8 Commercial models and procurement
This section provides a review of options for delivery of energy projects, to inform the Clyde Mission of possible routes to procurement for the short-listed energy projects.
8.1 Commercial structures
The commercial case for any district energy project in the respective council areas should demonstrate that the scheme will have a viable procurement and contractual strategy that provides a sustainable basis for the long-term operation of the system.
A commercial strategy needs to ensure that the project delivers an optimal return while aligning with the respective council's drivers for low carbon development. As such it needs to consider the commercial arrangements between principal parties including the council, any potential funders / investors, contractors, suppliers, and customers.
Key roles to be allocated for the development of a district energy network are given in Table 8.1. The allocation of these roles is dependent on the allocation of risks, ability to fund and requirements for participation and control.
Table 8.1. Key roles associated with a heat network
Often has a limited engagement with a decentralised energy project and is mainly concerned with delivery of a real estate project including compliance with planning conditions and net floor area for revenue generation.
The party that owns the physical assets, such as the generation technology and associated infrastructure.
Responsible for the technical operation of the energy scheme.
The party responsible for the retailing of energy, i.e. purchasing it from the generator, arranging transportation to the consumer and sale to the consumer.
In development of scheme options, the councils in the Clyde Mission area will decide the formal role they will take in the design, installation, commissioning, and long-term operation of the system. If no private sector involvement is possible (e.g. due to lack of commercial performance for private sector involvement) or desired, then the council can choose to self-deliver and operate the network. Councils have access to low cost finance through the Public Works Loan Board as well as other potential sources of public funding such as the Low Carbon Infrastructure Transition Programme (LCITP) and could benefit from the revenue generation of the scheme.
The commercial structure options are outlined in Table 8.2. This table, provided in Code of Practice Heat Networks (CIBSE), shows that the system can be broken down as required.
|Option||Energy centre||Heat network||Heat Supply|
LA – Local Authority
PSCo – private sector company
SPV – public-private special purpose vehicle
COCo – community owned company
The possible structures are summarised in Table 8.3.
Table 8.3. Potential commercial structures
- Common approach whereby a private ESCo company installs, owns, and operates the district heating network and acts as the energy service provider.
- Where the scheme is likely to be attractive to a private ESCo, this can remove any burden of operation and maintenance from the Council.
Council owned (direct involvement)
- Council undertakes delivery and operation of the project in its entirety. This will include sourcing all necessary funds, undertaking procurement, and owning and operating the scheme including acting as heat supplier to end customers.
- Any capacity the Council does not have in house would be contracted to third parties, e.g. through operating and maintenance contracts with equipment suppliers, and billing and metering with a dedicated company.
- The Council gains more strategic control, but also takes on more risk.
Council owned (DBOM)
- If there is not appetite for the Council to operate the network directly, this can be done via a Design, Build, Operate and Maintain (DBOM) contract in which a private entity is responsible for design and construction as well as long term operation and maintenance. The public sector secures the project's financing and retains the operating revenue risk and any surplus operating revenue.
Council Joint Venture
- Council enters into a formal agreement with a third party for supply of funding and / or operational and technical expertise. A Joint Venture can bring significant benefit by bringing expertise in the sector by managing delivery and operation however there needs to be a clear benefit to all JV partners.
The fundamental issue facing local authorities should they invest directly in the district energy scheme, is what the relationship is with the private sector.
The evaluation of the options usually revolves around a number of considerations: Table 8.4.
Table 8.4. Considerations for Council involvement
Control vs. risk
The tensions between the desire for control over project outcomes and the willingness to take on project risk.
The rate of return the project will actually support and whether this will be acceptable to the private sector.
Cost of raising capital
The recognition that the cost of raising capital for the private sector is generally greater than for the public sector which, on a capital-intensive project, has a major impact on viability and ultimately on cost of heat supply.
Availability of capital
The availability of capital to both public and private sector is limited but is also closely linked to the degree of risk involved and the organisations' understanding of the risks involved.
The amount of control that the council or the various stakeholders have over the scheme may be important in achieving their overall objectives. Similarly, drivers to participate may not be sufficiently strong to ensure agreements for connection are reached. For private sector developers it is likely that some form of compulsion will be required to ensure connection, through planning conditions which require this and safeguard infrastructure and heating system types to enable future connection.
In relation to the preferred project vehicle, particularly whether or not to set up a separate operating company (Special Purpose Vehicle), it is recommended that legal advice is obtained during the initial stages of design development prior to proceeding. Issues such as State Aid, legal authority for the council to undertake various activities, continued stakeholder engagement, flexibility, and implications for an exit strategy will need to be considered. Where a JV was taken it is likely that establishment of an SPV would be the preferred route.