Renewable District and Distributed Energy Systems in UK

Ownership and Financial Structures for Private Equity Owned Projects

Bhaskar Deol

deol.bhaskar@gmail.com

+44 (0) 753 667 0734

Bhaskar Deol 2

TABLE OF CONTENTS Objectives ...................................................................................................................................................................... 1

1. Private equity-based financial and ownership in local government ................................................................ 3

1.1. Local Government Owned And Financed ................................................................................................ 3

1.2. Local Government and Private Company Co-Owned and Co-Financed .................................................. 4

1.3. Public Private Partnership with Lease Back Agreement .......................................................................... 5

1.4. Privately Owned and Financed ................................................................................................................ 5

2. Major UK schemes ............................................................................................................................................ 6

2.1. Utilicom Southampton Scheme ............................................................................................................... 6

2.2. Tower Hamlets Scheme ........................................................................................................................... 7

2.3. Woking Borough Scheme ......................................................................................................................... 9

2.4. Birmingham Council Scheme ................................................................................................................. 10

2.5. Bloomsbury Combined Heat & Power Consortium & University College London ................................. 11

2.6. Eastleigh Council Scheme ...................................................................................................................... 12

3. Terms of arrangement and contracts between councils and ESCOs .............................................................. 13

3.1. Energy Performance Contracting Models .............................................................................................. 13

3.2. Energy Supply Contracting ..................................................................................................................... 13

3.3. Hybrid Models........................................................................................................................................ 14

3.4. Other Components Of Contracts ........................................................................................................... 15

Bibliography ................................................................................................................................................................. 16

Appendix – Utilicom Company Structure .................................................................................................................... 17

Glossary of Terms and Acronyms ................................................................................................................................ 18

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1. Private equity-based financial and ownership in local government

The following types of private equity based ownership structures were encountered during the study. Rather than

being an exhaustive list of all possible structures, this aims to be an ongoing account of different arrangements

encountered in this study.

1.1. LOCAL GOVERNMENT OWNED AND FINANCED

This category of projects is presented for sake of comprehensiveness, although it does not involve private equity in

the energy project. The local council may choose to deliver the energy service either by providing this service in-

house, while owning the assets of the project, or through a separately created legal entity, an ESCO.

An example of a scheme that falls in the former category is a set of schemes led by the council of Southwark for

delivery of energy services. The council has taken the complete responsibility of the delivery of the energy service

unto itself without the setting of a separate entity (Brodies LLP, 2007). Services of private sector contractors were

employed during the design and build stage for four CHP plants and 90 boiler houses that serve a total of 20,000

dwellings and a number of non-domestic properties. CHP and networks used for distribution were financed by the

council’s internal funds and also funding from the EEC, which helped fund the CHP. Subsequent to the design and

building phase, the operation and maintenance of these schemes came under control of the council. The

maintenance for these assets is contracted out to three private sector companies but is managed by the council’s

special technical services (SEA/RENUE Ltd, 2006).

An example of the latter scenario, wherein a council has delivered a project by setting up a legal entity separate

from itself is the project in Aberdeen. Aberdeen Heat and Power was set up as an arm’s length non-profit entity

embedded within the council of Aberdeen (King, 2007). The main motivation behind setting up this special purpose

vehicle was to allow for independence and control. The board of the company constitutes of local community

representatives. Aberdeen Heat and Power and Aberdeen Council have a Framework Agreement, regulating the

contractual agreement between the council and the ESCO, and an Installation Agreement containing specific

provisions for installation of heating units in council properties. It is worth noting here that the Aberdeen council

scheme does not have any type of an operating or performance requirements that are placed upon the ESCO,

making it a light touch contract. Private sector services were used in the design and building phase of the scheme.

The funding for the scheme came from a grant received from the Energy Savings Trust under its Community Energy

Program (Brodies LLP, 2007). Additional funding in the form of guaranteed annual funding was also given to the

scheme by Aberdeen council over a specified term. Using this funding as collateral, the ESCO was able to secure a

loan from the Co-operative Bank, with the council underwriting the ESCO’s obligations to repay the bank loan. This

amounts to a high risk being taken by the council as in case of failure of the ESCO to service the loans from its own

cash flows, the council would be liable to pay. On the other hand, this guarantee allows for a lower cost of debt for

the project. The ownership of the heating components is property of the council leaseholder while the heat

network, the CHP and the energy center are owned by Aberdeen Heat and Power. All surpluses made by the

scheme are recycled back into the scheme or are used towards bringing down the energy bills paid by the council

tenants (SEA/RENUE Ltd, 2006). The heating payments are collected by the council and paid to Aberdeen Heat and

Power and after using a third party to administer the sale of electricity, the council is now beginning to sell

electricity directly to the tenants.

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1.2. LOCAL GOVERNMENT AND PRIVATE COMPANY CO-OWNED AND CO-FINANCED

This model is used for development of the Thameswey ESCO, which has been operating successfully for many

years supplying energy and energy services to customers in Woking, Surrey. This ESCO is a public/private joint

venture with backing from all the local authorities involved and an external financier. The objective is to realize

energy and environmental goals across the area served.

Under this ESCO model the financier (local authorities, third party, or both) provides the necessary project

financing to the ESCO via a loan contract, the ESCO provides the service via a performance contract, the customer

pays the ESCO if the project meets its performance standards, and the ESCO repays the financier for the project

loan.

In this case the customer repayment risk is borne by the ESCO. As a consequence, the financier manages its risk by

“looking through the ESCO” to ensure the viability of projects. As the ESCO is also financed by the councils and

serving council areas there is a mutual benefit in ensuring projects are sustainable and successful. The contract

between the Customer and the ESCO is often made up of two parts:

1. Key Performance Indicator payments – the contract will specify a number of KPIs against which the

performance of the ESCO will be measured. These could be in terms of equipment installed or reduction

in energy use or cost. If these targets are met then the full amount is payable. Typically KPI payments

constitute 30% of the total bill (TNEI, 2007).

2. Baseline Costs – these spread costs cover the initial set up and purchase of capital equipment (capital

investment) necessary to achieve the energy savings and cost reductions guaranteed. These costs may

also cover the provision of energy sourced from a supply/utility or other distributed generation.

The ESCO contract is structured to provide incentives for continual improvement rather than simply rewarding an

initial change in performance. Moreover, typically an open book approach is used to ensure transparency in the

relationship and to create a win-win situation. The ESCO commits to guaranteed maximum levels of energy usage

subject to the use of the facilities. The ESCO will subcontract the delivery of services and energy supply to partner

companies with the necessary expertise. These companies will supply a range of services including:

Energy management services

Energy efficiency technologies

On-site generation expertise and technologies

Renewable energy expertise and technologies

Energy sourcing and sale

More details about this model are discussed in the study of the Woking model in section 2.3 of this report.

Local Govt

Bank

ESCO Payment

Service Payment Financing

Customer Energy

Payments

FIGURE 1

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1.3. PUBLIC PRIVATE PARTNERSHIP WITH LEASE BACK AGREEMENT

An example of this kind of an arrangement is the energy project setup by the council of Tower Hamlets. This is in

essence a build-own-operate-transfer or BOOT model and involves an ESCO designing, building, financing, owning

and operating the equipment for a defined period of time and then transferring this ownership across to the client

at the end of a pre determined agreement period. Clients are charged for the service delivered; the service charge

includes capital and operating cost recovery and project profit. BOOT schemes are becoming an increasingly

popular means of financing CHP projects in Europe (BERTOLDI & REZESSY, 2005). More details about the Tower

Hamlets scheme follow in section 2.2.

Unlike the other models, in the PPP with lease back agreement model, the local authority does not contribute

financially. Instead, the ESCO relies entirely on private finance and the local authorities (LAs) contribute by way of

providing direction, project ideas, and making legal commitments to ‘buy in’ to the model. The involvement of LAs

in the ESCO formation is important in that it will focus the ESCO on providing client value.

In order for the ESCO to be worthwhile it is important to ensure that ownership of the capital equipment, bought

to bring about the required energy savings, defaults to the local authority after its has been paid off (typically after

15 – 20 years). The ESCO can manage the Operation and Maintenance contract for all the capital equipment

installed. The advantage of this method is that it is likely to be much quicker and less complicated to set up and

operate in financial terms as it does not require capital commitment from the participants although this will

consequently increase the financing costs. (TNEI, 2007)

1.4. PRIVATELY OWNED AND FINANCED

This final category of financial and ownership structure of ESCOs is where a private company sets up and finances

an energy service company and takes advantage of government funding and meets any shortfall with its own

investment. Several of the schemes implemented by Utilicom can be put under this category. The structure

employed in this type of a model is similar to that under section 1.3 except that at the end of the asset’s life, the

project does not pass back to the council but is renegotiated. An example of a project under this category is the

Southampton Geothermal Heating company setup by Utilicom and is discussed in section 2.1 below.

Private Co.

SPC / ESCO

Equity

Heat and Power

Purchase

agreements

Service to

council

Bank

Loan

Local Authority

Customers

Heat

Payment

s

Retained

Earnings

FIGURE 2

Payment

s

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2. Major UK schemes

2.1. UTILICOM SOUTHAMPTON SCHEME

2.1.1. Structure – Utilicom Scheme

The Southampton scheme started with the council’s development of a geothermal well in the centre of the city.

This development was subsequently given to Utilicom to develop, including valuable city centre land for the well,

wellhead equipment and a sizeable heat station building. The council further granted licenses and way leaves for

laying distribution mains, and assisted Utilicom with the planning processes. It established a multi-disciplinary

project team, with representatives from engineering, planning, legal & finance officers to assist in development,

and made bids to the European Union for financial support in developing the scheme. Utilicom's obligation was to

finance, construct and operate the scheme's initial development, and it had a reciprocal obligation to co-operate

with the Council in later, wider development.

Utilicom set up a special purpose company for delivering the scheme, called the Southampton Geothermal Heating

Company (SGHC) Ltd. Originally the company had only one customer, the city council. Later, the Southampton City

Council assisted by actively encouraging new and existing buildings to connect to the scheme so as to spread the

fixed costs of the scheme over a larger group. The purpose of the SGHC, as per its filed articles of association (21

Feb 1992) is:

“To carry on the businesses of central and district heating engineers, installers, operators and consultants;

designers, manufacturers, wholesalers, retailers, lessors, dealers, repairers and installers of heating, ventilating

and temperature control plant, apparatus, instruments and fittings of all descriptions whether fuelled by gas,

electricity, coal, oil or other materials”

The equity in SGHC was provided by IDEX, a privately held French company (please see appendix 1 for organization

structure of IDEX). The ownership was structured through Utilicom, which holds SGHC as a 100% subsidiary with

the power generation assets held on the balance sheet of the subsidiary. The company’s annual reports suggest

that there is a debt in the business that is routed through a group company. In the year the company was setup,

the company had fixed assets worth £ 6.8 million that were funded by £ 1 million in shareholder equity, £ 2.9

million in long term debt, and £ 3.2 million in loans.

Utilicom Group Ltd

Royal Bank of Scotland

IDEX SAS

SGHC

Finance

Payments

Equity £ 2.5m

Connection Charges £ 1.5m Service to

council and

3rd

parties

EC Grants

Total £ 1.5m

FIGURE 3

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In addition to the above loans and shareholder equity, the scheme was also funded by a European Union grant

from DGTREN, plus some Energy Saving Trust Community Energy grants that have since expired. Presently

extensions of the scheme attract funding from several sources, including the Homes and Communities Agency

(HCA) and DEFRA Bio Energy Capital Grants (Bureau van Dijk, 2000-2009).

2.1.2. Structure – Millbrook Community Heating scheme

Millbrook community heating scheme is another partnership between Utilicom and the Southampton city council.

It is targeted to supply 3,400 council homes, 1,000 private dwellings and 14 other council buildings. Space heating

and domestic hot water for this development is provided by a community heating network connected to a new

50MW CHP generator.

The council received £5 million in grant from South East Economic Development Agency (SEEDA) under its Single

Regeneration scheme to convert dwellings for connection to this scheme. The Southampton City Council bills

Council properties connected to the Millbrook scheme and private customers are billed individually by Utilicom.

Originally, Solent Sustainable Energy Limited (SSEL), a not for profit company, was setup by the local council to

deliver combined heat and power district heating. SSEL was granted a funding agreement of £ 600,000 from the

council to pay for initial financial, legal and project management services. The generating plant and other

infrastructure were to be provided though an ESCO contract via a tender process– however, the scheme had a lot

of difficulties in getting off the ground with a partner being found, who then pulled out. Also, initially the scheme

was to be fuelled using natural gas, but the plan was later modified to use palm oil as a fuel, and the use of biofuels

and associated efficiency as well as renewable obligation certificates were seen as an additional source of revenue

in the project plan. As of September 15, 2009, SSEL has been dissolved and the current status of the project is not

clear.

2.2. TOWER HAMLETS SCHEME

The council of Tower Hamlets borough entered into a Design, Build, Finance and Operate Private Finance Initiative

(PFI) arrangement to set this scheme up. Under this scheme, the private sector installed community heating in 459

dwellings plus the local leisure centre and school. A new energy services company was setup under PFI to deliver

the outputs. London Electricity Services won the tender to supply London borough of tower hamlets with the

communal heating system, and set up the Barkantine Heat and Power Company (BHPC) to operate the scheme.

BHPC is a wholly owned subsidiary of the London Electricity Group (London Electricity has since been acquired

wholly by EDF Energy). The scheme received a PFI credit from the Department of Environment, Transport and the

Regions of more than £6 million, plus a grant of £12,500 from the Energy Saving Trust, awarded in 1998, to

investigate legal issues relating to this approach. The 1.4MWe CHP plant was installed at a refurbished electricity

substation on the estate owned by the council. Heat is distributed through a network of underground pipes and

the system has been designed to enable future expansion (Travers, 2009).

BHPC’s annual account filings suggest that EDF have taken a debt only approach to fund this project. In the year

2000 when the company was setup, BHPC’s company accounts show a long term loan of £2.1 million and a £0.98

million in current liabilities to fund a total of £ 3.02 million in tangible fixed assets. For the subsequent year, when

the scheme was brought online, before the assets could have been depreciated substantially the tangible fixed

assets stood at a maximum of £4.2 million against a total of £ 4.7 million in debt on the company’s books. As of the

year 2008, these numbers were down to £3.08 million £3.9 million respectively. It can be postulated that the utility

was able to secure this loan against the guaranteed credits from PFI, although this could not be confirmed during

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the interview with Mr. Bertrand Courau, the operations manager for BHPC. Another inference that can be drawn

from this company structure is that either the parent utility or the council may have had to act as a guarantor for

the loan as the shareholder equity invested in BHPC is insignificant and was £30,000 as of 2008 (Bureau van Dijk,

1999 - 2008).

BHPC will operate and manage the project for a period of 25 years, with the Council ultimately taking ownership at

the contract. The original plan was to establish a joint venture with the council owning 20 per cent, but the council

concluded that it did not have the necessary powers for this. (The council would have had to establish that it had

the express power to trade in electricity in order to run the energy service at Barkantine. Legal obstacles to this at

the time prohibited this approach). Instead, a Concession Agreement between the council and BHPC requires that

every 2 years after the third year of operation (2004 onwards), the council will receive 40 per cent of any profits in

excess of the expected return. When the plant is generating electricity at peak times, BHPC get a refund on

distribution charges. This money is split between EDF Energy and the council, providing the council with an annual

income of up to £10,000 (Travers, 2009).

The Council pays an annual ‘mortgage’ fee for the system that allows EDF Energy to make a 12% profit and

additional profit from electricity sales to National Grid. Tower Hamlets pay BHPC monthly to cover the initial

expenditure (two thirds of payments) and also pay a variable rate linked to operations and maintenance of the

scheme. The payment is linked to penalties related to delivered heat and the time it takes them to respond to

faults and heating malfunctions. BHPC must perform to specified performance level. If BHPC don’t rectify the

problem within the time limit they pay a financial penalty in the form of a reduction through their bills. The clauses

are stringent, requiring a 3 hour response time. The maintenance clause also includes the tenant heating system.

The estate buildings were externally clad in the 1990s, and there is little scope for installing additional insulation

measures. It is therefore hoped that this income can be used to connect the local community centre to the

scheme. Tariffs for gas and electricity are set in accordance with an agreed formula. At the end of the contract, the

plant will revert to the council on the basis that it will have at least two years of life remaining before major re-

investment is required.

The revenue funding for the scheme comes from heat and electricity sales, avoided maintenance costs, refunds on

distribution charges, revenue support from the Office of the Deputy Prime Minister (based on the PFI Credit) and

fees paid by the education and leisure services for supply provided.

EDF Energy

BHPC

PPA payments

Annual “mortgage” fee

Performance based payments

Service to

council

DEFRA

Total £ 6m

via PFI

Credits

TH Council

Customers

Heat

Payment

s

Retained

Earnings

FIGURE 4

Bank

Loan Payment

s

Equity

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2.3. WOKING BOROUGH SCHEME

In 1990, the Woking council published a document on climate change, stating that the council would undertake to

reduce its CO2 output. In 1999, Thameswey Limited was created as a 100% owned subsidiary of the council.

Thameswey was setup to be an Energy and Environment Services Company (EESCO) with a mandate to improve

the wellbeing of Woking by entering into public/private joint ventures to deliver its energy and environmental

strategies and targets. The company was structured in a way that profits generated by Thameswey Limited could

be reinvested in wellbeing projects that would benefit the council. At that time, a council could not own more than

19% of a commercial company so Thameswey Limited further set up an unregulated public/private joint venture

Thameswey Energy Ltd (TEL) with Danish company ESCO International A/S (wholly owned by Energi A/S, a Danish

green energy company) to finance projects with shareholding capital and private finance. Initially the shareholding

was 19% Thameswey and 81% Energi As. Subsequently, this shareholding was increased up to 90% ownership by

the council. Energi have gone under management with another Danish company Schouw, forming a partnership

called Xergi. Currently the remaining 10% of Thameswey Energy Limited is held by Xergi. (Regen SW, 2007)

The initial funding for the Woking council project was met through various sources, including an 11 million loan

from Lombard, an asset finance company. According to Mr. John Thorp, Managing Director of Thameswey Ltd, the

council also used a loan from the government that it passed on as debt to TEL under a prudential loan facility. The

terms of the loan facility were not available, except that the objective of the financing was such as to always

minimize the cost of capital of the investment.

Annual account filings of Thameswey Energy Limited suggest that the council had invested £ 0.72 million into the

company via Thameswey Ltd in the year 2000. This equity was coupled with a loan of £ 2.2 million to finance £ 2.47

million in fixed assets owned by the company in its starting year. This has grown to £ 2.4 million and £ 11.08 million

in equity and long term debt respectively in the year 2008. In the year 2005, Thameswey Energy Limited also setup

a wholly owned subsidiary Thameswey Central Milton Keynes Limited to deliver a project in Milton Keynes. With £

1.1 million on shareholder capital and £ 2.5 million in debt, Thameswey Central Milton Keynes has quickly grown

larger than its parent company with £ 20.6 million in assets funded almost in their entirety by debt as per their

annual filings for the year 2008 (Bureau van Dijk, 1999 - 2008).

For the original project, Woking council had entered heat and power purchase agreements with TEL with a

structure of the PPA such that the costs of all inputs and raw materials get passed on to the council on a cost basis.

Any ROCs (Renewable Obligation Certificates) generated by the scheme are retained by TEL to be auctioned on the

open market, and any funds pooled back into Thameswey Limited as per its supply agreement with the council.

Savings accrued in TEL are also passed on to the council and as part of a ring fenced fund, they are reinvested in

council projects.

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An interesting feature of the project in Woking is the use of private wire, rather than public utility infrastructure

for distribution of energy generated. Thameswey owns and operates a number of local community energy systems

on private wire district or distributed energy networks in Woking. These include the Woking town centre and

Woking park district energy systems as well as a number of residential local community energy systems around the

borough. Use of a private wire also necessitated the setup of a local trading system. In 2007, Thameswey bought

ECSC, a service company that offers planning and consultancy services but also offered local trading service. ECSC

offers consultancy support for local authorities, developers and architects. Its services also include strategic

support for local authorities implementing sustainable energy or climate change strategy to generation of energy

statements for single developments. ECSC is responsible for servicing the requirements of the Thameswey Group,

specifically involving the management of customer services for Thameswey Energy Ltd as well as the engineering

for current and proposed Thameswey developments.

2.4. BIRMINGHAM COUNCIL SCHEME

The Birmingham council scheme was setup in December 2006. Utilicom entered a deal with Birmingham City

Council for delivery of a new district energy scheme to serve many buildings in Birmingham City Centre after the

council had carried out competitive tendering. The Birmingham District Energy Company Ltd (BDEC), a wholly

owned subsidiary of Utilicom was setup to deliver the project. In exchange for the long term energy services

contract, Birmingham City Council have transferred risk of design, build, finance and operation of the scheme to

Utilicom. Consumers connected to the scheme procure their energy via an output-based contract with risk for

procurement of fuels, operation, availability, and maintenance of the scheme resting with BDEC. Under the

agreement Utilicom design build, finance and operate a district energy CHP scheme supplying 24 GWh of heat,

15.5 GWh of chilled water (for air conditioning) and 3.4 GWh of electricity annually to the various consumers for

the next 25 years. The energy services contract also includes terms of reference for joint cooperation between the

council and Utilicom (Ofgem, 2007). The first scheme delivered by BDEC was setup to serve the city’s central

business district. Extensions have since been made that deliver energy to Aston University (Jun 2009 – 3MWe),

Birmingham Children’s hospital (Aug 2010 – 1.6MWe) and a view to integrate these projects eventually. Each of

these extensions under the scheme view to bring in third party connections so as to bring down the overall cost of

supply. To be able to deliver this, BDEC has been laying down a network of private wire and a central heating

network across the city (Utilicom, 2009).

The scheme attracted funding from various sources including the DEFRA’s community energy program. As per the

annual account filings from BDEC, the energy generating assets were financed primarily through long term loan to

the amount of £ 2.2 million in the year 2008. This was used to finance the purchase of £ 2.0 million worth of capital

Thamesway Ltd

Loan from

council

Service to

council

Woking Council

Thamesway

Energy Limited Customers

Heat

Payment

s

Retained

Earnings

PPA

FIGURE 5

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equipment. In the most recent year’s filings, BDEC holds tangible fixed assets worth £ 3.0 million on its books

financed with an equal amount of debt. The total shareholder equity in the company is £265k (Bureau van Dijk,

2007-2009). Please refer to the appendix for a company tree.

2.5. BLOOMSBURY COMBINED HEAT & POWER CONSORTIUM & UNIVERSITY COLLEGE LONDON

This is a unique scheme in the sense that unlike the other cases studied; the Bloomsbury scheme was setup by a

consortium of institutions, rather than a local government authority. This consortium of institutions of University

of London was created to take advantage of CHP generation for the benefit of its members. The members of this

consortium are Birkbeck College, School of Oriental and African Studies, University College London (UCL),

University of London and The Institute of Education. The geographical location of the consortium in central London

had a considerable impact on how the scheme developed, with a majority of University College London premises

located in the North, and the remainder of the institutions in the southern part of the area. The original notice for

this scheme was placed on the Official Journal of the European Communities (OJEC) in 1996. However, as the

process continued it became evident that the schemes would have to be split the consortium into a northern and a

southern part in order to avoid practical problems of road crossing license and due to the fact that the UCL main

site was much larger than the remainder of the project. The northern and the southern groups were formed with

UCL remaining a member of the southern group and the only member in the northern group. Utilicom was

selected as the preferred supplier for both the groups (HEFCE, 2005).

2.5.1. Southern group

The main focus of the contract signed by Utilicom and the group was to procure a supplier who would design,

finance, build, operate and maintain a district CHP system for a period of 20 years. By introducing third party loads,

it was hoped there would be a benefit to both the supplier and the individual consortium members, so that when

these loads were brought on line, there would be a reduction in charges to consortium members. The structure of

the contract provided incentives for the supplier to market the capacity for third party loads, while maintaining as

efficient a service as possible for the original consortium members. The charging mechanism of the contract breaks

down the total amount into a component each for availability, performance and volume as is discussed in section 3

of this report. The following are the salient features of the final agreement between the southern group and

Utilicom.

heat and power are being supplied by Utilicom at a unit cost below that available on the open market

the electricity generated by the CHP plant avoids the environmental surcharge

the members have 20 years free of capital investment in their main heating and electricity supply system

subject to success in attracting third party loads, there is a possibility that over the period of the contract

the cost of heat and power will be further reduced in real terms

the form of contract used avoids creating an intermediary, avoiding VAT or other taxation liabilities

The project was funded in its entirety using debt procured by a project specific company: Gower Street Heat and

Power Limited. A total of £ 605,797 worth of fixed assets were financed entirely by loans. (Bureau van Dijk, 2001-

2009).

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2.5.2. Northern group

Negotiations for the terms of the contract between the Northern group and Utilicom were deferred till the

contract with southern group was completed. The southern group project agreement was used as the basis for

negotiations between UCL and Utilicom (HEFCE, 2005).

In developing the financial model it became clear that funding over £5 million of capital expenditure using a third

party lender was an expensive option when compared with the rates at which UCL could borrow. UCL therefore

decided to fund the scheme itself, conditional on sufficient guarantees from Utilicom. This required careful analysis

and acceptance of the risks, but demonstrated clear benefits in terms of value for money.

2.6. EASTLEIGH COUNCIL SCHEME

Eastleigh Borough Council entered a 25 year contract with Utilicom and the scheme came into operation in

February 2007 to provide the Council with heat and electricity from a CHP building located at the Fleming Park

Sports Centre operated by DC Leisure. The project was sourced through the OJEU procurement process. The main

features of the scheme were the supply of heat and electrical power to the complex and to supply heat (in the

form of a piped hot water supply) to the Civic offices. Utilicom undertook the responsibility of operational control

of all boiler room plant and undertook to replace boiler room plant and equipment as necessary throughout the

entire 25 contract period. The Council purchases heat and power from Utilicom and then sell amounts consumed

at Fleming Park Leisure Centre at a cost neutral position. The contract of the supply is such that the cost of the

energy supplied by Utilicom cannot exceed the cost at which the electricity and heat can be purchased from the

open market. (Eastleigh Council, 2006). The terms of the contract between the council and Utilicom ensure that in

case of a default on the contract, the ownership of the assets pass to the council. The building housing where the

CHP plant was housed was given from the council to Utilicom under a lease agreement. As per council documents,

at the proposal stage, it was envisioned that the project would receive a funding of £ 100,000 from the Community

Energy Program by the Energy Saving Trust, an additional funding of £ 160,000 by the council and an investment of

£ 27,000 by the ESCO partner or Utilicom. As per Utilicom’s published material, the total amount spent finally on

the project increased to £ 350,000. With a commitment from the Energy Savings Trust and the council it remains

clear that the majority of the funding came from the grant and the council, with Utilicom likely having put in

around 10% of the project value as equity.

Bhaskar Deol 13

3. Terms of arrangement and contracts between councils and ESCOs

3.1. ENERGY PERFORMANCE CONTRACTING MODELS

Energy Performance Contracting (EPC) is a form of creative financing for capital improvement which allows the

funding of energy efficiency upgrades from cost reductions. Performance guarantees are given by the ESCO in

terms of the level of energy service or the level of cost and/or energy savings. The savings are then split between

the ESCO and the client who could potentially reinvest this into more improvements. This approach differs from

the energy supply contracting models discussed below in that savings in production and distribution are targeted

instead of just focusing on the delivery of an energy service package on a commercially attractive basis. There are

two main variations of this model:

3.1.1. Shared savings

Under this model, the ESCO finances the project either through its own funds or by borrowing from a third party.

The ESCO takes on the performance risk of the project and any risk associated with the customer’s credit rating.

The cost savings are divided between the ESCO and customer at a prearranged percentage for an agreed length of

time. The percentage division is influenced by the cost of project, length of contract and risk accountability. The

percentage of the savings paid to the ESCO is higher than that in guaranteed savings contracts (see below). Shared

saving contracts are beneficial when the customer has a good credit rating but does not have borrowing capacity,

as might be typical of a council.

3.1.2. Guaranteed savings

In this case, the customer finances the design and installation of the project by borrowing funds from a third party

such as a bank or through leasing the equipment. The ESCO has no contractual arrangement with the bank but

does assume the project risk and guarantees the energy savings made. If the savings do not reach agreed minimum

the ESCO covers the difference; if they are exceeded then the customer agrees to share the savings with the ESCO.

Thus, the ESCO is providing a guarantee of performance to the customer, where the customer is willing to assume

the debt, or lease payment, because of the guarantee that the savings will exceed the debt payments. The

advantage of the guaranteed savings approach is that a third party financier assesses and bears the customer's

credit risk. ‘Pay from savings’ is a subcategory of a guaranteed savings contract whereby the payment schedule

depends on the level of savings made instead of the customer having fixed repayments. The greater the savings

achieved from the project the quicker the payback. This form of ESCO is particularly popular with the public sector

as it results in increased investment in energy saving measures and technologies.

3.2. ENERGY SUPPLY CONTRACTING

Energy supply contracting provides many of the advantages of the performance contracting model and potentially

more but typically has a shortcoming in that there is less motivation for the contractor to continually improve the

energy performance experienced by the client. This type of service tends to be delivered on a low risk – low margin

basis with suppliers’ business models often focusing on developing long term operation and maintenance

contracts.

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3.2.1. Chauffage contract

This is a type of supply contracting typically employed in the UK. This contract provides a structure in which end

users are sold energy, such as the energy generated from a CHP plant or sourced externally. The contractor

charges agreed rates for providing required energy services to a guaranteed level. Also, the contractor has the

freedom to act and make decisions on the installation of energy efficiency measures to reduce their own operating

costs. The contractor provides all associated maintenance and operations support throughout the duration of the

project. These contracts typically have a time scale of 20 to 30 years and are useful when the customer wishes to

outsource facility services and investment.

3.2.2. Build-Own-Operate-Transfer (BOOT) contract

This contract model is increasingly popular for financing CHP projects. The ownership of equipment is transferred

from the ESCO to the client at the end of a long term contract with the BOOT operator, before which the ESCO may

have designed, built, financed and operated the equipment. The charge incurred by the client includes the

recovery of operating costs, capital and project profit.

3.3. HYBRID MODELS

Several contracts attempt to combine the benefits of both the above set of objectives, namely Energy

Performance, Energy supply as well as Efficiency improvements. An alternative way to look at these aspects of a

contract is the following

3.3.1. Availability charge

The availability charge is levied on a purchaser of a service to dilute the fixed costs associated with setting up a

system. A good example of this is the Bloomsbury scheme by Utilicom. Introduction of this charge also introduces

an incentive for the contractor to bring onboard third party loads. This benefits the supplier and the consortium /

council, so that when these loads are brought on line, there is a reduction in charges to consortium members. The

structure of the contract provides incentives for the supplier to market the capacity for third party loads. In order

to ensure that third party loads brought onboard by the service provider. A mechanism is often built in for the

council / consortium to represent their individual and combined view on addition of loads and the implications it

might have for their own contractual positions.

3.3.2. Volume Charge

The volume charge represents the cost of operating and maintaining the plant on an on-going basis.

3.3.3. Performance Charge

The performance charge is the mechanism by which the supplier earns a return on his efforts, while providing a

mechanism to ensure that there is a strong incentive to avoid poor performance.

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3.4. OTHER COMPONENTS OF CONTRACTS

3.4.1. Indexing

As most service contracts between ESCOs and councils and consortia last over extended periods of time, often as

long as 20-25 years, they have a component of indexing that ties the prices companies can charge to indicators

such as inflation, oil and electricity prices, and so on. There are also mechanisms that need to be build into the

contracts that stipulate how and when such indexing is going to be reviewed and any limits applicable to this.

3.4.2. Other clauses

Clauses such as bankruptcy of a member, or eventuality of a member pulling out of the consortium or relocating

are also envisioned and built into the contracts signed by the parties.

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BIBLIOGRAPHY BERTOLDI, P., & REZESSY, S. (2005). Energy Service Companies in Europe. Retrieved from Institute for Environment

and Sustainability, European Commission Joint Research Center:

http://re.jrc.ec.europa.eu/energyefficiency/pdf/ESCO%20report%20final%20revised%20v2.pdf

Brodies LLP. (2007). Making ESCOs Work. Retrieved from London Energy Partnership, c/o Greater London

Authority: http://www.london.gov.uk/mayor/environment/energy/partnership-steering-group/docs/making-

escos-work.pdf

Bureau van Dijk. (1999 - 2008). Barkantine Heat and Power Company. Orbis.

Bureau van Dijk. (2007-2009). Birmingham District Energy Company. Orbis.

Bureau van Dijk. (2001-2009). Gower Street Heat and Power Limited. Orbis.

Bureau van Dijk. (2000-2009). Southampton Geothermal Heating Company. Orbis.

Bureau van Dijk. (1999 - 2008). Thameswey Limited. Orbis.

Eastleigh Council. (2006). Meeting Minutes. Eastleigh: Eastleigh Council.

HEFCE. (2005). PFI case studies. Retrieved from HEFCE:

http://www.hefce.ac.uk/pubs/hefce/2002/02_05/02_05.pdf

King, M. (2007). Energy Services Companies. Retrieved from London Energy Partnership:

http://www.lep.org.uk/uploads/220307%20LEP%20Forum%20W3%20-%20Michael%20King.pdf

Ofgem. (2007). Review of Distributed Generation. Retrieved from Ofgem:

http://www.berr.gov.uk/files/file39025.pdf

Regen SW. (2007). Woking Borough Council Energy Service Company. Retrieved from Regen SW:

http://www.regensw.co.uk/downloads/RegenSW_99.pdf

SEA/RENUE Ltd. (2006). Guide to Developing an Energy Action Area. Retrieved from London Energy Partnership,

c/o Greater London Authority:

http://www.lep.org.uk/uploads/Guide%20to%20Developing%20an%20Energy%20Action%20Area.pdf

TNEI. (2007). ESCO Feasibility Study. Retrieved from Manchester Knowledge Capital:

http://www.micropower.co.uk/publications/esco.pdf

Travers, T. (2009). Cutting Carbon locally – and how to pay for it. Retrieved from Friends of Earth:

http://www.foe.co.uk/resource/briefings/get_serious_finance_report.pdf

Utilicom. (2009). The Company Delivering Sustainable Energy to Birmingham. Retrieved from Utilicom:

www.utilicom.co.uk

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APPENDIX – UTILICOM COMPANY STRUCTURE

Source: Company presentation

IH International SA (Luxembourg)

o IDEX (France)

IDEX International (UK)

Utilicom Group Limited (UK)

o Birmingham District Energy Company (UK)

o Southampton Geothermal

o Bloomsbury Heat & Power Limited

o Gower Street Heat And Power Limited

Source: Bureau van Dijk, company report

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GLOSSARY OF TERMS AND ACRONYMS

BOOT Build own operate transfer model of contracting to the private sector

CHP Combined heat and power

DEFRA UK Department for Environment, Food and Rural Affairs

DGTREN European Commission’s Directorate-General for Energy and Transport

EEC European Economic Community

ESCO Energy Service Company

EST Energy Saving Trust. A UK organisation set up to mitigate the damaging effects of climate

change by promoting the sustainable and efficient use of energy, water conservation and waste

reduction.

HCA Homes and Communities Agency. The Homes and Communities Agency is the national housing

and regeneration delivery agency for England. The agency’s mandate is to create thriving

communities and affordable homes.

HEFCE Higher Education Funding Council for England

OJEC Official Journal of the European Community (OJEC is now recognized as OJEU - the Official

Journal of the European Union).

OJEU Official Journal of the European Union

PFI The private finance initiative (PFI) is a method to provide financial support for public-private

partnerships (PPPs) between the public and private sectors.

PPA Power Purchase Agreement

PPP Public private partnership

Prudential Loan

Facility

A loan facility provided to Thameswey Ltd by the Woking council, under which, the council

borrowed money from the government at low interest rates and passed on the funds to

Thameswey to achieve a low cost of capital for the project.

Ring Fenced

Fund

An Energy Efficiency Recycling Fund setup by the Woking council. Savings from energy efficiency

initiatives are often not apparent in the overall accounts and thus, a ring-fenced capital fund for

energy and environmental projects was set up by the council in 1991. The annual cost savings

achieved against the budgeted energy bill by each project go into this fund,. Thus funds are

built up which can be recycled for investment into new energy efficiency projects.

ROC Renewable Obligations Certificate. Renewables Obligation Certificate (ROC) is a green certificate

issued to an accredited generator for eligible renewable electricity generated within the United

Kingdom and supplied to customers within the United Kingdom by a licensed electricity

supplier. One ROC is issued for each megawatt hour (MWh) of eligible renewable output

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generated. ROC’s can be sold in auctions carried out twice annually by NFPA (Non-Fossil

Purchasing Agency) setup by regional electricity companies in England and Wales.

SEEDA South East England Development Agency. A regional development authority in the UK. SEEDA is

one of England’s nine Regional Development Agencies, funded by the United Kingdom

Government for development and implementation of the Regional Economic Strategy for South

East England.