Public energy company: outline business case

11 Appendix D – Financial Modelling Assumptions

Operating costs (Opex)

The costs of operating the Public Energy Company are limited due to the selection of a White Label company as the preferred option. In a company set up in this manner, many of the costs of operation are borne by the third-party energy supplier, for example, customer service and infrastructure costs. The table below shows the annual operating costs of the Public Energy company, the assumptions column provides an explanation of the formation of the cost. All cost assumptions have RPIx applied to them in the Financial Model. In order to present a 'rounded' view of the costs of establishing the Public Energy Company, we have included the set-up cost assumptions. For both the Acquisition Model and the Retention Model the same underlying operating costs are assumed.

Table 63 - Operating costs

Cost type	Value Core £	Value Optimistic £	Value Pessimistic £
Set-up costs
Internal costs	£20,000	£15,000	£35,000
Legal support	£50,000	£40,000	£75,000
Energy advisers	£50,000	£40,000	£75,000
Tendering for partner supply	£35,000	£25,000	£50,000
System costs	£50,000	£25,000	£100,000
Sub-total – Set-up costs	£205,000	£145,000	£335,000
Marketing costs (incurred during set-up phase)
Strategy and brand identity	£20,000	15,000	30,000
Web design	£8,000	5,000	15,000
Set-up / Miscellaneous	£15,000	10,000	20,000
Sub-total – marketing (set-up) costs	£43,000	35,000	65,000
Ongoing operating costs
Ongoing marketing spend	£420,000 per annum	£360,000 per annum	£520,000 per annum
Project Manager / Co-ordinator costs	£65,000 per annum	£65,000 per annum	£65,000 per annum
Support staff costs	£26,000 per annum (1 required per 20,000 customers)	£26,000 per annum (1 required per 22,000 customers)	£26,000 per annum (1 required per 15,000 customers)
Customer acquisition cost – single meter	£20.00 per customer	£12.50 per customer	£22.50 per customer
Customer acquisition cost – duel fuel	£30.00 per customer	£22.50 per customer	£37.50 per customer

The figure below demonstrates the operating expenses incurred on an annual basis, incorporating the impact of indexation.

Revenues

Revenues for the Public Energy Company are comprised of income from fees earned from the White Label Supplier to the Public Energy Company. In the retention model, these are provided as a one-off value on an initial sign-up basis. In the acquisition model, the Public Energy Company is assumed to received ongoing retention fees on a monthly basis. The two figures below demonstrate the annual revenues under each set of core assumptions that have been assumed for the Project.

Retention model - ongoing retention fees

Under the Retention model, we have assumed that the Public Energy Company will come to a contractual arrangement with the White Label energy supplier, whereby the supplier pays the Public Energy Company an agreed amount for each month that a customer remains with the Public Energy Company. This will have the benefit to the Public Energy Company of providing a (relatively) stable monthly income stream that can be used to subsidise activities. From the Public Energy Companies perspective, it also encourages Scottish Government to seek an agreement with an energy supplier that will prioritise quality of service delivery, as a satisfied customer is less likely to switch energy supplier.

The table below demonstrates the level of retention fees forecast under the core, optimistic and pessimistic scenarios.

Table 64 - Retention model - revenue assumptions

Revenue type	Value Core	Value Optimistic	Value Pessimistic
Amount received from energy supplier – first meter connected (assumed to be electricity)	£1.00 per month	£1.10 per month	£0.80 per month
Amount received from energy supplier – two meters connected (i.e. both electricity and gas connection assumed)	£2.00 per month	£2.20 per month	£1.60 per month
Percentage of customers assumed to be dual fuel (i.e. signing up with two meters)	69.45%	69.45%	69.45%

Acquisition model - initial sign-up fees

As an alternative to the Retention model, the contractual arrangement that the Public Energy Company comes to with the White Label energy supplier may be on an 'acquisition' basis. Under this model, the energy supplier pays the Public Energy Company a one-off payment for each customer that the Public Energy Company are able to sign up. This approach has the benefit of providing significant up-front cash inflows to the Public Energy Company (although it is recognised that in reality there may be a 'claw back' if a newly signed up customer does not stay with on their tariff for an agreed period).

The table below demonstrates the acquisition fees forecast under the core, optimistic and pessimistic scenarios.

Table 65 - Acquisition model - revenue assumptions

Revenue type	Value Core	Value Optimistic	Value Pessimistic
Amount received from energy supplier – first meter connected (assumed to be electricity)	£25.00 one-off	£30.00 one-off	£20.00 one-off
Amount received from energy supplier – two meters connected (i.e. both electricity and gas connection assumed)	£50.00 one-off	£30.00 one-off	£20.00 one-off
Percentage of customers assumed to be dual fuel (i.e. signing up with two meters)	69.45%	69.45%	69.45%

Funding

The funding structure for the Public Energy Company reflects the current thinking. Through the Commercialisation and Procurement phases this will need to be developed further in light of the final agreed procurement route and structure of the SPV.

The core scenarios assume that a Public Energy Company in the form of a company limited by shares will be established, into which investors can make a pinpoint equity investment in proportion to their ownership. The quantum of this amount reflects that it is not the principal source of funding for the Public Energy Company and is at sufficient levels to establish the Public Energy Company. This is therefore £1,000 for each investor into the Public Energy Company. Cash surpluses for funding initiatives aimed at reducing fuel poverty, will be paid out of the Public Energy Company in accordance with the ownership structure.

As noted in the Commercial Case, further legal advice should be sought to ensure an appropriate commercial vehicle is selected. In particular, the results presented in this Financial Case include the impact of corporation tax on the trading profits of the Public Energy Company. Should the commercial arrangement be set up such that the Public Energy Company is established as a charitable entity with a trading subsidiary, there is a potential that these trading profits could be paid via gift aid to the charity for use in charitable activities, thus obviating the need to pay corporation tax. The need for flexibility in future would however need to be considered if this approach was to be pursued, and how this may impact on future intentions of the Public Energy Company

The development and initial operational requirements of the Public Energy Company are structured to be met through an issue of debt to the company. This is set at a level to provide sufficient working capital such that e.g. an overdraft is not required in addition to this amount.

For the avoidance of doubt, the core, optimistic, and pessimistic scenarios all have the initial provision of debt flexed to ensure no additional overdraft is required.

The debt is repaid to the investors on a 10-year annuity basis, with interest charged at 5.09%, assessed to be a State Aid compliant interest rate. For the avoidance of doubt, there is no security associated with these payments – investors will be exposed to the risk that the Public Energy Company does not generate sufficient cash flows to cover these payments.

Amount of capital investment required

The initial funding requirements (including the impact of RPIx) are shown in the table below.

Table 66 - Investor requirements – Retention Model

Year to	Mar 2021 £000s	Mar 2022 £000s	Mar 2022 £000s	Mar 2023 £000s	Mar 2024 £000s	Mar 2025 £000s	Mar 2026 £000s	Mar 2027 £000s	Mar 2028 £000s	Mar 2029 £000s	Mar 2030 £000s
Scottish Government
Loan drawdown	(2,914)	-	-	-	-	-	-	-	-	-	-
Interest received	143	131	118	105	91	77	61	45	28	10	-
Capital repayments	229	241	254	267	281	296	311	327	344	362	-
Net investment	(2,541)	372	372	372	372	372	372	372	372	372	-
Cumulative investment	(2,541)	(2,169)	(1,796)	(1,424)	(1,052)	(679)	(307)	65	438	810	810
Dividends received	-	-	-	-	-	1,838	2,987	3,168	4,129	5,033	5,385

Table 67 - Investor requirements – Acquisition Model

Year to	Mar 2021 £000s	Mar 2022 £000s	Mar 2022 £000s	Mar 2023 £000s	Mar 2024 £000s	Mar 2025 £000s	Mar 2026 £000s	Mar 2027 £000s	Mar 2028 £000s	Mar 2029 £000s	Mar 2030 £000s
Scottish Government
Loan drawdown	(297)	-	-	-	-	-	-	-	-	-	-
Interest received	15	13	12	11	9	8	6	5	3	1	-
Capital repayments	23	25	26	27	29	30	32	33	35	37	-
Net investment	(259)	38	38	38	38	38	38	38	38	38	-
Cumulative investment	(250)	(221)	(183)	(145)	(107)	(69)	(31)	7	45	83	83
Dividends received	-	61	177	225	353	665	757	567	885	998	908

The tables above present the annual investment position for the investors under both the Retention Model and the Acquisition Model. This takes into account not only the initial loan drawdown, but also receipts from the Public Energy Company. It shows that:

• Under the Retention Model the loan required is £2,914k, receipts exceeding this amount by 31 March 2027. In addition, the model releases dividends of £22,540k which could be utilised in programs to address fuel poverty
• Under the Acquisition Model the loan required is £297k, receipts exceeding this amount by 31 March 2027. In addition, the model releases dividends of £5,597k which could be utilised in programs to address fuel poverty