Publication - Research and analysis

Energy Efficient Scotland programme: analysis of delivery mechanism

Published: 19 April 2019
Directorate: Energy and Climate Change Directorate
Part of: Communities and third sector, Energy, Environment and climate change
ISBN: 9781787817609

Report exploring how best to oversee the delivery of our programme to improve energy efficiency and promote low carbon heating in Scotland's homes and buildings.

Supporting documents

10 Outline financial case

10.1 Key points

In this chapter, cost drivers are identified based on the set of assumptions and expectations around the requirements to deliver the roles outlined in Chapter 7. This chapter then looks at the potential uncertainty around the delivery of EES due to factors such as the early stage of development and the timescale.

Although based on assumptions, costs will not be significantly different across differing options, it is expected that some costs will differ based on the models for review. These are summarised below. The remainder of the chapter then looks at routes to funding, potential alternatives and the risks which could influence scheme funding, followed by any other areas for consideration.

Broadly, the individual cost drivers of the proposed different sets of options are fairly well understood. At this stage, the scale of these costs is harder to estimate, however broadly, significant variation across the different models is not expected. Nevertheless, there are some general observations which can be made at this stage.

Namely, models that are close to government are cheaper to set up and run as they involve no new external structures. However, more arm’s length models, have higher set up and operation costs. If new bodies are operated outside of the Civil Service, there may be more scope for driving operational efficiencies in delivery.

This means that the Executive Agency and the Non-Ministerial office, have a weaker financial case, because these options would require the establishment of a new structure within the Civil Service.

10.2 Introduction

The outline financial case looks at the potential set up and operating costs required to meet the EES objective, and explores the fundamental financial principles of the project.

Due to the limited information available, the project’s early stage of development, and the uncertainty around potential scope, it has not been possible to estimate the actual costs for each model at this point in time. However it is possible to consider at a high level the potential differences between models regarding the financial viability of the NDM over time.

The financial viability of the proposed set of options over the course of the potential lifecycle, the 7 models have looked to be reviewed:

Steering Group & Scottish Government delivery;
Scottish Government Local Collaborative Structure;
Creation of EES Directorate;
Executive Agency;
Non-Ministerial Office;
Executive NDPB; and
Public Corporation.

Within a financial outline case, it is not expected that granular estimates of cost should be included, rather the potential differences between models regarding the financial viability of the NDM over time have been illustrated.

The financial case:

Comments on precedent for the scale of these potential costs and provides an illustrative example of their potential size;
Compares at a high level the differences between models and their financial performance over time;
Assesses possible routes for funding, the potential risks and uncertainties to this funding over time, and any material differentials between options in terms of funding flexibility;
Provides an outline view of the potential impacts of any proposals on future Scottish Government budgets; and
Outlines areas for further consideration.

10.2.1 Assumptions

Any reform will have a set of costs in order to fulfil the required roles, therefore the potential drivers of costs which could be incurred based on a set of high level assumptions have been outlined. These include:

The required funding regardless of approach is made available from the Scottish Government.
All roles will be fulfilled to the specification outlined within Chapter 4.

10.3 Cost drivers

Based on this set of assumptions and the expectations around the potential requirements to deliver the roles set out above, expected primary cost drivers have been outlined in Table 15 below.

Table 15: A summary of the primary cost drivers

Cost driver	Overview
Set-up	Regulatory, legal and process costs required to establish any new underlying body’s themselves. Recruitment costs due to the hiring of staff in preparation for the establishment of the body. Contractual procurement costs, dependent on what type of NDM is put in place.
Staff	Main operational driver as these are applicable to all roles. Requirement for capacity support and provision of experts will require significant staff outlay to reach all Local Authorities. Expertise will be required in order to help with LHEES development and implementation of the associated low carbon heat and energy efficiency projects, such as the potential to hire a specific technical expertise to set and monitor quality assurance. Enforcement and monitoring functions at any kind of national level will require sufficient workforce which may result in a high cost due to the headcount required. Specialists in the fields of legal, technical and expert advice will be required on schemes for certain roles. Ongoing general and administrative costs, and expected staff costs for the running of any functions.
Facilities	Proposals will require suitable facilities to operate. Potential for the requirement of regional offices due to the geographical split of the work required across the country. Offices will therefore require the installation and/or maintenance of systems such as air conditioning, lighting and heating.
Systems	Internal IT and infrastructure systems. Bespoke IT process infrastructure, particularly when dealing with the gathering of datasets whereby crucial and sensitive household and public data could be required for the delivery of specific roles. Use of PCS, a tool used by public sector bodies at a local, sectoral or national level to advertise the supply chain which will require specific investments.
Outlay services	Specific costings would be required to undertake internal or external marketing activities. In the case that an in-house marketing team is chosen, an appropriate budget would be required to ensure that costs are controlled.
Return	Some delivery models with private shareholders may require an equity return on top of day-to-day administrative and operational costs. These returns would be to account for the delivery at risk of equity capital. This return could be expected to be low as these organisations would be working with only limited commercial risk due to significant proportions of funding likely coming from Scottish Government.

10.3.1 Uncertainty and illustrative examples

Major projects typically have long timescales and substantial uncertainty at the early stages of development. EES is no different with significant uncertainty around the roles, funding, potential commercialisation and timescales for delivery.

EES is a 20 year project with targets across the 2030s and 2040s, costs have therefore not been estimated at a granular level at this stage. It might be expected, however, that these will be sizeable across the course of EES.

While it may be expected that in any one year, no individual option will offer significantly differing costs, over the course of the programme, cumulative differences could be more significant.

Chapter 9 already outlines how the costs of operating the ECO scheme amount to over £175m on an annual basis, around 11% of the programme expenditure. Similar capital intensive programs have had significant delivery costs, such as the smart meter rollout, which requires energy suppliers to offer a smart meter to every home in England, Scotland and Wales by 2020. In their 2016 cost benefit analysis, the department for Business, Energy & Industrial Strategy (BEIS) outlined that the legal and operational costs relating to the set-up of the smart meter roll-out across both the energy industry and Government has total present value costs over the appraisal period of approximately £258m.^[50]

10.4 Routes to funding

The expected routes which are fit for funding the different models outlined in Chapter 7 have been considered. Given the nature of the Roles being performed, the core assumption made is that all of the models would receive funding from Scottish Government and therefore other than for a Public Corporation, no other source of operating funding is likely to be appropriate.

At this stage, the scale of funding for the Programme is not directly known, however it has been outlined above that administrative costs and set up of any new architecture costs will be expected to be in the low percentage regions of any overall scheme funding.

Potentially, some models could raise funding from commercialised activities, such assurance roles undertaken on participating bodies, from licensing regimes or from charging for advice and support to Local Authorities and other parties. The Scottish Government’s ambition to establish a public publicly owned commercial but not-for-profit energy company by March 2021,^[51] may provide a model for how that would be possible.

10.5 Risks and uncertainty

An assessment has been made that there are potential risks and uncertainties which could influence scheme or model funding. If the funding is government based, there will primarily be political uncertainty which could delay spending and investment until this uncertainty is resolved.

There could also be potential budgetary constraints for the Scottish Government, however this will be seen as low risk. The scale of the project over time is variable and the delivery requirements are unclear at this stage, which can also create uncertainty.

In addition, there are risks associated with scheme implementation funding to ensure suitable financial arrangements are in place to install the required measures across EES. At this stage, it is not obvious whether any model can address these issues.

10.6 Areas for further consideration

This financial case will require additional consideration of several factors at further stages of any assessment process. These are expected to contain:

Government Funding: Further work into identifying the scale of Scottish Government funding which is available for the delivery of any new architecture.
Other funding models: Assessments of the potential for additional funding models, including the potential for commercial funding from licencing regimes or from other commercial activities.
Budgetary impact: Assessments into the different budgetary impacts which might be expected on the Scottish Government balance sheets from the use of different models.

Table 16: Summary of financial case assessment

Option name

Affordability of set up costs

Affordability of operations

Ability to drive efficiency in operations

Ability to maintain and generate surpluses for reinvestment in programme delivery

Steering Group & Scottish Government delivery

Higher

No new structure created.

Higher

No new structure, so additional operational costs will be minimal.
Indicative range of operational costs discussed within financial case.

Lower

Constraints around Civil Servants' salary and pension
Less ability to reduce overheads e.g. rent as staff located in central Government offices.
Steering Group structure has no delivery levers, and lacks ready access to economies of scale.

Lower

No specific budgetary arrangements around a Steering Group that would allow it to maintain surpluses.
Dependent on spending cycle.
Budgetary surpluses would arise in underlying teams and would not be retainable.

Scottish Government Local Collaborative Structure

Higher

No new structure created.

Higher

No new structure, so additional operational costs will be minimal.
However, collaborative arrangements will likely require increased costs but unlikely to be material in Programme terms.
Indicative range of operational costs discussed within financial case.

Lower

Constraints around Civil Servants' salary and pension
Less ability to reduce overheads e.g. rent as staff located in central Government offices.
Steering Group structure has no delivery levers, and lacks ready access to economies of scale.
However best practices could be shared across different bodies.

Lower

No specific budgetary arrangements around a Steering Group that would allow it to maintain surpluses.
Dependent on spending cycle.
Budgetary surpluses would arise in underlying teams and would not be retainable.

Creation of EES Directorate

Higher

No new external structure created.

Higher

No new external structure, so additional operational costs will be minimal.
This structure may also require collaborative arrangements to maximise effectiveness.
Indicative range of operational costs discussed within financial case.

Lower

Constraints around Civil Servants' salary and pension
Less ability to reduce overheads e.g. rent as staff located in central Government offices.
Steering Group structure has no delivery levers, and lacks ready access to economies of scale.
However best practices could be shared across different bodies.

Lower

No specific budgetary arrangements around a Steering Group that would allow it to maintain surpluses
Dependent on spending cycle
Budgetary surpluses would arise in underlying teams and would not be retainable

Executive Agency

Medium

New arm’s length entity created requiring resource planning, discrete systems and processes.
Staff are still Civil Servants, meaning staff have to be found, not recruited.
Unlikely to require legislation, and no corporate vehicle created.
Indicative range of operational costs discussed within financial case.

Medium

Additional costs associated with operation of new entity.

Medium

Constraints around Civil Servants' salary and pension.
Management focus and ability to drive efficiency is constrained by the status of the body.

Lower

Executive Agencies cannot retain surpluses to carry forward outside the cycle.

Table 16 (cont): Summary of financial case assessment

No	Option name	Affordability of set up costs	Affordability of operations	Ability to drive efficiency in operations	Ability to maintain and generate surpluses for reinvestment in programme delivery
5	Non-Ministerial Office	Lower New arm’s length entity created requiring resource planning, discrete systems and processes. Staff are still Civil Servants, meaning staff have to be found, not recruited. Potential for more extended set up time and cost due to need for legislation and parliamentary approval.- Indicative range of operational costs discussed within financial case.	Lower Additional costs associated with operation of new entity. Likely to have additional operating costs associated with status as separate legal entity e.g. different audit costs. A higher level of financial self-sufficiency will be required, which may involve additional operating costs.	Medium Constraints around Civil Servants' salary and pension. Management focus and ability to drive efficiency is constrained by the status of the body.	Lower Non-Ministerial Office cannot retain surpluses to carry forward outside the cycle.
6	Executive NDPB	Lower Discrete legal entity with higher threshold requirement for bespoke systems and processes. Need to recruit staff as no longer Civil Servants. Needs separate back office or arrangements to provide it. Timelines for set up carry extended cost risk. Indicative range of operational costs discussed within financial case.	Lower Likely to have additional operating costs associated with status as separate legal entity e.g. different audit costs. A higher level of financial self-sufficiency will be required, which may involve additional operating costs.	Higher No longer employing civil servants, so scope for savings. Independence from civil service creates more flexibility in cost base and potentially a more commercial culture. Hiring on commercial terms means reward can be more tightly linked to financial performance and efficiency.	Lower Non-Ministerial Office cannot retain surpluses to carry forward outside the cycle.
7	Public Corporation	Lower Discrete legal entity with higher threshold requirement for bespoke systems and processes. Need to recruit staff as no longer Civil Servants. Needs separate back office or arrangements to provide it. Timelines for set up carry extended cost risk. Indicative range of operational costs discussed within financial case.	Lower Likely to have additional operating costs associated with status as separate legal entity e.g. different audit costs. A higher level of financial self-sufficiency will be required, which may involve additional operating costs.	Higher No longer employing civil servants, so scope for savings. Independence from civil service creates more flexibility in cost base and potentially a more commercial culture. Hiring on commercial terms means reward can be more tightly linked to financial performance and efficiency.	Higher Able to retain surpluses. Potential to access loans from Government

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Email: james.hemphill@gov.scot

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10 Outline financial case

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