Energy boost

The government’s announcement that restrictions on local authorities’ ability to sell electricity will be lifted presents opportunities – and challenges, explains Humphrey Douglas.

The UK's commitment to achieving a 20% reduction in greenhouse gas emissions by 2020 may be raised to 30% (driven in part by reduced energy consumption from the recession). Local authorities (“LAs”) are now being encouraged to play their part in meeting emissions targets by both championing energy efficiency and renewable energy generation.

Whilst LAs were always able to generate renewable electricity for their own use, the Department of Energy and Climate Change (“DECC”) has announced draft legislation (the “Renewable Electricity Sales Order”) to remove a restriction which prevented LAs from selling electricity; a restriction which was designed to protect the privatised electricity generators.

Under the draft legislation, LAs which sponsor renewable energy developments may now benefit not only from lower energy bills for their own consumption, but also from central government financial incentives such as Feed in Tariffs (FIT) (applicable to electricity generation projects up to 5MW) and the Renewables Obligation (generally applicable to larger scale electricity generation projects), both for generating renewable electricity and for exporting it to the national grid for sale.

LAs will be monitoring also the potentially higher returns (and unlimited project size) currently planned (but not finalised) under the Renewable Heat Incentive (RHI) (which is designed to encourage the renewable generation of heat with a tariff targeted upon a 12% return on initial capital) which is currently due to be implemented in April 2011, subject to a funding decision expected after the October spending review.

Under the Renewable Electricity Sales Order, LAs will be able to sell electricity generated from:

• biogases;
• biomass;
• hydropower;
• landfill gas;
• marine;
• sewage treatment gas;
• solar PV; and
• wind.

According to DECC, only 0.01% of electricity in England is generated by local authorities. According to Gary Porter of the Local Government Association: "This has the potential to revolutionise the way we produce electricity by turning town halls into green power stations. This could save huge amounts of money to help maintain services in these difficult financial times and keep council tax down."

Whilst the potential for long term tariff based income is tempting, it does require LAs to first bear the capital cost of installing expensive renewable energy infrastructure. Whilst some costs may ultimately find their way to council tax bills, LAs will be keen to explore off-balance sheet funding options, within the Prudential Code, to limit the direct impact upon their own finances. Typical LA funding issues around renewable energy generation would include:

• Bridging finance to cover build costs before revenues are generated;
• Security issues inherent in relation to land and other relevant asset ownership;
• Reduced feed in tariff payments over time (degression) matching debt service; and
• Other risks including political risk (change in legislation), credit risk (where exposed to assignment of tariffs from individuals such as tenants), equipment theft/maintenance and non-performance risk and even exchange risk (where tariffs are paid in Sterling, whilst equipment may be purchased in Euros), and so on.

Such issues may be overcome with structuring and financing techniques typically used in larger scale energy, Private Finance Initiative and other projects, but need careful consideration to keep structures simple, and to avoid spiralling transaction costs and finance charges, whilst observing regulatory requirements related not only to generation but also to LA funding generally.

Electricity generation, distribution and supply is a regulated (and relatively complex) industry and LAs will need a licence or the benefit of an exemption to operate. Whilst certain functions may be outsourced, LAs will wish to analyse what degree of risk versus return they are prepared to keep in-house and which partnerships they wish to enter into in mitigating risk and delivering renewable projects. In addition, LAs need to navigate regulatory issues inherent in the nature of some renewable technologies and property ownership as well as regulatory hurdles specific to LAs.

A typical example of how LAs may wish to become involved is by using the roofs of council-owned properties for solar PV installations, offering tenants reduced electricity bills and providing the LA with an index-linked feed in tariff revenue. Such a scheme may provide a third party solar panel installer and financing bank sufficient scale and insulation from residential home-owner credit risk issues to be viable.

However, projects such as this do need to consider issues specific to LAs, such as procurement restrictions, potential interference with tenants’ rights to buy their rental properties and the restricted rights that LAs have to borrow. Whilst LA borrowing requirements were reformed by the Local Government Act 2003, which created the prudential borrowing regime, LAs may be able to borrow in certain circumstances against renewable energy revenues for capital expenditure and, indeed, the latest Pre Budget Report included a Government commitment to consider the scope for LAs to borrow against the income streams from both RHI and FIT schemes specifically.

In conclusion, evolution of emission reduction targets and the increasing accessibility of renewable generation incentives mean that there are significant opportunities for LAs to involve themselves directly, or in partnership, with the economic, social and political benefits (and risks) attributed to the UK’s rapidly greening economy.

Humphrey Douglas is an associate partner at Barlow Lyde & Gilbert. He can be contacted on 020 7643 8498 or via This email address is being protected from spambots. You need JavaScript enabled to view it..

Barlow, Lyde & Gilbert and accountants Mazars are hosting a seminar with construction consultants Davis Langdon on 12 October to discuss the opportunities for local authorities and other public bodies that arise from the government's renewable energy and climate change initiatives. Invitations are available from This email address is being protected from spambots. You need JavaScript enabled to view it.