios: Incumbent-led The main strength of this scenario is that the key players are known, have tried and tested business models and operations developed over many years. Risk-averse developers procuring infrastructure and services for new schemes will therefore favour this scenario in the short term. The utility companies have wellestablished means of servicing new development sites and are obliged by government to innovate in offering energy efficiency services to existing
64
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
There are market providers, including incumbent energy companies, for each of the elements of energy infrastructure and services likely to be required for the town. Depending on the precise specification and mix of these elements in the energy strategy, these providers may be able to offer the Eco-town the solutions it requires.
services and include multinationals, regional private companies and public sector bodies. As with those delivering energy infrastructure and services, these players also have standard business and operational models and legacy systems that have been used to support new development schemes. In the case of telecommunications and water, similar arrangements are made between developers and the main suppliers. Developers will also normally agree to pay sums to private bus companies already operating locally and to local authorities managing open spaces services in the area through S106 agreements.
Beyond energy services, the incumbents are also providers of telecommunications, water, transport and community
A combination of regulator direction and changes in planning, building regulation and environmental policy
communities. They have invested large sums in building infrastructure and services, the future efficient utilisation of which is key to their continuing financial success. Incumbent companies are also able to source capital funding from their own resources.
are requiring incumbents to innovate in infrastructure and service design and delivery. Whether or not this level of innovation will be sufficient to meet the needs and ambitions of the Eco-town is difficult to ascertain at this stage. Certainly, many elements of the energy strategy can be provided by the incumbents. But, it is doubtful that the mere provision of this infrastructure and these services will be enough to deliver the step change in environmental performance and consumer behaviour required. For the most part, incumbents are duty bound to maximise shareholder value; unless there is a significant commercial incentive, innovation will have to be driven by regulations and consumer drivers that carry much greater weight than the
needs of Whitehill Bordon. Herein lies the most significant weakness in the incumbentled scenario. Although these companies have invested considerable sums post privatisation in building distinctive brands, at present, most consumers show little interest in, or loyalty to, these brands and are encouraged to switch by the regulator to demonstrate a successful, competitive market. That said, consumers are relatively passive and there is a degree of trust in brands people know and consider ‘safe’ in supplying their energy needs. If the Eco-town is to be successful it must achieve a much higher level of awareness and engagement of consumers in how they use these services. Its ambitions across a range of
outcomes also require stepchange and not incremental improvements to infrastructure and services that may not be easy in this scenario, given the incumbents’ legacy systems and short term investment horizons. If the Eco-town project and its partners can confidently build a strong partnership with the local incumbents then this scenario, which is how business is done right now, may be plausible in terms of the meeting the aspirations for the Eco-town. ESCo-led The real strength of this option is that its business model and operations can be tuned to meet the specific needs of the Eco-town, rather than relying on the current or future offerings from the incumbents.
The ESCo could invest in and operate new energy generation capacity and provide energy services as described above. Not only can this model enable the specification of each element of the energy strategy to suit the Ecotown’s circumstances, but it can also coordinate and phase financing, delivery and operation of the range of energy infrastructure and services to avoid unhelpful competition for resources and customers. The Greenwich Peninsula case study (and similar initiatives at Corby, Southwark and Swindon, for example) shows how various forms of the ESCo model can address and coordinate the need for bespoke infrastructure and services to serve major new
schemes comprising many phases of development. It also allows for the Ecotown to capture and re-invest commercial value resulting from infrastructure and service delivery, rather than see that return accrue to the external shareholders of the incumbent companies. Not only can developers contract with an ESCo to outsource the responsibility for delivering new energy infrastructure and services, this retained value will accrue to the ESCo investors, which may include developers. As a result, there are new ESCo businesses now operating in the UK seeking to win contracts with developers requiring these services. However, the key weakness with the ESCo model is that it remains a solution with
little precedent at this scale in the UK and therefore the perception of investors, suppliers and customers of its business credibility. This could lead to conventional investors requiring premium returns to reflect the higher risk. MUSCo-led The potential strengths of this model are much the same as the ESCo model in that its business model and operations could be defined to provide infrastructure and services specially designed for Whitehill Bordon. Its main difference being that it can provide more than just energy. Again, it will enable commercial value to be captured and reinvested in the Eco-town as determined by its governance structure. There are additional strengths of this model. It can lead to
65
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
greater economies of scope by cross-selling services across its full range of activities and spreading the overhead costs of separate business units. It may enable sub-optimal infrastructure or services to come forward and be retained under its remit through initial and cross-subsidy. Its retailed services (e.g. bus ticketing) may have bespoke pricing tariffs that encourage positive environmental behaviours. And its portfolio of activities, each with a likely different investment and revenue profile, can enable it to spread financial risk across business and economic cycles. If measured over the long term, say twenty years or more, this model is likely to lead to lower total costs of ownership and operation and higher environmental performance
66
achievement. There are three key weaknesses with the MUSCo model, of which some are common to the ESCo model: • Diversity of responsibility – the distinctive business models of its different operations offer few opportunities for synergy and managing a diverse portfolio could become difficult • Dependence on a single organisation – weak performance by this single enterprise could jeopardise a wide range of services with likely high costs to replace it in the event of failure
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• Lack of precedent in this sector – there are no precedents for the successful deployment of a MUSCo on this scale in the UK In combination, these weaknesses are considerable and difficult to de-risk for potential sponsors and investors. Although the first two can be addressed in the legal form the MUSCo takes and in its organisational structure, the latter weakness will only be overcome with local stakeholders committing together to take risk and be the first in the UK. The lack of precedent will also likely increase the cost of capital given investors’ higher rating of risk, despite what would be a profitable operating model.
Strengths and weaknesses of the ownership and governance models
In the incumbent-led scenario, ownership and governance issues are straightforward. The Eco-town’s developers, residents, businesses and other organisations are customers of the incumbents, which are publically quoted, often multinational companies. The ownership and governance structure selected for either an ESCo or MUSCo could introduce both strengths and weakness. For example, a potential strength of the MUSCo model is its ability to encourage and enable cross-selling of services but a weakness may be in the Eco-town placing too much responsibility with one, albeit diversified, organisation. A privately-owned governance model may increase the risk of the latter weakness
as decisions on investment, service specification and pricing across the service mix will be made by a company whose primary objective is to maximise shareholder value, which may be remote from Whitehill Bordon. A social enterprise model, however, may enable a perceived weakness of dependency on the MUSCo to be turned into a strength if local stakeholders control the enterprise. Essentially, therefore, there are three guiding principles that will determine the most appropriate approach to delivering the energy strategy:
1. The more risk-averse local stakeholders are, the more willing they will be to trade-off economic, social and environmental outcomes in order to accept the specification of infrastructure and services provided by the incumbent companies and to benefit from external private capital. 2. The stronger the drivers for bespoke design solutions to meet the future energy needs of the Eco-town, the more likely it is that stakeholders will accept the risk of creating a new enterprise for delivery and will seek to manage this risk by using governance models that allow for some degree of local control.
3. The greater the degree of behaviour change required of consumers to achieve longer term goals, and the more important it is to capture and retain commercial value within the Eco-town, the more important social enterprise solutions will be. Resolving these governance issues in the energy strategy will be crucial to determining the mix of energy technologies that will be deployed, their financing and phasing. If a MUSCo model emerges as a favoured option this will have to shape the other infrastructure and service components. These in turn will have spatial consequences for the masterplan refresh.
At this stage, a social-enterprise controlled MUSCo has the greatest fit with the stated Ecotown aspirations. Not only does this option have considerable strengths in creating bespoke, consumer oriented services that offer local people the opportunity to secure an economic stake in the enterprise, it will also address one of the key MUSCo model weaknesses in allaying fears that the Eco-town will be too dependent on a single enterprise entity that it cannot control and secure for the long term. More generally, the MUSCo model will enable far greater co-ordination of infrastructure and service delivery by removing unhelpful competition between providers and by planning services over the long term to meet the needs of the local community.
67
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
9.0 Conclusions and Recommendations Conclusions
This study has explained the business models available to the Eco-town to achieve its ambitions in respect of meeting its targets for how energy will be generated and used. It has rehearsed how these options may evolve over the next few years in a series of three scenarios. It has considered the ways in which success may be measured collectively by local stakeholders and it has identified some of the key strengths and weaknesses of each scenario in this light. The study has not sought to get into the detailed business modelling, which would include further work on the financial aspects, as this is not necessary to communicate the key issues. Detailed business modelling can only be done alongside other detailed work required to develop and take
68
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
the energy strategy forwards, when more is known of the masterplan and other strategic delivery issues. Nor has it sought to challenge the underlying philosophy or targets of the Eco-town; rather it has focused on the practical challenges of turning ambition into reality. Enough is already known to draw some key conclusions for the revision of the draft masterplan and of the other strategic components. The summary conclusions are therefore: 1 The range of energy projects that could form part of the energy strategy could be delivered by the incumbent companies for the most part, but this option will not be the most
effective at meeting the Eco-town’s ambitions and needs, nor co-ordinate investment most effectively 2. There may be a limit to which households and businesses will be willing to change their energy use behaviours within the current consumer retail model that provides little incentive to change 3. Alternative delivery models to the incumbents have no precedent in the UK at this scale as the barriers to new entrants to the energy generation, supply and retail sector are high for a variety of structural, competitive and regulatory reasons
4. That said, the drivers of alternatives are increasing in their combined force and in the next few years the constraints of the current industry structure will have to change to facilitate a low carbon economy – somewhere along the line, the UK will need ambitious and realisable alternative structures 5. Some elements of ESCo and MUSCo models have been around for many years in the form of private district heating networks and have been tested more recently in smaller development schemes – there are no technical or operational barriers but the costs of capital and economies of scale have been real constraints
6. In order to secure the full benefits of an ESCo or MUSCo (and to avoid some weaknesses), the choice of governance model will be crucial. A standard private sector-led approach may lower costs and public sector risk but will not be able to match the revenues or wider social performance of an approach based on local ownership 7. To ensure that the Ecotown’s ambitious objectives are achieved, it may be necessary for the public sector to take a more active role in delivery, with leadership and coordination from a central body to help to drive the process and provide support to elements of the energy strategy which may
not come forwards on a purely commercial basis 8. Establishing an ESCo/ MUSCo as a separate company or SPV to deliver the energy strategy allows energy assets to be considered separately from other core Council services or business. This enables targeted financing from investors whose requirements for returns, timescale of investment and attitudes to risk are more appropriately matched to the energy infrastructure or services being proposed 9. No matter which business and governance models are chosen to structure future energy investments, there will need to be a greater integration in the planning and delivery
of the Eco-town across a variety of supporting infrastructures and services, especially other utilities like telecommunications and water management, but also public transport and community services 10. A MUSCo that took responsibility for managing green assets may be able to use cross-subsidy from its profitable activities to fund or endow management costs and bring its entrepreneurial skills to realising commercial value through appropriate ecosystem services, e.g. local food, biomass etc. This issue should be considered carefully within the development process
69
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
11. Responsibility for managing the process of developing and delivering the energy strategy and projects would best be handled by a dedicated member of staff with the expertise to coordinate stakeholders and partners and drive the forward delivery 12. To encourage and facilitate the delivery process for existing buildings, an advice service could be provided to residents and businesses in Whitehill Bordon. This could provide information on the costs and financial benefits of the different options available to them, help in interpreting quotes from suppliers, and advice on securing funding
70
These conclusions point to a preferred direction of travel for the energy and other strategies to pursue in due course. Some form of locally-controlled MUSCo solution appears most able to serve the Eco-town’s future needs and ambitions and is one that can enable it to capture, retain and invest economic value created by future development. The ESCo model shares similar characteristics but is most likely to be only the starting point for a MUSCo in the longer term. The incumbent model is one that will work but will have increasing limitations for the Eco-town and will not enable local differentiation of service offering or local value capture.
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Accepting that this conclusion represents the most challenging option to pursue, the Eco-town project and its key partners – East Hampshire District Council, Hampshire County Council, the MOD, Annington Properties and representatives of the local community – should quickly determine their collective appetite to pursue this option and then ensure that all future masterplanning and delivery work tests the practicality of the model. In doing so, the new masterplan and its component strategies will be able to develop spatial and delivery plans that take the shared control of a series of crucial community assets into full account in setting their objectives and targets.
Delivery Recommendations
There follow a series of recommendations to the Ecotown Delivery Board in light of the above conclusions. It is recommended that the Delivery Board: a) Appoints a dedicated, suitably qualified person within the Eco-town team or Eco-town delivery SPV to manage the process of developing and delivering the energy strategy and projects. This would be a long term and broad role, seeing the energy strategy through the next couple of years of development and overseeing delivery, for example by representing the Eco-town delivery SPV on the board of the ESCo/ MUSCo joint venture, coordinating stakeholders and partners
b) Establishes an advice service for residents and businesses in Whitehill Bordon, such as a telephone helpline or helpdesk at the EcoStation to encourage and facilitate the delivery process for retrofitting energy efficiency and microgeneration measures to existing buildings c) Comes to an early view on the appetite of the Council and local stakeholders to take managed risks in pursuing its energy and other ambitions and this view is communicated to inform the refreshed masterplan and the iteration of its component strategies d) Commissions further work at the appropriate time that will include an outline
business plan for an ESCo (see Appendix 2 as an example) that allows for its diversification into other infrastructure and service provision in the form of a MUSCo e) Invites each of its relevant Specialist Groups to fully explore the infrastructure and service opportunities and implications for their respective remits of a new ESCo, the scope of which may be extended to become a MUSCo
Infrastructure, Transport and Education Specialist Group g) Commissions a report that examines in detail the potential for a social enterprise governance model for one or more of the delivery vehicles, including an ESCo or MUSCo, once the specification of energy, transport and other infrastructure is more clearly defined
f) Gives the responsibility of co-ordinating a report on the potential benefits of an appropriate form of MUSCo to the relevant Specialist Group, to be decided by the Delivery Board. It is recommended that this resposibility is given to the
71
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
72
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Appendix 1 Consultation Workshop Comments on Presentation 1 – Energy Action Plan Would welcome more information on the potential impacts on the wider area, in order to visualise the possible impact, i.e. sizes of plant needed. Also more detail in due course on size of infrastructure, cost (relative / actual), ownership, potential restrictions (birds/ bats) and delivery options and mechanisms. Need this level of info to make informed views, but realise study is at an early stage and is looking at feasibility rather than detailed proposals. Activity Session 1: To seek views on how the environmental, social and economic success of energy
actions may be measured in years to come and to consider stakeholders’ attitudes to financial and other risks to deliver this success. Green Group Discussion Points: • Timescale for measures – over 20 years? Is the assumption that the National Grid will break down? – No – still see incumbent services as being important. • Some aspects hard to measure, especially over time. • Environmental Outcomes – carbon emissions and maintaining biodiversity are key points. • Social Outcomes – need a greater understanding of choices and higher take
up of energy options in the town, a shift in mindset and active community engagement. Question how to measure behavioural change – by more active participants? Need more buy-in/engagement, especially from youth – future generation important for energy decisions. Need less of a ‘throwaway’ culture. Need to change behaviour and aspirations, but how can you measure the benefit to the town over 20 years?
people – change ‘get out of Bordon as soon as they can’ view. Need sound inward investment especially from big ‘eco friendly’ companies like Sony. • Financial Outcomes – Need to look at the level of public and private investment needed to secure change. Measure the level of profit reinvested locally. • Risk – political and financial are key elements. Will the town be willing to take risks – uncertain?
• Economic Outcomes – need to look at potential job creation, especially in new energy sources. Will need more local jobs after the MoD depart; will be an employment ‘vacuum’ for a while. Need to raise job and career aspirations – young
73
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Green Group
•
Red Group
ENVIRONMENT
• •
Emissions Biodiversity loss/ maintained
ENVIRONMENT
4
3
SOCIAL
£££ •
•
• • • • • • • •
2
Level of public and private investment Local reinvestment
3
Take up Interest Engagement Young people Life expectancy Shift in mindset Aspirations Cultural perspective
3 4
LOW RISK • •
Political Financial
SOCIAL
£££ • • • • • • • •
3 ? Subsidy Private investment Long term Reality of quality choice Infrastructure Low carbon 8-10yr pay back Financial viability
4
1
• • • • • • • •
3
Visual impact Noise impact Quality of life Pride Education Exemplar Energy efficiency reduced bills Comfort
ECONOMY • • •
Jobs created Aspiration – job/ career Inward investment More local
LOW RISK • • • •
74
• • • • • • •
Impact on European designated birds–if? Local Regional National European Worldwide Low carbon EE
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
•
Public sector or private sector Community feeling Standards/ policies/ guidelines/ requirements Number of providers and competition Co-ordination of providers/ utility plan
ECONOMY • • • • •
Local jobs Small businesses Regional National World wide
Blue Group Discussion points: * With change comes opportunity – change to Bordon – positive making it better • U se current stock to show examples of how older houses can be more energy efficient • T his will help to convince people: good for energy reduction and saves money • N eed community on side, may galvanise the community • C ould give 1 share to each member of the community to ensure buy in – it will help people to want the change
• C an we afford as a town and how can we pay off costs – how long is the turn around going to burden the town • R evenue stream to community if local company • T he area is surrounded by protected sites, need to be aware of this in plans • R isks: technological/ financial • N eed to agree to move forward each specific energy project to X point then reassess if the project is working – reiterative process. Ensures community has control • W ho takes the risk? Community can’t be left with the risks. Need to
decide where the risk lies – this is fundamental • C ommunity may take small share of the profit but the community must accept that company will take the rest of the profit as its taking the risk • W hat is the acceptable/ unacceptable risk? • I f we always go for high risk things will the community be penalised as a consequence? • W ith innovation risk is high but also financially high • H igh risk to start with but lower as the technology improves • N eeds to be profitable to make it happen
• A cceptable environmental level but has to meet targets • T he spidergram changes over time especially between risk and financial impact, in the long take more risk and have higher financial reward as more evidence/ community support for work, 4 for risk at start and 1 for financial then opposite over time • S tep by step approach to development of energy to ensure best fit and works • r elationship between the objectives – can’t have one without the other • Change over time • I nnovation – more risks could be taken over time and profit could go up
75
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Blue Group
Activity Session 2:
ENVIRONMENT
• • • •
Carbon Protected sites Local materials Waste and water
To seek views on the perceived success factors for the delivery scenarios and to assess their strengths and weaknesses using outputs from Activity 1.
3
SOCIAL
£££ • • • • • •
Cost of investment Source of investment Affordability Energy costs and carbon charges Profit Financial sustainability
2 4
• • • • • •
Flexibili ty and choice Community ownership Health and well-being Affordability Public buildings Behaviour
3 3
LOW RISK • • • • •
76
• •
Technological Financial Physical risk Eggs-in-one-basket Community vs private sector - Who takes the risk? Political Acceptable/ unacceptable risk
ECONOMY • •
Local jobs Local spending e.g. energy bills going to local companies
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Blue Group discussion: • E nergy – need to ensure baseline uptake to make viable - Denmark housing associations are both the supplier and buyer of energy • E lectric vehicles will increase the market for local electricity • B usinesses in – give to community a share to get them started, then community invest more over time
• L ocal Company – local community own shares. People buy more shares and increase the size of company as energy model improves • I f community more involved and have shares then will use local facilities more as they have an interest in them • H ow much and how you split the profit – community/ private – key decision for the Eco-town • C o-op very different from PPP models - No obligation on private sector to cross subsidise - Co-op more cross subsidy control
• P rivate or community sector only finance – no public finance
• O ne trench will have all services in to make digging up the road easier
- Public sector business opportunity for CHP – high returns
• H ow do we get the quality of services in the town we want?
- Could just do private sector work and not involve the public sector at all – does this fit with Eco-town
• C an’t deliver with incumbents in terms of environmental targets
• Not for profit best • I nnovation? Where does this lie: - Big incumbents: don’t innovate or have innovation departments - Small companies: more innovative as not so restrictive but too small to fund?
- Can’t national/ local rules be changed to ensure in WB companies operate to a higher standard? • W B creating a centre of excellence – build skills at ‘home’ but once set up effectively need less employment • B rand of the project – benefits having one theme/ brand for Eco-town – which model fits this brand image
• L ocal places and local energy • I ncumbents – new houses get the best out the deal with old houses not gaining by the new technology as too expensive to retrofit • E SCo etc. again new houses gain more than old as services fitted into new town • M USCo company multifaceted – going outside core business • W ho is providing services/ going to give expertise to ESCo/ MUSCo – are they in for the whole deal • C ontrol and accountability apply to all 6 boxes
77
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Blue Group
Strengths
Weaknesses
Incumbent
• Will work without relying on community
• Less control over profit and service less efficient
• Easy
• Less co-ordination
• Free market choice for consumer
• Go as far as profitable e.g. no bus services • Will it deliver Eco-town or bare minimum • State of the art services to central WB but not to more widely disperse community
ESCo
• Innovative way of working
• Local employment, social responsibility/ role, local • Less flexible in terms of fixed supplier skills and knowledge/ cross subsidise other • Difficult community areas
MUSCo
• More community control over bus/ PT services etc. • Community share and involvement and profit -
D epends on business model e.g. co-op vs PPP
• More efficient, integrated and planned services • More able to tackle less profitable/ higher risk e.g. existing town services
78
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
• Limited choice for buyers to ensure sufficient uptake
Green Group other comments • M USCo - Why not include a transport company too, or business services, or water, or community transport? • N eed to consider the many different business models and drivers. Town Centres Business Improvement District bodies (BIDs) could be a similar model – an umbrella organisation delivering commonlyagreed services yet where each member retains their own independent corporate identity. Also PPPs or Community Interest Companies.
• N eed to think long term i.e. 20 years, for the duration of the Masterplan. • 3 key factors – should be bespoke to WB, could do more than energy, and the degree to which the town can work with the incumbent providers and others in the future.
Green Group
Strengths
Weaknesses
Incumbent
• Experience and infrastructure already present
• Infrastructure?
• Known – low risk the uncertainty of the unknown ESCo
• How responsive to changing aspirations? • Monopoly
• New and efficient infrastructure
• One stop facility
• Opportunities for greater partnerships
• Political slant
• Not for profit organisation MUSCo
• Planned for the future
• Privatisation of assets
• Embrace eco-rural context
• No choice inducement = conflict of interests
• Not for profit organisations Accountability
• C ontrol, Risk, Choice and Accountability are key factors.
79
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Feedback and discussion from Activity Session 2 • M USCO’s – can give you ‘carrots’ • W ill incumbents deliver Eco-town measures? • S ocial outcomes leads to an engaged community • I ssue: these community led operations normally develop organically bottom up, this is being developed top-down • P PP: possibility as less need of community involvement, may be the model needed
80
• C ommunity can’t necessarily lead as they don’t know all the options due to a lack the awareness and risk adverseness • G overnment not been interested in making other energy options happen. It is a highly regulated sector, small companies can’t get in as over regulated • D rivers for rural areas dissatisfied with current services may drive ESCo models etc. • V illages – Eco-town development team discussions with small business in villages concern over bigger local companies attracted into the area and the home working/ smaller village
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
businesses shut down • A dd to list of ESCo and MUSCo other options e.g. ESCo plus Transport etc. - May not have just one ESCo could have a number focusing on different fields, locally run options not through the incumbents e.g. Green Infrastructure/ services for the community/ water management etc. With different priorities and business models. These could join up at some point for efficiencies of scale into larger MUSCo.
Appendix 2 Business Structure, Financial Modelling and Establishment of an ESCo/MUSCo Special Purpose Vehicle Aim To inform a business structure and create strategy advice for the formation of a Special Purpose Vehicle (SPV) Company to own and manage the services delivery infrastructure for ESCo/MUSCo. Through the creation of a commercial model and business plan, it is possible to design an energy services or multi utility services solution while at the same time ensuring a legally compliant and consumer friendly approach. This business plan will include funding options which will allow flexibility on future funding.
Objectives It is important that modelling the services delivery and financial elements of low carbon energy strategies and any other multi utility services (ICT, transport, efficiency) encompasses the commercial, legislative, regulatory and financial aspects of a fundable, compliant solution. Structure The SPV structure requires a business plan which provides: •
•
•
legal and targets •
Stakeholder participation
•
Leadership and control of performance
•
Shareholders agreement
•
•
A financial model – to benchmark all decisions, risk management and control
•
A Statement of Aims & ambitions – what does the business want to achieve?
•
SPV structure – tax efficiency, governance,
Treatment of Loan capital (and funding mechanisms) Maximised value to stakeholders – financial and carbon Suitability and attractiveness for/ to external operators/ participants Exit strategies
The SPV will represent all stakeholder interests and appoint, manage and control all internal and external elements required for the delivery of the services to the community. Once there is an understanding of the proposed energy strategy for the town and the additional. Services which could be included, then it is possible to build a model to assess its likely financial performance, allowing the variables to be tested to establish the viability of the strategy under various scenarios. The model will provide the measurement metrics for the stakeholders as directed by the stakeholders rather than by external companies or organisations
Scope What does a business plan look like? •
Implementation plan and programme
•
Design, cost and procurement strategies
•
Optimisation of load capture and services provision
•
Plot interface documentation and connection agreements
•
Planning for energy centre(s) or other infrastructure
•
Commercial modelling
•
SPV Structure (as per bullet points list above)
81
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
•
•
SPV shareholders agreement (key heads of terms) Funding mechanisms and options
•
Energy (or Multi Utility) services legal suite
•
Scheme development advice - technologies, design, plant and equipment specifications
•
Additional services assessment, testing and integration
82
Deliverables What is required?
Key elements will include: •
•
A SPV business plan
•
A commercial model for the compliant energy (and other services) strategy and an iterative process to flex for stakeholder decisions/ options
•
A commentary on the model explaining the commercial relationships and the regulatory framework for the community energy solutions (including advice on tariffs and standing charges), the inputs and drivers to the model, and the significant influencing factors.
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
•
•
•
Operation & Maintenance, administration costs, insurance, direct overheads and operational costs. Oversight of Capital costs of constructing the on-site generation assets and energy distribution networks including energy centres and plant, subterranean pipe work, heat substations and interface to plots (finishing in heat exchangers with metering etc). This will be based on technology selected in consultation with the energy strategy. Year of first operation and long term investment model for up to 25 years as flexed for the various scenarios.
•
•
•
Cost of fuel – imported grid supplies, and renewable fuel costs will be incorporated as required. Current supply chain arrangements and availability of feedstock will be included as risk assessments for the project. Heat and electrical demands of development profiled according to construction phasing and changes to the Code for Sustainable Homes. The impact on the model of changes to phasing in terms of volume and timing. Connection charges – an assessment of the connection charges
•
Heat tariff and Electricity tariffs and charges for any other services considered (ICT, transport etc).
•
Value of fixed charges – as assessed by the model. The standing charges level can provide the corner stone of a funding mechanism and setting these at the right level is critical.
•
The availability of ROCS, FiT, RHI and LECS revenue to support the business case.
•
Operating costs of the energy centres and infrastructure including a plant replacement fund so that all future on site infrastructure can be replaced without capital cost to the tenants.
•
Outputs including Profit & Loss account, Balance Sheet, Cashflow Statement, Performance against financial hurdles, operational cash generation, Indication of the level of debt funding which may available, and a potential valuation.
The model will take consideration of current legislation and regulation which may affect the financial performance of the business. Factors requiring consideration include: •
•
Enhanced Capital Allowances and tax application Alternative financial support mechanisms in the process of legislative consideration (for example Renewable Heat Incentive (RHI))
•
The Citiworks case and the implication on Private Wire and Independent District Network Operation as methods of maximising the value of embedded or near site renewable generation.
into long term energy services agreements. The business plan will need the following information in order to produce the model:
Technical •
The proposed generating asset details
•
The output capacity of the plant.
•
The fuel specification, source and volume.
•
The proposed mode of operation
Development Data •
•
Code for Sustainable Homes – changes to the code for the inclusion of near site renewable generation and it’s implications The implications of Voluntary Emissions Reduction (VER) trading and/or EUTS participation.
The legal framework and service agreements will also inform the model with regard to consumer rights, the landlord and tenant act, environmental legislation and targets and the integration of funding models
•
•
•
•
The proposed start date of the development and first supply date The proposed development accommodation schedule by type The proposed development program by accommodation type. The proposed development layout and master plan.
Cost Data •
Budgeted build cost
•
Cost of any energy related permits, wayleaves etc.
•
Estimated maintenance costs (if available)
Timescales & Costs The production of the financial model and SPV structure will require 4 months. The creation, agreement and execution of the legal documentation associated with the SPV will take six months. These activities could run concurrently to some extent but an overall programme of six to eight months should be allowed. The business planning and SPV structuring to achieve ESCo/ MUSCo set up will require a budget of approximately £70,000 with legal costs at approximately £120,000 at 2011 prices.
83
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
Endnotes i. www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/ renewable/renewable.aspx
ii. Whitehill Bordon Eco-Town: Draft Framework Masterplan - produced for East Hampshire District Council, AECOM (2010). Masterplan and all related publications available from www.whitehillbordon.com
xi. www.sustainablewantage.org.uk/uploads/Solar%20Wantage%20 Scheme%20v2.0%20%2021%20March%202011.pdf xii.
www.energysavingtrust.org.uk/cafe/Green-Communities/Funding-Advice/ How-to-get-funding-for-your-community-project
xiii.
istrict Heating Good Practice: Learning from the Low Carbon Infrastructure D Fund, HCA (2011)
xiv.
T he Carbon Co-op Feasibility Study, Urbed on behalf of the Manchester Innovation Trust (2010)
xv.
aluation of Energy Use and Greenhouse Gas Emissions for Appraisal and V Evaluation, IAG, HM Treasury and DECC (2010)
xvi.
Update on the Design of the Green Investment Bank, BIS (2011)
vi. Power and Money: How Local Economies can Benefit from Renewable Energy, New Local Government Network (2011)
xvii.
www.bigsocietycapital.com
vii.
http://ceo.decc.gov.uk/
xviii.
www.eif.org
viii.
www.energy4all.co.uk
xix.
www.hmrc.gov.uk/guidance/vct.htm
ix. www.settlehydro.org.uk/
xx.
www.hmrc.gov.uk/eis
x. www.glasu.org.uk/en/uploads/documents/Llanidloes%20AD%20 Feasibility%20Study.pdf
xxi.
F unding Revolution: A Guide to Establishing and Running Low-Carbon Community Revolving Funds, Forum for the Future and Bates Wells & Braithwaite for DECC (2011)
iii.
iv. v.
ommunity Energy: Planning, Development and Delivery, TCPA, CHPA and C LDA Design (2010) www.decc.gov.uk/en/content/cms/what_we_do/consumers/saving_ energy/cert/cert.aspx
www.decc.gov.uk/en/content/cms/what_we_do/uk_supply/energy_mix/ renewable/renewable.aspx
84
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
xxii.
www.abcul.org/home
xxxv.
xxiii.
www.eib.org/index.htm
xxxvi. Community Development Finance Association, www.cdfa.org.uk/
xxiv.
nlocking Investment to Deliver Britain’s Low Carbon Future, Green U Investment Bank Commission (2010)
xxxvii. www.decc.gov.uk/en/content/cms/legislation/energy_bill/energy_bill. aspx
xxv.
www.dmo.gov.uk
xxxviii. www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/ feedin_tariff/feedin_tariff.aspx
xxvi.
www.hm-treasury.gov.uk/press_47_10.htm
xxvii.
www.wandsworth.gov.uk/news/article/10538/bond_issue_plan_could_ save_millions
www.puretrust.org.uk/page.jsp?id=105
xxxix. www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/ incentive/incentive.aspx
xxviii. The Green Deal, DECC (2011), available from www.decc.gov.uk
xl. www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/ renew_obs/renew_obs.aspx
xxix.
www.britishgas.co.uk/greendeal.html
xli.
http://etl.decc.gov.uk/etl
xxx.
www.energyefficiencyfinancing.co.uk/Pages/home.aspx
xlii.
www.carbontrust.co.uk/cut-carbon-reduce-costs/public-sector/pages/ default.aspx
xxxi.
www.salixfinance.co.uk xliii.
www.carbontrust.co.uk/emerging-technologies/fast-track/pages/default. aspx
xxxiii. www.nef.org.uk/communities/communities-funds.html
xliv.
www.eib.org/products/technical_assistance/elena/index.htm
xxxiv. www.financesoutheast.com/ourfunds/index.aspx?id=1654
xlv.
http://ec.europa.eu/environment/eco-innovation/index_en.htm
xxxii.
www.nef.org.uk/communities/community-generation-fund.html
85
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
xlvi.
http://ec.europa.eu/energy/intelligent/call_for_proposals/index_en.htm
lviii.
www.forestry.gov.uk/ewgs
xlvii.
www.e2b-ei.eu/default.php
lix.
www.bis.gov.uk/news/topstories/2010/Dec/electric-car-revolution-revs-upfor-2011
xlviii.
http://cordis.europa.eu/fp7/energy/home_en.html
xlix.
http://setis.ec.europa.eu/activities/overview
lx. www.zerocarbonhub.org lxi.
ircular 06/03: Local Government Act 1972 General Disposal Consent C (England), CLG (2003)
lxii.
Starting a Co-operative: A Guide to Setting up a Democratically Controlled Business, Co-operatives UK for the Cabinet Office (2008)
l. www.direct.gov.uk/warmfront li. www.energysavingtrust.org.uk/Easy-ways-to-stop-wasting-energy/Energysaving-grants-and-offers lii. www.biglotteryfund.org.uk/ liii.
www.naturesave.co.uk/trust_naturesave.html
liv.
www.energyshare.com/fund/about-applying/
lv. www.co-operative.coop/enterprisehub/ lvi.
www.edfenergy.com/products-services/for-your-home/our-services/greenenergy-fund.shtml
lvii.
www.naturalengland.org.uk/ourwork/farming/funding/ecs/default.aspx
86
Whitehill Bordon - Energy Infrastructure & Services Delivery Study - Final Report
www.whitehillbordon.com Produced on behalf of East Hampshire District Council Penns Place Petersfield Hampshire GU31 4EX 01730 234 329