How can local authorities become licensed suppliers of electricity? Tom Bainbridge and Sandy Abrahams explain.
Nabarro, together with energy consultants Cornwall Energy, have recently developed a contractual framework to enable local authorities to provide power to customers, from council-operated distributed generation power stations.
Taking advantage of the exemption granted under electricity supply licence condition 11, which allows a small scale electricity supplier to secure its own supply licence (a "Licence Lite") without requiring costly compliance with electricity codes, a "Supplier Services Agreement" ("SSA") was developed to:
- govern the relationship between the Licence Lite holder and a fully licensed electricity supplier, who will comply with electricity codes on the Licence Lite holder's behalf;
- enable local authorities, holding a Licence Lite, to supply electricity to customers at a retail price (rather than simply exporting electricity to the grid and receiving a wholesale price);
- enable local authorities to increase renewable/low carbon energy generation in their council or borough.
In order to convey electricity across licensed networks to domestic customers, under s6 of the Electricity Act 1989, an electricity supplier will require an electricity supply licence. The licence contains a number of obligations, including condition 11, which requires the licence holder to enter into a number of industry codes. Entering into and complying with the relevant industry codes, is administratively burdensome and expensive, therefore, only those electricity suppliers to domestic customers, who intend to supply over at least 500,000 customers will consider becoming fully licensed.
Ofgem recognised the problems facing smaller scale electricity generators wishing to supply domestic customers in their locality and therefore, following consultation in 2008, created a carve out from condition 11 in February 2009. This carve out permits an electricity supplier to secure a "Licence Lite", provided it enters into alternative arrangements with a fully licensed supplier which is a party to the relevant industry codes and able to discharge the necessary code functions and activities on behalf of the Licence Lite holder.
However, despite this first step being taken by Ofgem, the further work needed to get the concept off the ground was not developed. The mooted working group which would have explored viable business models, good practice, new processes and consequential changes to industry codes, failed to materialise. As a result, by January 2011, despite the new licence arrangements having been in place for two years, no "Licence-Lite" applications were made.
Due to the lack of progress in this area, DECC, together with the London Development Agency, commissioned a project to develop a SSA which would govern the relationship between the Licence Lite holder and a third party licensed supplier ("TPLS"), in the hope that a model agreement would encourage potential Licence Lite applicants to go out to market for the provision of TPLS services.
Local Authorities are ideally placed to take on the role of Licence Lite, given their recently extended powers to generate electricity and their existing customer base in the form of social housing and other local authority stock. The London Borough of Haringey took on the role of piloting this project and appointed Nabarro and Cornwall Energy to produce the SSA and explore the contractual framework which would exist between the TPLS and the Licence Lite holder.
The Supplier Services Agreement
The SSA sets out the terms under which the TPLS will provide services to a Licence Lite holder. Such services involve:
- compliance with industry code obligations, which the Licence Lite holder, without being a signatory to those codes, cannot perform;
- acting as a trustee in relation to the Licence Lite holder's customers and customers' data; and
- procuring direct agreements with other industry agents in order to ensure that the Licence Lite holder has a direct right of action in the event that, for example, a data collector fails to convey the customers' data.
However, the establishment of a model SSA is just one of the steps to creating a sound framework in which a Licence Lite/ TPLS relationship can operate.
For example, a "Netting-off and Standby Agreement" will be an essential component in the framework. This Agreement will govern the relationship between the Licence Lite holder as generator of electricity and the TPLS as a shipper and purchaser of that electricity. It will also deal with issues such as the purchase of excess electricity generated (i.e. above that required to be conveyed to customers) and the provision of back-up services (i.e. the provision of additional electricity when that generated is not sufficient).
In addition, a number of technical areas have been identified which will need to be clarified by Ofgem in order for the relationship between TPLS and the Licence Lite holder to operate smoothly.
For example, which party will benefit from and which will bear the burden of "commodities" (for example, Feed-in Tariffs and Renewable Obligation Certificates) will need to be established, together with how such a burden or benefit will be treated under the SSA and the Netting-off and Standby Agreement.
Arrangements between groups of councils will also need to be considered, with the scope for economies of scale presenting themselves not only with regard to increased customer bases, but also the potential for shared back office services and administrative functions.
Finally, as this is an entirely novel arrangement, the potential costs of the services and negotiating positions of potential TPLS are unknown. The appetite of potential TPLS to enter into the relevant agreements and provide the services will therefore need to be tested.
There are a number of further steps that need to be taken to make a Licence Lite-holding local authority a reality:
- resolving technical matters with Ofgem;
- the testing of the SSA in the market;
- the development of a Netting-off and Standby Agreement; and
- the development of a local authority "business case" for a Licence Lite.
However, given the backdrop of wider market reforms, coupled with local authority low-carbon targets and the drive to find additional revenues, we consider that local authorities, councils and London boroughs are ideally placed to help develop and take advantage of this scheme.