Energy Efficient Scotland programme: analysis of delivery mechanism

11 Outline commercial case

11.1 Key points

This chapter outlines key considerations for a new NDM from a commercial perspective, in particular issues around commercial feasibility, procurement and contracting. In particular, this chapter:

• Provides a broad overview of how the different commercial structures for the considered options are expected to function;
• Summarises how the considered options are expected to differ in a contractual and commercial basis; and
• Discusses a range of considerations that must be explored and taken to a greater level of detail at the appropriate later stage when developing a more detailed operating model and developing the framework for any new body.

In general, the further the delivery body is from Scottish Government, the more formal contractual arrangements will need to be and the more extensive the governance arrangements will need to be in order to ensure clear allocation of responsibility. Other key points include:

• New bodies outside of the Civil Service tend to perform better on the commercial case, the NDPB and Public Corporate both offer some flexibility around delivery, charging and incentivisation of performance. While also clearly defining and allocating risk and responsibility through contracts with government.
• Those bodies which are closer to government are more flexible when it comes to taking on additional responsibilities, such as new functions outside of the 10 Roles. This flexibility could allow for models to subsume existing areas of energy policy currently being delivered outside of EES, simplifying an already complicated landscape.
• A Public Corporation will require over 50% of revenue to come from commercial sources. It is doubtful whether such significant commercial revenue schemes would be feasible in the context of EES delivery.
• The New EES Directorate and Executive agency can provide good flexibility, allocation of risk and performance incentives. It is not clear the extent to which these models could charge for services.
• Steering group models, although well placed to remain flexible in delivery, lack accountability due to their decentralised structure i.e. drawing members from different directorates.
• While the NMOs has clear frameworks to define accountability, this body’s ability to remain flexible is constrained, due to the time requirement to provide parliamentary approval for changes in function.

11.2 Commercial overview

11.2.1 Working assumptions

In order to develop this outline commercial case, the following working assumptions have been made:

• Under any new arrangement, all of the Roles identified in Part 1 of this Strategic Outline Case will be carried out, under all delivery body options.
• The new delivery architecture will have a time-limited life determined by the final delivery date of the EES programme in 2040.

11.2.2 Commercial structures

The new delivery architecture will create a mechanism to deliver a Government scheme. Commercial feasibility will therefore largely be driven by the funding received from central Government, rather than commercial revenue streams. As noted previously, there may be commercial revenue streams that emerge as the EES programme develops e.g. in relation to charges for advisory and support services, accreditation of suppliers, collection of fines for non-compliant properties.

The commercial significance of these are not assessed at this stage of the business case - this will need to be considered in the next iteration. If the new delivery body is able to charge for services, a public corporation structure becomes attractive as it allows revenue to be reinvested in delivery. The ability of bodies that are close to Scottish Government (such as Steering Groups) to charge for commercial services is likely to be very limited/non-existent.

The different options identified provide different constitutional options for EES delivery, but under all options the activities undertaken will be the same. This implies that there will not be significant differences in the commercial feasibility of different delivery options.

The activities (and hence commercial structures) of the delivery body are likely to change over time. In the early years of the scheme, the emphasis will be on incentivising households and businesses to install energy efficiency measures, with financial support provided by Scottish Government. In the later phases of the programme, it is likely that there will be a shift towards enforcement, in order to ensure that households and businesses who do not respond to financial incentives install the necessary measures.

This may lead to significant changes to the focus of any delivery body over time. It could also in principle create the possibility of turning on a specific regulatory function later in the Programme, but unless this is expected to have an enduring role beyond the end of the programme, the view is that it is likely to be better to develop options that allow for the regulatory function to sit alongside other Roles, subject to any appropriate ring-fencing, as discussed in Section 11.2.6 below.

11.2.3 Key contractual issues

The delivery body’s principal contractual relationships will be with^[52]:

• Central Government: this will define the delivery responsibilities for the new body under the EES programme, and the terms and conditions under which it carries out this role.
• Delivery partners: this will define the terms of the relationship between the delivery body and its partners e.g. Local Authorities, parts of the supply chain, and the responsibilities of each for delivering the EES programme.

The nature and complexity of these contractual relationships will depend on the extent to which the delivery body is at arm’s length from Scottish Government, and the degree of responsibility for EES delivery which it takes on.

In models where the delivery body is closer to Scottish Government e.g. Steering Group, creation of new directorate, there will be less or no need for a ‘thick contract’ between Scottish Government and the delivery body, and the working relationship will instead be defined through a framework document or Terms of Reference (ToR).

Conversely, where a delivery body is at arm’s length from Scottish Government, a ‘thicker’ contractual arrangement/framework will be required. However, a more arm’s length body may be able to take on a wider range of roles under one roof, lessening the need for additional contracts with a range of supporting delivery partners.

Under models where the delivery body is close to Scottish Government, there may be some responsibilities which it is inappropriate for the delivery body to take on e.g. a regulatory/enforcement role. This would create the need for additional contractual arrangements with the delivery partner with responsibility for these additional roles.

As previously noted, the nature of EES delivery is likely to change over the course of the programme, with a general shift from incentivisation to enforcement. The contractual framework will therefore need to be flexible enough to adapt to this changing delivery role. This flexibility can be provided relatively easily in models that are closer to Scottish Government, as decisions on new roles are made through discussions within Scottish Government, followed by changes to framework documents/Terms of Reference.

11.2.4 Identification and allocation of risk

It is too early to assess the risks of delivery across the different options, or draw up a comprehensive risk register for the implementation of a new delivery body. However, there are some general observations that can be made at this stage:

• Under Steering Group models, there is the potential for conflict between the ToR/framework for the new group and the existing governance documents of Scottish Government directorates. This creates the potential for lack of clear allocation of risk and responsibility;
• For more decentralised models e.g. where Local Authorities or other delivery partners have responsibility for a significant part of delivery, or which involve a number of different Scottish Government directorates, it might be harder to allocate risk; and
• For more arm’s length arrangements, ‘thicker’ contractual arrangements will be required, as well as a clear framework for establishing accountability.

11.2.5 Personnel and procurement

The extent of procurement activity required to set up the new delivery body will depend on the extent to which it is arm’s length from Scottish Government, and will vary materially across the identified options. Models where the delivery body sits closer to Scottish Government will involve less new procurement, while those at arm’s length will require the provision of e.g. new premises, IT and staff contracts, Scottish Government guidance on the creation of new public sector bodies covers all of this in detail of course, but for the purposes of this SOC the general thrust only is noted. ^[53]

The extent of personnel implications will again depend on how separate the delivery body is from Scottish Government. If a new body is set up outside the Civil Service, with staff previously in Government roles, there are potentially Transfer of Undertakings (Protection of Employment) (TUPE) implications. Notwithstanding this, arm’s length bodies outside the Civil Service will have greater flexibility to offer specific performance-based incentives for their staff.

11.2.6 Regulatory functions

The delivery body may be required to take on roles that are explicitly regulatory (over and above supporting and assisting existing trade bodies and regulators). In particular the delivery body may be called upon to administer accreditation schemes, or take enforcement action against suppliers who cause detriment for property owners, or property owners who fail to install energy efficiency measures by the required date.

As noted above, under models where the delivery body is close to Scottish Government, it may be inappropriate for the delivery body to take on an extensive regulatory/enforcement role. Under all models, to avoid conflicts of interest, it will be important to ensure an appropriate degree of separation of regulatory function with related commercial activity. This will obviously be of particular significance if a Public Corporation model is pursued following further evaluation of the potential for enduring relevant commercial income generation.

These factors imply that there may be a need for some regulatory functions to be undertaken by a third party, or for some degree of ring-fencing within the delivery body. This need should be considered in a future iteration of the Commercial Case, and separation options identified and evaluated.

11.3 Areas for further consideration

Future iterations of the commercial case should consider:

• How regulatory functions sit within the delivery body, i.e. is there any need to ring-fence from commercial functions, or allocate to a separate body; regulatory aspects would sit alongside anybody].
• Extent to which delivery body can fund its activities from charging: if charging revenues are significant, and it is deemed appropriate for the delivery body to reinvest these revenues, a more arm’s length, commercial model might perform best.
• The ease of which different delivery mechanisms could take on and subsume additional functions outside of the 10 Roles, to potentially allow for simplification within the existing landscape.

Table 17: A summary of commercial case assessment

No	Option name	Clarity of allocation of risk and responsibility	Flexibility around taking on potential additional roles	Flexibility to charge for services	Flexibility to set terms and conditions for staff and reward delivery	Ability to mandate and hold to account for specific performance
1	Steering Group & Scottish Government delivery	Lower Primary Terms of Reference applied to Steering Group: this is Non-contractual. Potential for conflict between TOR of SG and Governance Documents & Objectives of relevant directorates.	Higher Decisions on new roles are a matter of discussion within organisation and amendment of Steering Group Terms of Reference.	Lower Steering Group has no power or leverage to charge for services.	Lower No scope for sharp specific performance based incentives.	Lower Potential low levels of accountability for specific steering group role.
2	Scottish Government Local Collaborative Structure	Lower Primary Terms of Reference applied to Steering Group this is Non-contractual. Potential for conflict between ToR of SG and Governance Documents & Objectives of relevant directorates. Increased complexity allocating risk and responsibility when working with a number of different Local Authorities and supporting bodies.	Higher Decisions on new roles are a matter of discussion within organisation and amendment of Terms of Reference.	Lower Steering Group has no power or leverage to charge for services.	Lower No scope for sharp specific performance based incentives.	Lower Potential low levels of accountability for specific steering group role.
3	Creation of EES Directorate	Medium Clear framework around establishing accountability while in addition the Body will have standalone staff and purpose allowing clear identification of responsibility However as with a standalone directorate requires no legislative basis and can be created and abolished, therefore limited ability to perform at arm’s length - limited independence.	Higher Decisions on new roles are a matter of discussion within organisation and amendment of framework documents.	Lower Unclear whether able to charge for commercial revenues.	Medium Limited scope for sharp specific performance based incentives.	Medium Potential low levels of accountability for specific role.
4	Executive Agency	Medium Clear framework around establishing accountability while in addition the Body will have standalone staff and purpose allowing clear identification of responsibility However as with a standalone directorate requires no legislative basis and can be created and abolished, therefore limited ability to perform at arm’s length - limited independence.	Higher Decisions on new roles are a matter of discussion within organisation and amendment of framework documents.	Lower Unclear whether able to charge for commercial revenues.	Medium Limited scope for sharp specific performance based incentives.	Medium Potential low levels of accountability for specific role.
5	Non-Ministerial Office	Higher Clear framework around establishing accountability and independence from direct Directorate/Ministerial control while in addition the Body will have standalone staff and purpose allowing clear identification of responsibility.	Lower Except to extent to which specific responsibilities may be delegated by ministers, changes to functions are likely to require additional time to process due to the required parliamentary approval.	Lower Unclear whether able to charge for commercial revenues.	Medium Limited scope for sharp specific performance based incentives.	Medium Potential low levels of accountability for specific role.
6	Executive NDPB	Higher Clear framework around establishing accountability while in addition the Body will have standalone staff and purpose allowing clear identification of responsibility.	Medium Ministers can specify amendments through e.g. powers to amend business plans and budgets. However, there is potential for conflict between Directors' fiduciary duties to company and requests for changes.	Medium Reliant on the extent to which an NDPB can charge for commercial activities e.g. through sector levies.	Higher Flexibility to offer specific performance based incentives.	Higher High levels of accountability for specific roles as set out within framework.
7	Public Corporation	Higher Clear framework around establishing accountability while in addition the Body will have standalone staff and purpose allowing clear identification of responsibility.	Medium Ministers can specify amendments through e.g. powers to amend business plans and budgets. However, there is potential for conflict between Directors' fiduciary duties to company and requests for changes.	Higher By definition, Public Corporations are required to generate at least 50% of costs through commercial revenues.	Higher Flexibility to offer specific performance based incentives.	Higher High levels of accountability for specific roles as set out within framework.