Financing Eco-refurbishment – a Scottish local authority solution

July 2012

Christoph HarwoodMarksman Consulting LLP

Local authority activity on Green Deal model

Multiple areas of dialogue

Business case Procurement

Newcastle (5+5)

Birmingham (1+22)

Option review

Developing regional support

London boroughs

Greater Manchester

West Sussex

Scottish Government

Leeds City Region

Black Country

Welsh Government

Worcestershire

Changes to the energy efficiency sector

2011 2012 2013

Economic Activity

Warm homes/Warm Front

CERT

CESP

Green Deal & ECO

Solar PV programmes

Potential ~200,000 house roll out programme in 15 years

0

2

4

6

8

10

12

14

16

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2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021 2021-2022 2022-2023 2023-2024 2024-2025 2025-2026 2026-2027 2027-2028

Illustrative

Houses retrofitted

Phase 1

15,000-20,000(£75m)

5

Local Authority Partnership Model

Installation companies

Install and manage

ContractMarketing

Finance

Payments

Other

Energy Companies

ECO

Management Company

Finance vehicle

LA

Finance (Prudential borrowing or reserves)

Green Deal Payments

PV Meter/deemed

Benefits

Green Deal + FIT payments

Social Housing Finance

National and local fuel poverty funds

Green Deal LA joint approach

Contract

Anchor

Anchor local authority• Set up and run

procurement process• Manage ongoing

programme

£

IPA

£

IPA

£

FoPA

Partner Authorities• Self financing with own

prudential borrowing– Initial; from start to achieve

critical mass for tender– Follow on;when ready

£ £

Client authorities• Access neighbours’

prudential borrowing• Provide marketing

support• Underwrite bad debt risks

Management Company

7

Minimum size - £75m

• Cost £1m to tender• Not see reduction in overall

costs• Means higher costs per house• Need to see long term pipeline

• Economies of scale require to spread fixed costs

15,000 –20,0000

88

Green Deal early adopters

Source; Grand Designs; Great British Refurb Campaign

Nationally early adopters can account for up to 13% of the population – first target market

Early adopters

Early majority

Late majority

Laggards

0% 10% 20% 30% 40% 50% 60% 70% 80%

BCC target

North East Target

Gentoo

Stroud/SWEA

BCC

BG2

BG

B&Q

London searly adopters (low)

London solid solid wall early adopters (high)

Interest with interest rate at 6%

Early adopters (GBR)

London three year target (2014-2017)

Adoption rates and targets

Market research

PAYS pilots

Target set

£75m and 5% adoption is £1.5b target market

Financing requirements by hub area, measures required and house type

0.5

0.0

1.0£b

Achieving desired market size

2.0

1.5

1.0

0.5

8 LAs to commit 10 LAs to commit

Single programme for Scotland

£2.1b

16 local authorities

£1.5b

5% adoption target

Without flats and social housing

With flats and social housing

£3.7b

5 local authorities

Anchor authority

• Scottish Government

• Single Authority

• Scottish Cities Alliance

– Already reviewing its role– Seven authorities increases overall market size– Covers rural areas

• Scottish Futures Trust support on procurement

• COSLA support with local authority engagement

• Scottish Government – assistance with start up costs

Recommended

Margin from providing finance

Market APR to consumer (~7.5%) set by TGDFC

Operating costs

Cost of capital

• GIB junior debt to TGDFC is 3.85% over Gilts• PWLB is 0.8% over Gilts

LA Margin

LA costs• Procurement• Officer time

LA broader outcomes• Jobs• Fuel poverty• Special areas

LA support to householders• Cost of measures• Incentives

Provisional

First loss layer (%)

Base case

Revenues available from taking a first loss position

Local Authority Green Deal Warehouse

Green Deal Warehouse

Bond

LA1

LA2

LA3

etc

£3-500m

Uniformity requirement

Bank finance

First loss risk retained

Role of LAs for TGDFC

TGDFC

Customer authorities Financing authorities

Uses capacity – no revenue Expands capacity – receives revenue

Lending to TGDFC Refinance using TGDFC

Using TGDFC operations platform from the start

Adoption risk

Start up costs

House by house implementations

Every house implementation covers its own costs and a share of start up costs

Set price to householder based on a target of installations

£1.5-2m

£75m

• Business case• Procurement• Operational set up post procurement

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Summary

• Local authorities have core role to play

• Trusted by householders• Access to low cost finance• Fits with requirements on jobs, low carbon and fuel poverty

• Green Deal legislation is strong enabler

• Private sector finance does not seem to be available without public sector support – ie local authorities and/or GIB

• Private sector delivery sector is supportive

• Local authorities are taking the lead

• Birmingham and Newcastle have enabled the programme• Other UK local authorities are expected to follow• Scottish Cities Alliance is able to take leadership position for Scotland

http://www.energysavingtrust.org.uk/england/Publications2/Local-authorities-and-housing-associations/Funding-and-finance/Options-review-of-a-local-authority-led-partnership-model-for-the-green-deal-in-scotland.pdf

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Financing Eco-refurbishment

Christoph Harwood

Marksman Consulting LLP

Christoph.harwood@marksmanconsulting.co.uk