Financing Eco-refurbishment – a Scottish local authority solution July 2012 Christoph Harwood Marksman 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 Economic Activity Warm homes/Warm Front CERT CESP Green Deal & ECO Solar PV programmes

Potential ~200,000 house roll out programme in 15 years Illustrative Houses retrofitted Phase 1 15,000-20,000 (£75m)

5 Local Authority Partnership Model Installation companies Install and manage Contract Marketing 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 £ £ 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 Downside of fund size lower than £75m Delivery Partners Cost to Customer 15,000 –20,0000

8 8 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

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 £b

Achieving desired market size LAs to commit10 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 authoritiesFinancing authorities Uses capacity – no revenue Expands capacity – receives revenue Lending to TGDFCRefinance 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

19 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 finance/Options-review-of-a-local-authority-led-partnership-model-for-the-green-deal-in-scotland.pdf

20 Financing Eco-refurbishment Christoph Harwood Marksman Consulting LLP