carbon trust ps ee finance final

7/30/2019 Carbon Trust Ps Ee Finance Final

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Carbon Trust Public Sector financing of Low Carbon Programmes- v1

Introduction ............................................................................................................................... 2 Funding versus cash flows ...................................................................................................... 2

Value for money, balance sheet accounting and procurement ................................................ 4 Value for Money ..................................................................................................................... 4 Balance Sheet Accounting ..................................................................................................... 4 Procurement .......................................................................................................................... 5

Overview of current sources of funding for Public Sector organisations ................................. 6 Internal sources of funding to an organisation ..................................................................... 6

External sources of funding ............................................................................ 6 Sources of internal funding ............................................................................ 7 Sources of external public sector and mixed funding ............................................. 8

Central Government Departments ................................................................. 8 Local authorities, police forces and fire services ............................................... 9 NHS Trusts .............................................................................................. 9 Schools ................................................................................................. 10 Universities and HE Colleges ....................................................................... 11 Further Education Colleges ........................................................................ 11

Specific sources of low carbon external funding .................................................. 12


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IntroductionThe aim of this document is to help public bodies access potential sources of energy efficiency and renewable energy finance for their building stock and toassess the costs, risks and benefits of doing this. It is intended to helpsustainability professionals in the public sector to understand the different ways tofinance low carbon projects, how to put together a business case and what to

consider when procuring and implementing a project. It was put together by theCarbon Trust with assistance from Marksman Consulting and SKM Enviros, alongsidevalued input from a number of external reviewers.

This is important as we are now at a time at which the financing of low carbonprojects is undergoing a shift away from smaller one-off projects to the delivery of larger scale initiatives with the corresponding need to investigate whether toattract private sector finance. This shift is being driven by a number of factors

including increased pressure on internal budgets, rising energy prices, concernsabout energy security and increasing urgency around emissions and energy usereduction. A further factor is the current shift away from grant fundedgovernment support to cash flow mechanisms such as Feed in Tariffs or Green Deal,which offer a payment stream to underpin the financing of projects. As a resultthe scale of funding required for projects is often going beyond the financingcapacity of individual organisations, leading to new low carbon financing models.

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It is important to understand and quantify the sources of cash flow for any energyefficiency and renewable energy programme. These can come from both theobvious energy cost savings, but also from other sources such as reduced

maintenance costs, personnel savings, or increased longevity of the equipment.Quantifying all of these in a cash flow analysis showing that investments createlong term benefits is critical to the success of fund raising.

Cash flow from a Green Deal programmeThe Green Deal legislation allows upfront investments to be made in public sectorbuildings, commercial buildings and private and social housing by a financingvehicle. The debt is paid off via the utility bill over a period of up to 25 years. As

the utility bill remains with the building, the debt will transfer between tenants orbetween building owners. Thus a public sector body can invest in energy efficiencyin buildings even though it may not be confident that it will own or occupy thebuilding at the end of the payback period.

The legislated Golden Rule says that the bil l payer should not be worse off fromtaking on the programme. The income generated therefore has to cover both theloan interest and the management of the programme


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Value for money, balance sheet accounting andprocurement

Value for Money

When considering what type of finance will be suitable for financing a particularproject against future cash flows, there are three important considerations to keepin mind as you read this document, value for money, how the finance will beaccounted for on the balance sheet of your organisation and the procurementapproach.

Value for money there are three elements to value for money as defined by theTreasury (HMT):

1. quality and suitability of the service for the individual project2. long-term implications or whole-of-life costs3. wider outcomes for society and the state

When considering value for money, you will need to consider the cost of resourcingand project set up, the maintenance and capital cost of the equipment, and thecost of different sources of finance (or the cost of capital as it is often referredto). As a part of this assessment you will also need to take account of thell i f h d h i k i b i k


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Overview of current sources of funding for PublicSector organisations

Internal sources of funding to an organisationAs with other business expenditure, energy efficiency projects can and have been

funded in the past through an organisation s revenue and capital budgets. Revenuebudgets cover the running costs of the organisation related to the budget year,such as staff, rent, energy consumption, consumables and services. Some lowcarbon projects, mainly energy efficiency ones, will have been funded as part of the on-going maintenance of properties in this manner. Capital budgets are used topurchase assets, construct or improve infrastructure including buildings, plant andequipment for which benefits will accrue over a number of years.

Organisations generally cannot borrow to fund revenue expenditure but they cando so to fund capital projects, or they can draw down or use their reserves. Thesesources of funding are covered later in this document.

In this context, the concept of invest to save for low carbon programmes is animportant part of putting together the business case for financing low carbonprojects. This is when an investment is made justified on the basis of future cashflows from energy efficiencies made. For example, a heating system within apublic sector building could be at the end of its useful life and constantly breakingd I ld h b l d h b i f i d li If h h


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accessing private sector finance, as well as looking at their existing internalsources of funds.

Private sector finance covers a range of sources of funds from direct bank loans, toproject finance from banks, to infrastructure and equity funds where investorsinvest with funds where returns are less certain than those achieved throughlending. The return on equity investments is recovered through dividends or saleof assets.

See the section on Working with the Private sector for more information.

It is vital to understand how this type of finance will be accounted for in theorganisation accounts. The public sector is governed by a number of specific rulesin regard to accounting for expenditure, financial commitments and assets andoften when private sector funds are used the accounting treatment is sti ll on

balance sheet .

Private sector partnerships and service contracts private funding may take theform of an energy services or performance contract (EPC). Private sector partnerscan provide energy efficiency projects as a service, which can include technicalassistance, upfront finance, and guaranteeing the future energy savings. The costof the finance and guarantees are paid for out of the project savings. This is

d i d il i h ESCO i 16


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In order to secure some of this funding you will need to have a thoroughunde rstanding of how your organisation s business planning process works and howcapital expenditure is approved, for example through a capital investmentcommittee/group.

It is vital to approach your finance team prepared with an outline business case,and an explanation of why your projects should be prioritised. Larger projects willneed a full business case- see appendix C for more on this. Use of the followingmetrics will help you to gain internal buy in:

payback period; net present value/ lifecycle cost; internal Rate of Return; regulatory and compliance benefits, for example CRC or meeting targets; operational benefits reputational benefits delivery of desired organisational outcomes

Opportunities that pay back within one year should not need separate capitalfunding, as they will pay for themselves out of in year revenue budgets. It issensible to prioritise short payback projects first, so that savings can bedemonstrated to fund larger or longer payback projects later.

It may be possible to set up an internal revolving invest to save fund along theseli Thi i b hi h h i i i l f d d i i d


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Local authorities, police forces and fire services

These are governed by the Prudential Code, introduced in 2004. This code allowslocal authorities and others to borrow to finance capital investment in fixed assetsprovided they can demonstrate that they are acting in a financially prudent andsustainable way. This will require an assessment of the impact of the investmentacross all the years that this investment will financially impact the authority

The prudential code requires these bodies to apply due process to setting budgets,limits and indicators. When setting prudential indicators these authorities need totake account of the implications to taxes or rents, the implications of borrowing,value for money, asset management, strategic planning and the practicality of delivery.

For more information http://www.cipfa.org.uk/pt/prudential_framework.cfm

The Public Works Loan Board lends money to local authorities and other publicsector bodies. The funds sit on the organisation s balance sheet, but carry a verycompetitive rate of interest. Energy efficiency measures are eligible, but priorapproval is needed for all loans from CLG.More information on the scheme is available athttp://www.dmo.gov.uk/index.aspx?page=PWLB/Introduction

T I Fi i li l l l h i i I i l i l
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Non-foundation NHS Trusts can only borrow from the Department of Health.Foundation Trusts can borrow from the Foundation Trust Financing Facility (FTFF)and also from commercial banks subject to a Prudential Borrowing Limit (PBL) thatis re-visited annually by Monitor, the independent regulator of NHS Trusts.

The PBL is made up of two elements:

The first is the long-term borrowing limit. Monitor sets this annuallybased on an assessment of the FT s financial r isk and it forms part of theFT s terms of authorisation. Monitor sets what is known as a tier 1 limitfor FTs, based on their annual plans and in accordance with certainratios. In certain appropriate circumstances however, Monitor may set atier 2 limit to allow for affordable major investments. FTs may apply toMonitor for a tier 2 limit if their plans suggest that they will breach theirtier 1 limit.

The second element is any working capital facility approved by Monitor.This is an additional level of short-term borrowing which may be usedfor short-term cash flow management. It should not be treated asprudential borrowing for other uses such as investments in carbonreduction.

For a Foundation Trust the key requirement is that they can cover the interest

l f h i l d h h f h


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LA funded schools cannot access private sector loan finance without secretary of state approval. This includes finance leases, hire purchase and any form of lending.

Universities and HE Colleges

Higher Education institutions are funded in part through grants/student fees, butalso have commercial income streams from R & D and can borrow directly fromcommercial banks or the European Investment Bank (EIB) to finance projects. Insome cases the Higher Education Funding Council England (HEFCE) will need toapprove borrowing if annualised servicing or interest costs as a proportion of income are above a certain level. This is set out in the Model FinancialMemorandum between HEFCE and institutions, Annex F: Consent for FinancialCommitments 2 and include instances where long term or higher risk financialarrangements are proposed or where certain ratios are exceeded. Universitieshave also on occasion issued bonds for large projects such as the development of student halls of residence. Their ability to use these funds to finance energyefficiency and renewable energy programmes will depend on the range of competing projects looking to access funds.

Further Education Colleges

Colleges can borrow within the terms and conditions of the Financial Memorandumb h ll d h k ll d ll d h


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Specific sources of low carbon external funding

Salix- Most Public sector bodies are able to apply for interest free invest to saveloans from Salix. Salix is an independent, not for profit company, limited byguarantee funded by DECC through the Carbon Trust. Salix delivers interest freefunding to accelerate investment in energy efficiency technologies across the UKpublic sector. It provides loans for a wide range of energy efficiency technologies,for either individual projects or larger multi project programmes that reduceenergy bills and carbon emissions, provided those schemes meet certain carbonand financial criteria.

More information is available at http://www.salixfinance.co.uk

Carbon Trust/ Siemens loans scheme - this provides commercial loans and leases,from Siemens Finance, of almost any size, with payments offset against energycost savings. Projects need to be assessed by the Carbon Trust in order to verifythey will deliver real cost and carbon savings.

More information on the scheme is available athttp://energyefficiencyfinance.co.uk/

Partnership for Renewables is a Carbon Trust enterprise providing finance to thepublic sector for investment in renewable energy projects. It covers all renewables

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The EIB will need to see evidence of a bankable project as any bank would, butthey are likely to be able to offer more favourable terms for energy efficiencyprojects such as a lower interest rate or longer fixed term. However, theygenerally prefer straight forward lending arrangements directly with public bodies,rather than public private partnerships. Projects normally have to normally be over100m in size and the bank can lend 50% of the total project value. The EIB UKoffice is based in London.

For more information http://www.eib.org .

European Regional Development Funds (ERDF) provide grant funding that aims tostrengthen the competitiveness and attractiveness of all regions in the UK throughpublic sector led economic regeneration projects. The funding is currentlyavailable until 2013 and comes from European Structural Funds.

A wide range of public sector organisations can apply including governmentdepartments, local authorities, higher and further educationestablishments. Other public bodies and the private sector can alsoapply. Management of ERDF programmes outside London has transferred fromRegional Development Agencies to locally-based CLG teams, who will run anyfuture funding rounds. The London programme is administered by the GLA. Projectswill need to provide varying levels of match funding.
http://www.eib.org/http://www.eib.org/http://www.eib.org/http://www.eib.org/


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For more information http://ec.europa.eu/environment/life/funding/lifeplus.htm

The Intelligent Energy Europe (IEE) - programme is designed to give a boost toclean and sustainable solutions. It supports their use and dissemination and theEurope-wide exchange of related knowledge and know-how. Targeted funding isprovided for creative projects putting this idea into practice. The 2012 call has abudget of 67m. The Energie Helpline (www.energiehelpline.co.uk ) provides theUK National Contact Point.

The projects help to further the three main objectives: Promoting energy efficiency and encouraging the rational use of energy

sources Increasing the use of new and renewable energy sources as well as

encouraging energy diversification

Stimulating energy efficiency and renewables in the field of transport.

More information can be found at http://ec.europa.eu/energy/intelligent/

European Local ENergy Assistance (ELENA ) provides up to 90% of the costs of thetechnical support that is required to prepare, implement and finance aninvestment programme. This would include elements such as feasibility andmarketing studies, setting up programmes and business plans, energy audits and
http://ec.europa.eu/environment/life/funding/lifeplus.htmhttp://ec.europa.eu/environment/life/funding/lifeplus.htmhttp://ec.europa.eu/environment/life/funding/lifeplus.htmhttp://www.energiehelpline.co.uk/http://www.energiehelpline.co.uk/http://www.energiehelpline.co.uk/http://ec.europa.eu/energy/intelligent/http://ec.europa.eu/energy/intelligent/http://ec.europa.eu/energy/intelligent/http://ec.europa.eu/energy/intelligent/http://www.energiehelpline.co.uk/http://ec.europa.eu/environment/life/funding/lifeplus.htm


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The London Energy Efficiency Fund (LEEF) - has been set up by the GLA as part of the JESSICA programme with finance from European funding via the ERDF inpartnership with private sector financial institutions to provide energy efficiencyand decentralised energy loans to public sector bodies in London. This providessemi commercial loans, at slightly below market rates, repayable over a number of years from the energy savings made.

The fund has 100m to invest in energy efficiency retrofit to publicly owned oroccupied buildings, either directly to the public body or via an ESCO or landlordsupplying the public body. The fund will lend in tranches of between 1m and20m, and projects should deliver at least 20% annual carbon savings. Visithttp://www.leef.co.uk/ for more information.

Similar funds exist outside London; for example Manchester has a similar fund, theEvergreen Fund, and Scotland has SPRUCE (www.ambergreenspruce.co.uk ). Wales

has set up The Regeneration Investment Fund for Wales (http://www.rifw.co.uk ) .

European Energy Efficiency Fund (EEE F) - launched in July 2011 to financeenergy efficiency, small-scale renewable and clean transport projects. The fundcan be accessed by public and private entities, including private entities acting onbehalf of public authorities. The fund will offer a wide range of financial productsloans, guarantees and equity investments, at commercial rates. There is also atechnical assistance facility similar to ELENA but it differs in that EEE-F technical
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Working with the Private Sector

If the internal and external funding described above are not available, you mightlike to consider alternative financing models such as:

Energy Service/ Performance Contracting Leasing

Private Finance Initiative (PFI) Local Improvement Finance Trust (LIFT)- NHS only Operating lease arrangements

The key element of all the above is that private sector partners/providers provideboth the initial finance to create an asset and importantly take on the majority of the risk.

Energy Services Contracting

Essentially, this allows organisations to access some or all of the following fromthird party organisations which provide energy efficiency and other energy servicesas a service rather than something that has to be paid for up front. Their servicescan cover the following;

External expertise


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It is important to be aware of how much risk you are transferring to a third partyvia Energy Performance Guarantees (EPG), or via third party ownership andoperation of the assets. You will need to be clear about the terms of anyperformance guarantees, and about exactly what outputs are guaranteed under thecontract. It is equally important to be aware of how much you are paying for thisrisk transfer. Competitive tendering is likely to be needed for large contracts toensure value for money and to comply with procurement law. ESCOs are not newwith organisations like Dalkia, Mitie and Cofely active in the market for many yearsand with a growing market in the USA. There is a good risk register in publicationGPG 377 on the Carbon Trust website.

An ESCO often approaches potential clients with proposals for energy savingprojects and performance contracts. Initial research and investigation determinesareas where cost savings are feasible and is usually free of charge. The first outputis normally a feasibility study which the ESCO will expand upon in a proposal and

detailed design.

There are various funding structures that can be used in an agreement between anESCO and a public sector body:

ESCO provides all equipment and in return receives a percentage of theenergy savings. The savings can be guaranteed or variable. Smallinvestments such as variable speed drives or voltage optimisers often fall


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Case Study 1 Woking Borough Council- how a public body and a private partner canestablish an ESCO to provide energy services. Figure 2:

Any public sector organisation which wants to emulate the model in figure 2 should


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RE:FIT

RE:FIT is a procurement framework set up by the Greater London Authority (GLA)for the delivery of energy services in public sector buildings in London.

An OJEU compliant framework of 12 energy service providers has been procured ina way that allows all public sector organisations in the UK, not just in London, toaccess the framework. The framework went live in January 2010 for 3 years withan option to extend for a fourth year.

The public sector buyer identifies a portfolio of buildings they would like toretrofit, writes a project brief, runs a mini-competition and then selects an ESCOfrom the RE:FIT framework. The supplier installs energy contract measures (ECM)in identified buildings and guarantees annual energy savings over an agreedpayback period. The public sector buyer pays up front for the capital cost of installing the ECMs from its own funds. This energy performance contracting modeltransfers the risk of performance of the ECMs to the ESCO for the term of theAgreement.

The RE:FIT programme has therefore been aimed at building owners who haveaccess to funding for energy efficiency programmes either from their own reservesor other sources (eg. debt). However, projects may also be able to access finance


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By definition an operating lease is one where the majority of risks (e.g.maintenance, asset value) remain with the provider. The minimum lease paymentsshould normally be significantly lower than the value of the assets. If yourorganisation is in effect paying for the asset in instalments, it is unlikely to be anoperating lease, and will need to be shown as debt on the balance sheet. Yourfinance department will be aware of the latest accounting standards and tests thatapply.

It is also important to secure the revenue expenditure budget to cover the regularpayments over the lifetime of the asset.

Private Finance Initiative (PFI)

The suitability of Private Finance Initiatives is currently being reviewed for valuefor money based on concerns that these activities have a cost of capital far higherthan that from public sector financing, and it is unlikely that many new PFIschemes will launch in the near future. However, we have included them in thisreport to ensure the full range of options are covered. Most PFI schemes have afunder (bank), builder (creator of the asset and part investor) and operator (whowill manage the asset once created and may or may not be the builder). The endproduct is an asset that the public sector will have the benefit of using for a


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It is important that the payment for the use of the PFI asset is adjusted forperformance by the PFI operator. The latest contract documentation reflects again share type arrangement whereby the operator is incentivised to operate thePFI facility optimally rather than just pass through any energy costs. The energyefficiency of any facility should not be allowed to be fixed at its design level andcontinuous improvement should be an essential part of the contract.

The following guidance is also relevant to PFIs:

Department of Health (DH) PFI guidance - Standard form of agreement ismaintained by the Capital Investment Department (and Private FinanceUnit). A full suite of documentation is available, guiding NHS Trusts throughthe procurement.

Design Development Protocol - This advises of the design process to be

followed, requirements in relation to plans to be prepared and submittingby bidders.

The Green book - This details the particular requirements in relation to PFIagreements.


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Bringing in private sector finance at scale

When you explore the funds available to deliver projects using your own sources of finance or specialist funds, you may find that what is available is not sufficient tomeet your requirements. This could be because the project is larger than theorganisation is prepared to fund, despite being a good project in other ways. Withthis result you may choose to explore whether you can raise funds from the privatesector. However, the general principle set out in Managing Public Money 3 alwaysapplies. Public sector organisations may only use private sector funds if they areable to achieve good value for money in so doing. The private sector option willonly be value for money if the savings outweigh the additional finance cost, asuitable level of risk can be allocated to the private sector finance partner andlower cost finance is not available as an alternative.

It is worth noting not all public sector bodies have this option available to them.Schools and the NHS are not able to use private sector finance. A summary of which bodies can access the different types of finance is available in Appendix D.

In reviewing how to work with bespoke private sector finance it is important tounderstand that organisations in this area generally work on large-scaleprogrammes and projects. They do this to spread due diligence and operationalcosts, so that they would far rather work on one 50m project than ten 5mprojects. This presents a challenge to public sector bodies on how they can


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Figure 3 Financing over the lifetime of a project


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developing track record and ironing out teething problems, which is the evidencerequired to show a future investor that the project is proven and not justtheoretical. Once you can show evidence of the financial returns your project isconsidered less risky than when you were starting out.

Steady state/exit/refinance . The length of time it takes to develop track recordvaries between projects, with shorter periods for proven technologies and longerperiods for newer or larger projects. When cash flows are stable, you can considerrefinancing your project. The project would then be considered to be in a steadystate and it is not uncommon for investors to then talk about an exit stage. In thecase of providing project finance it is often the intention of a finance provider tofund the first phase with the expectation that the organisation they are fundingwill look to refinance once the project is proven. This therefore provides an exitroute to the initial investor so that they can get their money back.

For an investor to exit there must be sufficient track record to enable anotherinvestor to put their money in to the project, normally at a lower required returndue to the decreased risk. The project needs to be in this steady state where cashflow is predictable and the operational risks are well known and mitigated against.It is the reliability of the cash flow and the understanding of risk that enables thenext investor to provide finance at a lower cost of capital, which reduces theoverall cost to the project.


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required if the financing is for a programme of activity rather than a singleproject. For example if you were financing energy improvements to houses,it is the ability of the organisations responsible for delivering the project tosign up sufficient homes. In the case of district heating it would be theability of the delivery organisation to connect up the required number of properties;

Operations - this will include looking at what resources and competenciesthere are to monitor and manage the programme throughout its life.Investors will need to be confident that the systems and governance are inplace to ensure that the project or programme continues to deliver cashflow as planned. This will include the delivery of maintenance and repairprogrammes;

Supply - the consideration of supply side risks is about understanding whatinputs a project is reliant on to make the necessary financial returns. Forinstance in the case of biomass heat you need a reliable supply of biomass/wood. The investor will need to have confidence in the supply of thoseinputs, and at a cost that will ensure you make the necessary returns;

Demand - the final area to consider is demand. Who will be purchasing orusing the output of the project and how can you guarantee that level of demand over the lifetime of the financing so as to guarantee the cash flows?This is important, for instance, in the funding of decentralised energywhere investors will be concerned that long term supply contracts may notbe honoured should a buyer go out of business.


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particular assets financed through asset finance companies such as Siemens. Thiswill impact the balance sheet liabilities of the public sector organisation whichmeans it needs to fall within its overall borrowing limits.

Project financeEquity investors and banks will provide the finance to a Special Purpose Vehicle(SPV) or company specifically created to deliver a programme. This means that thecash flows out and back from the SPV are ring-fenced and with liabilities limitedfor the funders to the money they have provided.

Equity for projects can be raised through the following sources:

Private direct investment private individuals can invest into a company Infrastructure funds these invest in projects where the technology is

proven and finance is required to roll out measures such as wind farms.They will look for pre-tax returns of about 15% IRR. Private equity funds these buy into or buy out existing companies and are

not generally applicable to new low carbon finance vehicles Venture capital venture capital funds can put some of their funds into a

programme although more often they are looking for companies into whichthey can invest. They will generally look for a 30% return on investment(IRR) and invest when a business is cash generating, but before it is


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equity. It can be structured in a number of ways, for instance debt canconvert into equity. There is not always mezzanine finance in aprogramme.

Junior debt this is debt that is paid after the senior debt has received itsdue payments. There is not always junior debt in a programme.

Debt funds. There are not many debt funds available although this new

area is slowly growing given the lack of financing by banks. Thesegenerally lend to low risk projects and take a higher return than banks.Venture debt funds fund new companies to take them through to being cashpositive and debt funds generally fund projects that roll out proventechnology. Sometimes debt funds are used to supplement bank finance.Not many funds are active in energy efficiency projects although some arefinancing renewable energy.

Bond financeBonds are tradeable investment products where investors buy the rights to futurecash flows from the issuer of the bond. For the issuer, they are similar toborrowing money with an upfront agreed interest rate and repayment schedule.Local authorities can issue bonds to finance their balance sheets, but most otherorganisations might consider project bonds which finance specific projects. Theseare not common but universities have issued them to finance studentaccomodation.


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Social finance bonds purchase of bonds where bond payments are madecontingent on delivery of social and environmental benefits

Equity finance as with equity above.

Blending financeAll these types of finance can be mixed into finance vehicles to create funds forfinancing low carbon projects. Investors create stacks with the highest riskinvestments on the bottom shielding lower risk- and cheaper- debt on the top. Theaim is to keep the weighted average cost of capital (WACC) as low as possible. Thisblending of finance in a vehicle is illustrated below.


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The role of public bodies in accessing private sectorfinance

A significant part of unlocking the flow of private capital into low carboninvestment is creating programmes and investment opportunities for private sectorinvestors at the right scale. It is worth reviewing the public sector strengths whenit comes to creating sizeable investment opportunities for the private sector.

Convening power Public and not for profit bodies have the ability to work across sectors. Forinstance local authorities can convene programmes across their own buildings andthose of fire, social housing, police and maintained schools. They also have theability to work across boundaries and adopt common processes and practices.Central government procurement procures energy on behalf of all centraldepartments and a range of other public sector organisations

It is the public sector s ability to do things in a common way because bodies arenot in competition with one another that allows them to create programmes withthe underlying consistency needed to aggregate a number of individual projectstogether to achieve sufficient scale. Grouping projects so that finance is raised fora suite of projects across different buildings or organisations means that the needsof finance programmes to achieve scale and spread risk can be met, making


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Case study 3 - Birmingham Energy SaversBirmingham City Council (BCC) is using a large scale innovative programme toenable the financing of energy efficiency programmes for a range of public sectorbuildings, leveraging a domestic energy efficiency programme to do this. Theprogramme, developed with the Energy Saving Trust and Marksman Consulting, usesthe ability of public sector organisations to borrow as a means of accessing earlystage project finance. This investment is repaid through savings made, using theGreen Deal as a means of collecting payments via the electricity bill.

The finance is deployed through a procured delivery partner from the privatesector who is responsible for signing up householders and public sector buildingmanagers, having the measures installed and collecting the payments via the

delivery partners back into the finance process. The finance vehicle is whollyfunded from the participating public sector bodies who in turn access finance fromprudential borrowing or use of reserves. Technically private sector finance couldalso be provided as equity from infrastructure funds or from the delivery partner,or as debt from commercial banks, but given the costs of doing this and resultinggovernance issues this was not seen as attractive in the base business case.

Whilst BCC provides necessary scale required to attract private sector interest, it


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Appendices

Hopefully this guide has provided a useful overview of the funds available to thepublic sector, considerations of scale of financing and some advice on bringing inprivate sector finance.

The following appendices provide more detail Procurement and contracting Assessing costs Building a business case Summary of which organisations can access the different types of finance.


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Appendix A: Procurement, Contracting and implementation

There is a mass of advice and guidance on the procurement, contracting andimplementation processes. The purpose here is to give some insight into thevarious procurement processes and provide advice on how they can be optimised todeliver the anticipated carbon reductions.

Overview

Whatever the procurement and contracting process there are several commonfactors to consider:

Be specific about the design and performance that you need Get specialist input to advise on design Make sure you can measure the performance you are achieving Use whole life costing and carbon analysis when evaluating bids and tenders Build in penalties where actual solution does not meet the design

specification Provide incentives to the supplier to deliver carbon and cost savings Consider carbon emissions during construction phase Ensure carbon reduction is a continuous process.


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Health Building Notes - HBNs detail the space and area requirements for thedepartments. These are summarised as Departmental Cost allowance Guides(DCAG), which are used in determining the size of the facility and ultimately thecost;

Healthcare capital investment Summary DCAG s to b uild-up costs perdepartment;

Framework guidance for the Estates content of business cases sets outrelevant Estate detail required for a capital investment business case.

The following methods are available to reflect carbon and energy in procurement.The key requirement is to include all requisite elements as selection criteria in theappraisal process:

Procurement - use electronic tendering system; Product specification - set out lowest carbon products as a project selectioncriteria. Tender return documentation to require details of productselection as noted. In addition, tenderers to be encouraged to proposealternative energy provisions. Study of options, detailing whole life benefits,to include sustainability, financial and lifecycle costings to demonstrate


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Appendix B: Assessing the costs

The table below shows some of the typical revenue and capital considerations tolook at for different categories of carbon reduction projects:

Revenue considerations Capital considerations Energy/fuel/transport/waste

savings in financial terms. One off installation or

commissioning costs that can t becapitalised.

Annual running costs. On-going maintenance costs or

savings. Potential for income generation. External services or consultancies

employed. Internal manpower. Comms/PR materials.

Purchase/ build cost. Project management, commissioning

and installation costs capable of beingcapitalised.

Lifetime of the asset (lifecycle costs perhaps insert a footnote here about

what lifecycle costs are). Residual value of asset at end of life. Any metering or other long term

assets. IT systems, infrastructure or other

equipment needed to supportchanges.


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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Capital cash flows

Purchase of asset () -22000

Revenue cash flows

Installation () -2000Maintenance () 300 200 200 200 100

Energy savings

electricity kWh 60000 60000 60000 55000 55000

price per kWh (pence) 9.00 9.45 9.92 10.42 10.94 11.49

Savings () 5670 5954 6251 6017 6318

Carbon savings(tonnes) 31.4 31.4 31.4 28.8 28.8

Annual cash flow () -24000 5970 6154 6451 6217 6418

Cumulative cash flow() -24000 -18030 -11876 -5425 792 7210


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Project prioritisation

In financial terms, any capital spend that pays back in less than 5 years is likely tobe a good investment. However, many projects have a significantly quickerpayback- Carbon Trust experience of working with the public sector suggests thatabout a third of opportunities identified by public sector bodies pay back in less

than a year. Examples include simple controls and sensors, BMS tuning, energyprofiling, metering and targeting, and awareness and waste campaigns. It isimportant to prioritise these projects for implementation first, both to achieverapid carbon reductions and to make the most rapid efficiency savings.

Larger projects will require the net present value of the project to be calculatedover the project lifetime as described above. Lifecycle costing can be a verypowerful tool for making the business case for larger invest to save carbon

reduction projects, as they often generate significant savings over the projectlifetime. It is also very useful for ensuring value for money and energy efficiencywhen making significant purchases, such as new buildings, cars and energy usingequipment.

Another financial tool that is sometimes used to prioritise projects is the projectInternal Rate of Return (or IRR). This is defined as the discount rate at which thenet present value (NPV) of the project is zero, and is a measure of the rate atwhich the project pays back its initial cost. IRR is less simple to calculate than


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Appendix C: Building a Business Case

The Treasury Green Book 4 states that All new policies, programmes andprojects, whether revenue, capital or regulatory, should be subject tocomprehensive but proportionate assessment, wherever it is practicable, so as bestto promote the public interest. The term proportionate is relevant here and it isimportant that you determine whether formal Strategic Outline Cases (SOC) orOutline Business Cases (OBC) are required. They are unlikely to be necessary forsmaller projects- your Finance Director should know the limits above which formalbusiness cases are required.

There will also be internal requirements contained within your Standing Ordersand/or Standing Financial Instructions about the appropriate business case processthat should be followed.

It is recommended that you follow the 5 case model developed by HM Treasury 5 for all opportunities although smaller initiatives will only need a relatively shortsummarised case to be made. The five cases are:

Strategic case supported by a robust case for change


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A key element of any business case for carbon management opportunities will bethe anticipated carbon savings. Manufacturer claims can sometimes be optimisticso it is recommended that hard evidence of implementations at otherorganisations is obtained and that the savings are sense checked by independentcarbon management consultants.

Types of Business Case

There are 3 stages to a business case. Depending on the size of your project youmay not need to do all 3. Your finance department will be able to advise you.

1. Strategic Outline Case (SOC)2. Outline Business Case (OBC)3. Full Business Case (FBC)

Strategic Outline Case (SOC)The SOC is a brief, preliminary document of no more than 5 or 6 pages thatintroduces the basic project concept and contains enough detail to support aninformed decision on whether to proceed to an OBC. It should include a preliminaryassessment of strategic fit, options, value for money, affordability andachievability. Key elements in a SOC include:

the project concept and rationale for public sector intervention; initial statements of strategic aims, business need and project objectives;


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The final stage, if required, is the full business case.

Outline Business Case

1. On SOC approval appoint team to prepare Outline Business Case(OBC)

2. To take forward long list of options and establish shortlist

3. Set benefits, selection criteria and weighting and identify preferredoption.

4. Depending on project and approach (traditional, PFI/PPP, P21 etc)undertake design with users, progress local authority planning

5. Develop costs of project, detailing all capital and revenue implications

6. Set out proposed and projected carbon savings

7. Where appropriate, secure outline planning permission

8. Write Outline Business Case and seek approval

9. Seek appropriate approval (e.g. Board, sponsoring GovernmentDepartment)


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Appendix D: Sources of funds open to public sector organisations

General financingGeneral financing is when the public sector body uses its own balance sheet to finance specific projects such as invest to save. This borrowing is managed bytreasury functions within finance departments who will access funds in the most optimal away across all projects and core activities. It is not expected thatsustainability professionals would apply for this type of financing directly.

Balance sheet funding e.g. internal cashor reserves

Borrowing for projects Bonds

Central governmentdepartments

From central budgets National Loans Fund

Local authorities Central governmentLocal taxes

From commercial banks, PWLB and EIBTax Incremental Financing

Able to issue bonds, but generally notseen to be an efficient approach

NHS Central government funding From commercial banks if Foundation TrustsPublic Dividend Capital and CapitalInvestment LoansFoundation Trust Financing Facility

Higher Education From student loans and centralgovernment fundingResearch and commercial income

From commercial banks and EIB Able to issue project bonds underwrittenby the establishment

Further Education From local authority funds From commercial banksPolice and fire service From local authority funds From commercial banks and PWLB

Schools From local authority funds if LA ownedAcademies from General Annual Grant

(GAG), paid by the Young People'sLearning Agency (YPLA)Free Schools via DoE using a formula aswith academies

All schools need secretary of state approvalto borrow


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Specific project financingThese are source of funds that might be available for specific projects. It is important to ensure that the necessary scale is in place for the source of funds.

Grants Invest to save funds ESCOs with private sectorfinance Financing of ventures withthird party capitalGenerally small grants for technical assistance coststowards large projects

Sources of funds for small projects

Sources of funds for larger projects

This describes whether public sector bodies are ableto provide finance to third

party companies, at timesalongside private sector

financeCentralgovernmentdepartments

ERDF Partnership for RenewablesCarbon Trust/Siemens loansschemeLEEF for London bodiesEEE-F

London REFIT

Localauthorities

European ERDF ELENA IEE EEE-F Life+

SalixPartnership for RenewablesCarbon Trust/Siemens loansschemeLEEF for London bodiesEEE-F

London REFIT Allowable and underway

NHS SalixPartnership for RenewablesCarbon Trust/Siemens loansschemeLEEF for London bodiesEEE-F

NHS Carbon and Energy FundLondon REFIT

Community HealthPartnerships via LocalImprovement Finance TrustPFI

Salix London REFIT Off balance sheet PPP e.g.


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Grants Invest to save funds ESCOs with private sectorfinance

Financing of ventures withthird party capital

HigherEducation

ERDFRGF

Partnership for RenewablesCarbon Trust/Siemens loansschemeLEEF for London bodiesRevolving Green FundEEE-F

partnership withconstruction company andfacilities manager to buildstudent accommodation

FurtherEducation

ERDFSFA

SalixPartnership for RenewablesFrom local authoritiesCarbon Trust/Siemens loansschemeLEEF for London bodiesEEE-F

London REFIT

Police and fireservice

SalixPartnership for RenewablesCarbon Trust/Siemens loansschemeLEEF for London bodiesEEE-F

London REFIT

Schools LAcontrolled

ERDF SalixPartnership for RenewablesCarbon Trust/Siemens loansschemeLEEF - for LA owned schoolsonlyEEE-F

London REFIT for LA ownedschools only

Schools Academies andFree Schools

ERDF SalixPartnership for RenewablesCarbon Trust/Siemens loansschemeEEE-F

carbon trust ps ee finance final

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