Charging up the councils

There’s a compelling case for local energy. So why aren’t more town halls getting in on the act? Terry Slavin digs out the keys to the powerhouse.

Every ministerial speech on sustainable energy, it seems, invokes the name of Woking. David Cameron’s utterances, too, are peppered with references to the Surrey town. Groups such as Greenpeace and Green Alliance hold the place in the highest esteem.

So what is it with Woking? Quite simply, it has become a byword for what local energy management can achieve. The council cut its own carbon emissions by 77% by creating a network of 60 local generators to power, heat and cool municipal buildings, social housing, and town centre businesses. The idea was based on a simple premise. Our centralised model of power generation, the reasoning went, wastes two-thirds of primary energy - so there were vast efficiencies to be gained by generating and transmitting energy close to the people who use it.

“A distributed system would fundamentally change the way we meet our energy needs, contributing to emissions reduction, the reliability of our energy supplies and potentially to more competitive energy markets,” according to last year’s DTI report Our Energy Challenge.

But Woking’s success masks a bleak statistic. Public sector land accounts for only one tenth of 1% of renewable capacity in the UK. In other words, the trail Woking blazed has gone stone cold. The question now being asked by green groups and politicians of every stripe and government level is how the revolution in decentralised energy can grow, literally, from nothing.

It is a question that is gaining urgency, as the government pushes ahead with its target for all new homes to be zero carbon by 2016. Where will they get the green power they need? Through its Low Carbon Building Programme, the government is encouraging micro-generation technologies. Local planners are now encouraged to require developers to integrate on-site renewables in their developments. And environment secretary David Miliband did announce £10 million in seed capital last autumn to launch Partnership for Renewables, which aims to generate 500MW of electricity on publicly owned land over the next five years. But these initiatives will be put to the test. The draft planning policy statement on climate change (published just before Christmas) increases the onus on town planners to approve low and zero carbon communities, and English Partnerships’ Carbon Challenge, which was announced in February, aims to fast track a raft of zero and near-zero carbon communities on local authority and private land over the next five years.

Small wonder that, when housing minister Yvette Cooper met housebuilders at a summit in January, she heard a plea for help in establishing affordable local supplies of renewable energy. Developers would have difficulty going zero carbon on their own, says Daniel Epstein environmental policy manager at the national regeneration agency English Partnerships. Instead of putting the onus on them, he says, “it would be better if the local authority took the lead, developing a wind farm or installing a combined heat and power (CHP) system, and then offered developers to plug into it at a viable rate.”

But getting local authorities to take this on is hugely difficult. Michael King, associate director of the Combined Heat and Power Association, says Woking succeeded only because the council’s political will was matched by commitment of two key officers: Ray Morgan, who was then finance director and is now chief executive of the council, and Allan Jones, Woking’s erstwhile energy services manager, since poached by London to run its Climate Change Agency. 

King says the first difficulty is the fact there is no statutory mandate to provide energy in the same way as councils must provide waste collection and street lighting. The second is political risk.

“Most political terms are four years, yet it can take five years for a wind farm or a CHP project to get off the ground,” King points out. “Councils worry that it will be on their watch that all the roads will be dug up - and their political rivals will get all the glory.” But the biggest barrier is commercial, he says.  “Once it’s up and running as a utility, a CHP project is a low-performing but very safe investment,” says King. “The risk is in the 1-2% that’s needed upfront for development costs to get through the various stages to planning permission. In a big £100 million project, that’s £1 million to £2 million you could lose.”

So the question becomes: how to underwrite that risk.

The ESCo solution

Woking, and the few other councils that have ventured into these choppy CHP waters, have done so by creating ESCos - energy services companies, independent entities to the council, which can assume much of the financial risk, and give the councils a share of the profits. Thameswey Energy Ltd, the ESCo created by Woking council, is a complicated joint venture agreement with a Danish pension fund. The council originally stumped up £250,000 to hold a 20% stake, but last year took over another 60% from the Danes, with profits from the company going to fund other environmental projects in the borough.

Britain’s nine other municipally owed CHP projects were all developed in partnerships with utility companies. The most ambitious is Southampton’s 20-year-old district heating system, which exceeds Woking in size and serves 40 businesses, the university and hospitals as well as council owned buildings. It is a joint venture with French utility Utilicom in which the council receives £10,000-£15,000 a year as part of a profit-sharing arrangement.

Michael Smith, Utilicom’s commercial director, and formerly Southampton council’s finance director, says there is an irresistible commercial logic to the model. “We can offer savings of up to 20% to developers on capital costs and 10% a year on running costs. You also get 80-90% efficiencies for every unit of fuel, compared to 30% on electricity from the grid.”

But even in partnership with a utility company, the road to an ESCo is not an easy one. The number of potential partners is small, and signing a 25-year contract, as Southampton did, carries its own risk. What happens, after 10 or 15 years, if the utility company partner decides it does not want to back a project the council deems necessary?

“The government should be explicit about what it expects councils to do.”

The Carbon Trust’s Partnership for Renewables (PfR) project aims to allow local authorities to outsource their renewable energy schemes, in the same way that many organisations outsource IT functions, without losing control to a third party. Andrew Wordsworth, director of business development for Carbon Trust Enterprises, which is running the scheme, said PfR would put up the risk capital necessary to get a development to the planning permission stage, and then put up equity and debt finance for the project itself. Although the initial focus will be on 2MW-10MW wind projects, Wordsworth says that CHP and small hydro schemes are among the 25 projects that PfR is now looking at funding for local authorities, NHS trusts and central government departments. “We’re offering a complete outsourced solution,” he says. Miliband’s £10 million in seed capital may be small beer, given the 500MW in renewable capacity that the programme is hoping to generate, but Wordsworth says the Carbon Trust is looking to draw commercial partners into the venture, and is “reasonably confident” it can raise the funds.

There are other initiatives bubbling away.

• Epstein is looking at the viability of English Partnerships setting up its own ESCo to supply low carbon energy to all its housing sites across the country. Not only could legal costs be slashed through the creation of a standard contract (it typically costs £500,000 to negotiate a single contract with a utility company), but English Partnerships would be in a position to negotiate better terms for selling its energy back to the National Grid, he says.

• In the East of England, where half a million homes will be built over the next 15 years, Renewables East is looking at a similar job-lot approach. Renewables East director James Beale says a region-wide ESCo would be able to significantly reduce costs and risks, for councils and property developers, by offering fully financeable generic models that will “tick all the boxes” now being demanded by the government in its march towards zero carbon homes.

Mixed messages from the top

For all the talk about a network of Wokings up and down the country, says Beale, the messages from the government are unclear and contradictory. “There’s no government legislation insisting on it, no capability in the local authorities to do it, and no drive from developers to do it.”

“The Woking story tells us two fundamentals about local government,” says Warren Hatter, head of the public sector programme at Forum for the Future. “Successful innovation by one authority can be slow to be picked up by others. And sustainable development doesn’t yet have the local political leadership elsewhere that leads to this type of innovation.”

Simon Roberts, chief executive of the Centre for Sustainable Energy, believes that government needs to be explicit about what it expects local authorities to do, rather than simply point to examples of best practice, which are not necessarily replicable. “Woking showed us things could be done differently, but not necessarily how things should be done. There are a lot of other things that councils should be doing on CO2  emissions.” Surprisingly few councils, he says, have even mastered the fundamental job of tackling energy efficiency.

But Roberts does think the planning policy statements on renewables and climate change are positive developments, and Partnership for Renewables holds promise for those councils that have already mastered the basics to venture into decentralised energy schemes.

As Wordsworth says, despite little advertising about the Partnership for Renewables programme, more than 50 local authorities have already expressed an interest. “There’s an enormous enthusiasm out there. A lot of people know it’s the right thing to do and want to get out and do it.”

Breakthrough in Brum
Terry Slavin is a regular writer for ‘The Observer’, specialising in environmental issues.

2 May 2007

Terry Slavin