Public sector warming to the idea of investing in decentralised energy schemes

Local authorities are increasingly looking towards investment in decentralised energy projects as a way to create new revenue streams, drive local investment, cut carbon, and help to address fuel poverty. At present gas-fired combined heat and power schemes in high-density urban areas are proving most popular as the costs are viable, the technology is mature, and heat networks can benefit large numbers of users. However as the importance of cutting carbon continues to grow there is increasing uptake in use of biomass and renewables at a local level.

This trend has been recognised and supported by the government, who in March announced a £9 million package to help local authorities get heat networks set up around the country. There will also be £1 million made available for Manchester, Leeds, Newcastle, Sheffield and Nottingham to help them develop heat networks.

There are, however, a number of barriers to developing schemes despite the very attractive potential benefits. Many of these barriers can be institutional, because of the reliance of public sector involvement, particularly in planning approvals. But the biggest obstacles tend to be access to finance, overcoming technical or financial complexity, and a lack of understanding in how to structure finance in the project development process.

Deciding on a business model has a critical impact on the objectives that a project can address. In some cases it may be appropriate to involve a private partner that is able to shoulder costs and risk, but will look for a commercial rate of return from energy prices. In other circumstances, for example trying to tackling fuel poverty or driving the economic regeneration of an area, then local authorities may have to bear the brunt of the costs. Although public sector borrowing limits and capital constraints can be an issue, local authorities are increasingly gaining confidence in managing their own schemes. This can create a revenue stream that can ultimately be reinvested, giving greater local autonomy.

There is also an issue with identifying and making the case for a feasible project. In a time of shrinking resources, the enthusiasm and dedication of local authority staff is not always matched by the capacity available to take projects through to procurement.  Where local authorities lack internal capacity but do not want to give a project away entirely to a private partner, the result can be deadlock. Although local authorities that can access their own capital, public funding through government or European schemes, or cheap public borrowing may be able to accept a far lower rate of return than a private partner, and could still receive a better return on their capital than they would get from a bank.

Decentralised Energy in Action

The Carbon Trust has been working with Bristol City Council to help them develop a new combined heat and power scheme based around the Bristol South Swimming Pool. This will provide heating to the pool itself and four nearby residential blocks incorporating a total of 159 flats.

The council is responsible for the energy bills at the pool as well as the costs for associated carbon emissions under the CRC Energy Efficiency Scheme, and the nearby flats are a complex of high and low-rise social housing where addressing fuel poverty is a concern. The scheme will help to cut immediate costs both for the council and local residents, offering anywhere from a 20-50% saving in energy bills, and providing resilience against price rises.

The project will partly be funded through the Energy Company Obligation, and provide a return on investment in 10 to 15 years. It will give the council an ongoing revenue stream, reduce risk to energy shortages and price volatility, and help contribute to reducing the carbon footprint of both the city and the country as a whole.

"With energy prices rising quite sharply over the last few years, and general strain on public finances, then cutting bills and fuel poverty are two pretty major concerns for us at the moment," said Paul Barker, Energy Management Officer at Bristol City Council. "Decentralised energy schemes are a big part of our commitment to investing in making Bristol the most sustainable city in the UK with a high quality of life."

The Carbon Trust offers independent, technology-agnostic help and advice for the public sector on decentralised energy schemes. For further information contact or call +44 (0)20 7832 4803.