The lessons, or lack thereof, from Portsmouth's failed ESCO launch - Current±
29 August 2018
News circulated recently around local government that Portsmouth City Council has decided to pull the plug on its proposal to establish a fully licensed Energy Company. It had been anticipated that this would be the third local authority to enter this market, after Nottingham and Bristol City Councils. There are clearly ramifications to this scenario, including public money being wasted. The question is whether this will have an impact on other authorities seeking to establish their own fully licensed ESCOs?
Nottingham City Council established Robin Hood Energy and it is now trading in its fourth year. It reported at the end of its third year that it had moved into profit. Bristol Energy opened a year later and is on the same path. Both were created for social reasons, including combatting fuel poverty and improving the prices paid for energy by their inhabitants. Other local authorities have looked at the options and most to date have either delayed action or plumped for the lesser white label option.
The principal hurdle for a fully licensed company is the level of investment (which is in millions of pounds) and the risk of operating in a commercial and changing energy environment. This has ensured that only the most hardy will traverse this route.
Portsmouth presented a paper to Council on 29 July 2017 proposing to establish Victory Energy, which was to be a joint venture municipal energy supply company. Immediately it can be seen that there is a difference from the others. Energy supply is largely undertaken by the private sector: local authorities are aiming for energy services companies which have a much wider remit, including public education and awareness and providing services that are needed but missing from the majority of private energy suppliers, such as lowering energy use and promoting energy efficiency.
Portsmouth believed that it could reduce the risk to public funds by entering into a joint venture with a senior energy individual, who was experienced in energy companies, with over 25 years of experience with one of the big 6 energy suppliers. That person would be a joint owner of the venture and supported by two other experienced individuals, who would form the management team of the new company.
The new venture was to be a company limited by shares and would be a commercial company operating in a commercial environment. The Council paper made clear that the Council was targeting a commercial return on its investment. The individual investor would be expected to exit within 10 years.
The business case was aggressive and planned a payback of the Council's £4m investment in just 3 years and 7 months years of operation, based on attracting 25,000 new customers per annum.
The proposals raised eyebrows across local government, where there was considerable surprise at how Portsmouth was going about this. I described them as a 'lose lose' scenario for the Council: if the plan works and the company is wildly successful, the Council would be criticised for giving away some of the equity and particularly for the millions it would have to pay the individual on his or her exit from the company; if the venture did not work, the Council would be criticised for the unorthodox way in which it had chosen to go. The reason for the latter comment is that it is very unusual in local government for deals such as this to be given to individuals by local authorities where they will use public money to generate personal profit.
And so it came to pass. The administration of the Council changed and further advice has been taken on the business case and the proposals. As a result, the plug has been pulled on the proposal. In a Press Release of 10 August 2018, the Council said:
"Portsmouth City Council has stopped its fledgling energy company Victory Energy. The decision was taken by the council's Cabinet following a briefing session for all councillors that included analysis of the company's business plan by finance experts PwC. The company would have needed many millions of pounds of taxpayers' money from the council to get it up and running and was not predicted to pay it back for up to eight years. The council has already invested a significant sum in setting up the company and may lose at least £2.5m of money already committed to the project by the previous administration, but the current Cabinet felt it more responsible to cut the council's losses rather than risk spending further money with no guarantee of it being returned."
It is clear that the business case was a large part of the decision. The customer numbers were aspirational and the Council's money would have been at risk if it had taken longer to establish itself. There are also other initiatives in the Solent area, such as the white label entered between Robin Hood Energy and neighbouring Southampton City Council which has just launched the CitizEn Energy brand, which would have been competing for customers. Alternatively, it may have been unease on the part of the new Administration about the nature of the planned joint venture and considerable experience across local government hinting that such a deal was unwise.
So will this case study have any impact on other local authorities that are proposing to traverse this path? Not in my view. The authorities that are known to be considering this are planning on taking the traditional route, of establishing a wholly owned venture and recruiting a management team to operate the venture on the Council's behalf. Normally a more modest business case is prepared in support and more realistic customer numbers and financial returns agreed. The risks are still there, but can be managed in the normal way. Other local authorities will seek to distinguish the way that Portsmouth planned to go as an aberration to the norm and one that unsurprisingly failed to materialise.
It is likely that the local authority fully licensed ESCO field has yet to fully assemble. My guess would be that between a half dozen and dozen such companies will come forwards over the next five to ten years, offering a national coverage of the municipal alternative. As indicated above, this route is not for any but the most hardy authorities, but those that manage to scale the mountain will benefit in both financial and non financial outcomes.
Stephen Cirell is an independent consultant on the green agenda specialising in local government and the public sector. He is author of Energy Services Companies, White Label Arrangements and Their Role in Local Government, published by APSE.