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Community Energy Finance and the Energy Supply Company (ESCO) Structure >

Material for this section taken from the governments “Financing Community Energy Schemes” document issued 1 st November 2003 [http://www.est.org.uk/communityenergy/information/financeguide.cfm]

Community Energy is a government program providing grants and assistance for development and implementation of community energy schemes which meet criteria for energy effectiveness. Scheme support has so far mainly been for CHP and renewables. Currently up to 50% development grants and up to 40% implementation grants are available in addition to consultant support. The existing scheme is in place at least until 2005 at which time it will be reviewed.

Community Energy Finance Guide - Overview and Links :

Financing Community Energy Schemes Overview

An invaluable guide from the Community Energy programme providing information on routes to funding your community heating scheme.

A whole life costing overview is provided (NPV), see annex A.

Financing vehicles are discussed and a range of Energy Supply Company (ESCO) options given. Options discussed include wholly owned, joint partnership and wholly private ESCO's.

The formation of the ESCO with contractual mechanisms to promote organic growth of energy effectiveness over time is discussed.

There is an excellent section on maximizing revenues covering options such as load factors, thermal storage, absorbtion cooling, electricity export, CCL exemption, ROC's and emissions trading. The organic growth and extension of the scheme over time through electricity, heat and cooling sales can drive revenue and profits and provide funds for re-investment.

Annex A - Performing Whole Life Costing

This document addresses Whole Life Costing when applied to community heating schemes. Method recommended is to use NPV analysis to pick ‘Best Value' option. Treasury recommendation for public sector is for 25year NPV using a 3.5% rate. Private sector typically uses 15 year NPV and a 10% rate.

Indirect benefits to customers such as avoidance of plant capital and maintenance costs etc are discussed.

Benefits of scale are discussed and the benefit that can be realized through looking beyond the narrow confines or boundaries to explore possible partnering arrangements.

A worked example is provided.

Annex B - Case Studies

A selection of case studies highlighting approaches to funding community heating.

Edinburgh University ESCO financing of its CHP schemes is reviewed. The ESCO gave the benefit of the avoidance of VAT on the construction and installation. The Edinburgh scheme has been funded by Community Energy and through a private sector loan to the university. There is also a 2004 document on the Edinburgh Case Study which provides additional insight into their university owned ESCO. [http://www.est.co.uk/communityenergy/images/uploaded/documents/Edinburgh.doc ]

Annex C - Using Revenue to Finance Bank and Lease Finance

Community heating schemes tend to generate revenue through the sale of heat and/or electricity to a range of customers. Find out how to utilise your revenue streams to leverage additional funding.

Public sector bodies are often constrained by borrowing limitations. This annex describes how partnering or ESCO can be used to finance off balance sheet .

PFI is discussed but recent revision of government guidelines mean that only schemes > £20m will now normally qualify for PFI.

ESCO's can claim enhanced capital allowances (ECA's) however non profit making organizations (inc. universities) have no tax liability to be offset.

Annex D - Housing And Regeneration Projects

This document helps you to identify additional capital sources available for community heating schemes serving social housing or communities undergoing regeneration.

Annex E - Universities and Hospitals

Find out more about additional sources of capital available for community heating projects in the health and education sectors.

This annex references the HEFCE Best Practice guidelines on Energy Management in Universities.This useful document highlights several Case Studies of examples of best practice including Edinburgh University. [http://www.hefce.ac.uk/pubs/hefce/2003/03_30/03_30.pdf].

Annex F - Community Energy Using Renewables

More and more community heating schemes are making use of renewable fuel sources. This guide will help you to identify sources of funding for developing renewables-fired schemes.

Annex G - Planning Policy and Community Energy Schemes

This document addresses the opportunity to use the planning system to deliver investment in Community Energy schemes.

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Private Finance Initiative >

Welcome to the section of our framework related to project finance through the P ublic P rivate P artnership (PPP) and the P rivate F inance I nitiative (PFI).

This section explains what PFI is, how it can be utilised to finance projects and how to manage the procurement process. It also describes how sustainability can be incorporated into PFI projects.

Background

A PPP refers to any alliance between public bodies, local authorities or central government, and private companies.

The PFI is a formal approach to PPP where the public sector specifies a level of service and the private sector provides the capital asset and services relating to that asset in return for a unitary charge. A long term contract is undertaken and the private sector has responsibility for designing and constructing a building or facility and maintaining it throughout the contract term. The public sector retains accountability for the main public services.

The PFI is principally a form of contracting or procurement, the hallmarks of which can be summarised as follows:

• a long term service contract between a public sector body and a private sector ‘operator'
• the provision of capital assets and associated services by the operator
• a single ‘unitary' payment from the local authority which covers investment and services
• the integration of design, building, financing and operation in the operator's proposals
• the allocation of risk to the party best able to manage and price it
• service delivery against performance standards set out in an ‘output specification'
• a performance related ‘payment mechanism'
• an ‘off balance sheet treatment' for the local authority so that any investment delivered through the project does not count against borrowing consents
• support from central government delivered through what are known as ‘PFI credits'

The public sector specifies its requirements in terms of outputs. This gives the private sector the scope to determine how best to deliver the services to the required quality and performance levels.

The private sector is responsible for financing the project up front and only receives payment from the public sector once construction has been completed and the services have commenced. Payment takes the form of unitary payment at regular intervals over the life of the contract.

The aim of the PFI is to allow the public sector to employ private sector capital and management expertise in the delivery of public services. Instead of the public sector buying the capital assets and operating them, it purchases these services from the private sector operator and makes payments for them on typically on the basis of availability and performance.

Risk transfer is fundamental to all PFI projects. Placement of risks with the most appropriate party and subsequent efficient management of those risks are essential for value for money.

Project Procurement

There are 14 stages leading to project procurement through the PFI. The guidance below is a summary of that produced by the Scottish Executive aimed at managers in the public sector contemplating PFI procurement.

Stage 1: Establish a business need. A pressing need for change in a service must be identified. Stage 2: Appraise the options. The client must carry out extensive research to find out as much as possible about the project and if any similar projects have been undertaken. The client needs also to produce a clear output specification. An option appraisal should then be carried out. This is a strategic examination involving identifying and assessing options, realistic ways of achieving the change that has been deemed necessary. Stage 3: Business case and reference project . If there is a strong case for investment which is expected to be cost effective, then the possibility of a PFI solution should be explored. An outline business case needs to be prepared. This should be a realistic assessment of what is possible and include a reference project which highlights a possible solution to the output requirement. A Public Sector Comparator (PSC) will need to be worked out. Stage 4: Developing the team. The procurement organisation has to be developed. Once appointments have been made, roles should be clarified and responsibilities allocated. Stage 5: Deciding tactics. The Client's professional advisers should advise on the tactics for the procurement best suited to the particular business. It is important to have a clear plan of what is to be achieved at each stage. The final tender list should be limited to the least number of contenders needed to ensure genuine competition. Stage 6: Invite expressions of interest, publish OJEC notice. The formal procurement begins with publication of a contract notice in the Official Journal of the European Community (OJEC). Stage 7: Prequalification of bidders. The list of respondents to the OJEC should be evaluated against a minimum standards set for technical capacity, financial and economic standing, and where the procurement is for services (but not works) ability. The purpose of this stage is to assess the competence of the interested suppliers. Stage 8: Selection of bidders. From the list of potential suppliers the client needs to compile a short list. Clients may be in a position to score the relative merits of the supplier's competence and so rank them and select the required from the resulting list. Stage 9: Refine the appraisal. In advance of the issue of the Invitation to Negotiate the original appraisal of the project should be revisited, drawing on the knowledge gained during the procurement to date. The Business Case and any PSC should be further refined. Affordability and funding commitments should be re-affirmed, as should accounting treatment. Stage 10: Invitation to Negotiate. The Invitation to Negotiate should include the following; the service requirements, the constraints on service, the contractual terms governing the arrangement, the contract length, payment mechanism, timetable and process for negotiating an acceptable set of terms and conditions for the submission of bids, the criteria for evaluation of bids and the extent to which bidders are encouraged to submit variant bids. The Client needs to fix the criteria for evaluating bids, in order to permit selection of the most economically advantageous solution. This stage can take 3 to 4 months. Stage 11: Receipt and evaluation of bids. The project team will need to evaluate the bids received in accordance with the principles set out in the invitation documents. At the end, the Client may seek a best and final offer on the basis of the clarified bids. Stage 12: Selection of preferred bidder and the final evaluation. As the preferred bidder is selected the PFI proposition should be retested against key criteria. It must be affordable, or within a likely negotiating distance of affordability. The Accounting Officer should compare the PSC with the cost of the preferred bid. Stage 13: Contract award and financial close. The contract is signed and a contract award notice placed in the OJEC. Stage 14: Contract management Contact management is a distinct process which follows on from the process of procurement.(Further guidance should be taken from the PFI regulations: http://www.local.dtlr.gov.uk/pfi/regs1.htm and the Central Unit of Procurement Guidance Note:http://www.ogc.gov.uk/sdtoolkit/reference/ogc_library/procurement/cupguidance.html.)

Energy Use

The PFI procurement route provides an opportunity to drive energy efficiency into public sector buildings through risk transfer and whole life costing. The private sector company has the responsibility of constructing and running the building for the duration of the contract, typically 25-30 years. They are therefore required to take into account all costs including running and maintenance as well as the initial purchase price. This means that alternative and higher cost design features can be considered if those features will be offset by lower maintenance and running costs during the operational life of a contract. This is a huge step away form traditional contracting where after construction the building is handed back to the client (this can lead to low capital cost designs with high operating costs and energy consumption) and no responsibility is taken for the operational costs.

To produce energy effective buildings using the PFI procurement route energy efficiency principles have to be factored into the contract from the outset. The output specification has to be clear and concise regarding energy consumption and environmental performance but at the same time flexible to allow potential contractors to propose innovative solutions which integrate design, construction, operation and maintenance. The requirements should be expressed in terms of the service outputs and outcomes required rather than a tightly specified list of inputs.

Sufficient time, combined with design team commitment, must be allowed to enable full and proper consideration of these requirements. There needs to be a commitment from both the service provider and contracting authority to minimise energy consumption.

Quantifiable benchmarks and targets should be provided which the contractor has to meet. If these are exceeded or not meet throughout the contract the contractor should be financially rewarded or penalised. To facilitate this scheme metering and monitoring should be built into the project with appropriate feedback to the client.

A sample output specification to drive energy efficiency has been produced based on the learning's from our case study and can be viewed below. 

Sample Output Specification •  Energy effective methods of supplying electricity, heating and cooling to the facility shall be evaluated and included where appropriate. These shall be cogeneration of heat and power, the use of district heating or cooling schemes, heat pumps, solar water heating, absorption cooling, photo voltaics and wind turbines. •  Methods for reducing the facility energy demand shall be evaluated and included where suitable. These shall be high standards of insulation, natural ventilation, natural day lighting, free cooling, grey water schemes and passive heating and cooling techniques. Occupant comfort and building functionality shall not be compromised. •  Demand reduction methods and energy efficient technologies shall be evaluated and selected prior to the evaluation of energy supply loads. •  Facilities shall meet, or better, government published benchmarks for electrical and thermal energy consumption. •  The projected energy consumption for the facility and predicted running costs shall be agreed with the client. These shall be demonstrated to the client at regular intervals over the duration of the contract. If the projected energy consumption figures have not been achieved the reasons why should be identified along with any remedial action. •  Distribution systems and plant shall be minimised along with operational times. •  Distribution systems and plant shall be designed to be energy efficient. Components shall be appropriately sized and capable of operating efficiently across a range of outputs. •  Distribution systems and plant shall be appropriately controlled to ensure that they only operate when required and at the required level of output. •  The orientation, form and fabric of new buildings shall be evaluated and decided upon with consideration given to energy consumption reduction. •  Facilities will comply with building regulations as a minimum level and not as a design target. •  Buildings shall be designed to meet air tightness levels of 5m 3 /m 2 of façade area, and shall be pressure tested upon completion. •  Gas and electricity metering shall be installed such that greater than 90% of the energy consumed within the facility building can be accounted for. Incoming supplies and individual zones shall be sub metered as appropriate to identify energy usage. •  A building energy management system shall be installed to measure, monitor and control the facilities energy usage.

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