The purpose of this report is to detail the
outcome of the commercialisation stage of the Solihull Town Centre
Low Carbon Energy Network project (referred to as the “Energy
Network”), considering all five elements of the Full Business
Case for Phase 1 of the network development.
The Cabinet was provided with the outcome of the commercialisation stage of the Solihull Town Centre Low Carbon Energy Network project (referred to as the “Energy Network”), considering all five elements of the Full Business Case for Phase 1 of the network development.
Members were advised that core elements of the Strategic and Economic Cases remained unchanged from the Outline Business Case reported to Economic Development and Managed Growth (EDMG) Scrutiny Members in March 2021. However, these cases had been strengthened through recent and emerging national policy on heat networks and the net zero ambitions of the Council and WMCA.
The establishment of a heat network in Solihull town centre offered a clear opportunity to make significant reductions in CO2 emissions. However, the associated financial modelling was complex for such a major investment, was subject to many variables and the IRR for Phase 1 was positive but low. There was, however, potential for further expansion of the network across the town to specific customers which would improve the financial position and give further CO2 savings.
The total capital cost of the Phase 1 scheme was £18.390m. The financial position for the Council in the Phase 1 base case demonstrated a £4.140m surplus over the 40-year project period; thus, representing a positive, but ‘marginal’ position in terms of financial viability. The financial model associated with Phase 1 was very sensitive to pricing and inflationary changes. Therefore, key sensitivities had been run by independent consultants against the base case including extreme gas and electricity pricing scenarios, inflation changes, removal of a major customer connection and analysing the effect of maximising use of the Phase 1 heat generation plant to further local customer connections.
The report included the Energy Services Company (ESCo), Solihull Energy Limited’s Shareholder Agreement and draft business plan. The ESCo had already been established as a non-trading entity and would need to be established as a trading entity prior to the award of contract with the main contractor. The ESCo would hold the Energy Network assets, enter into contracts for construction and operation, and customer heat and power supply, and manage and operate contracts on behalf of the Council as sole shareholder.
Officers advised that the full report had been shared with the Council’s External Auditors for comments and the Auditors had not made any comments.
Members were presented with the recommendations of the Resources and Delivering Scrutiny Board from 6 March, following the Boards consideration of the report.
The Leader acknowledged that this was one of the most significant decisions that Cabinet would be asked to make. The Leader advised that he had submitted a number of questions prior to the meeting, which Officers had responded to, and which he wanted Members to consider before deciding:
· With regard to the Resources and Delivering Value Scrutiny Board it was noted that they did support the proposal, but they did have some issues which were reflected in the minute. One being weather there should be a Member on the company (ESCo). The Leader confirmed that he had received advice on this, and an alternative approach had been suggested;
· It was noted that Scrutiny felt that the financial case was positive but not strong, but the carbon savings from the heat network made a significant contribution to the Borough's carbon reduction targets;
· In relation to the various legal documents the Leader advised he would not be approving legal documents, but Cabinet would approve the principles so that Officers could then follow these through, so there would be an amendment to one of the recommendations;
· The Leader commended Officers for obtaining additional grant monies (par. 3.5.3 of the report) and Officers confirmed that the Council did not need to be in a position where the Council had a signed contract or lose the money;
· The Leader referenced several high profile Council owned companies which had failed. It was noted the failure was down to the model used which was based on selling energy bought from the open market. The Solihull model was different as it was based on generating our own energy and not gambling on the energy market. The Council was also targeting local businesses with whom the Council had a relationship, and the customer base was more defined with an appropriate critical mass;
· The Leader sought assurance that the Council was covered for cost over runs. Officers advised that risk sat with Vital as did design risks for Phase 1. With regard to work on the public highway, Vitals’ quote also included this;
· The Leader had questioned why businesses would want to sign up to the scheme, and Officers advised a reduction in C02 emissions would motivate some, and others by the fact that it would avoid upfront investment in low carbon systems;
· With regard to the history of Vital Energy and examples of successful other projects, Officers advised their track record was very strong and had delivered on a number of contracts. (Further detail was provided in the private section of the meeting);
· In relation to the project failing, Officers had advised the risk to the Council would centre on loan repayments, capital and equity and reputational damage. The Leader noted a strong business continuity plan had been developed in case of technological failures;
· It was noted that the customers contract and the operational contract period was shorter than the loan period of 40 years. Officers advised that the customer base could change over the years, but the key entity was the Company which needed to last over 40 years;
· With regard to the useful life of the facility, Officers advised that each piece of the kit had its own economic life, and it was the operator’s responsibility for servicing it and maintaining it;
· Members were advised that the risk of not proceeding meant the Council would lose government funding, it would impact on the how the Council would deliver carbon savings and reputational damage with phase 1 customers;
· Officers advised that those businesses within the town centre which had not been included in the scheme was because they had insufficient heat load to be considered;
· On the point of the technology not being able to deliver the results required Officers advised this risk was carried by Vital;
· Officers advised that in relation to the carbon savings they had followed BEIS guidance for the business case and particularly for the economic case, so this was already built in;
· Further discussion was had on how to future proof the scheme especially around capacity and infrastructure. Officers confirmed that the energy centre could expand. Officers advised on what future expansion could be and what would be required to go beyond phase 1b and up to phase 3;
· Officers advised that a strong consultancy team had been assembled so the assurance required for a scheme like this could be acquired;
· Officers confirmed that grant conditions regarding the tight deadlines could be met and explained how.
The Cabinet then went into private session before making the decision in public session.
(i) That the latest commercialisation position, in particular the procurement outcome, the affordability position, sensitivities undertaken, and the financial risk assessment be noted, and that it be agreed to proceed with the delivery of the project;
(ii) That delegated authority be granted to the Acting Chief Executive in consultation with the Cabinet Members for Resources and Climate Change, Planning & Housing to sign any contractual arrangements associated with additional Heat Network Investment Project (HNIP) funding set out in section 3.5.3, of the report, subject to satisfactory conditions being agreed;
(iii) That the prudential borrowing of £8.7m required to fund the Council’s investment into the ESCo be agreed;
(iv) That the delivery programme of the Energy Network to the Council and external customers be noted;
(v) That the draft Business Plan April 2023 – April 2028 as set out in Appendices 1 and 2 of the report be endorsed;
(vi) That it be agreed to endorse Solihull Energy Limited entering into a contract with Vital Energi Limited as the Design, Build, Operate and Maintain (DBOM) contractor on the basis that it is confirmed to the Leader of the Council and the Cabinet Members for Resources and Climate Change, Planning & Housing, as advised by the Director of Economy and Infrastructure, that the conditions set out at paragraph 4.7.10 (c) of the report were achieved; and
(vii) That the Resources and Delivering Value Scrutiny Board recommendation be noted, and Cabinet agreed to establish a shareholder panel.