The business case for a Cambridgeshire low carbon investment fund and development unit

The business case for a Cambridgeshire low carbon investment fund and development unit 1 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Document type: Client: Client contact: Final Report Cambridgeshire County Council Sheryl French Other details: Title: The business case for a Cambridgeshire low carbon investment fund and development unit Date: 26/03/2014 Author: Signature Date: Robert Clark, Christoph Harwood and Duncan Price... (hard copy only)... (hard copy only) QA: Signature Date: Duncan Price... (hard copy only)... (hard copy only) Contact details: Robert Clark Email: robert.clark@vercoglobal.com Telephone: 07789248432 2 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Contents 1. Executive Summary... 5 2. Mobilising Local Energy Investment in Cambridgeshire... 10 2.1 Purpose of this report... 10 2.2 The aim and scope of the MLEI project... 10 3. Project Vision... 11 4. Development of a finance and delivery framework to attract investment 12 4.1 Investment requirements... 12 4.2 Addressing the core barriers to investment... 12 4.3 Summary of recommendations from initial report... 14 5. The business case for the Cambridgeshire Low Carbon Delivery Unit 16 5.1 CLCDU set up and operation... 16 5.2 It has a self-sustaining operating model... 18 5.3 It can be financially viable... 25 5.4 Summary business case for the Cambridgeshire Low Carbon Delivery Unit 27 6. Cambridgeshire Low Carbon Investment Fund... 27 6.1 A new fund is required... 27 6.2 Investment in the fund... 30 6.3 Deployment of funds... 30 6.4 Crowding in private sector finance... 31 6.5 The fund will deliver quick wins and then focus... 31 6.6 Strategy, operation, specification and governance... 32 6.7 It can be financially viable... 43 6.8 Summary... 46 7. Set-up process... 47 7.1 Fund development strategy... 47 7.2 Implementation tasks, costs and timetable... 49 7.3 Monitoring and verification procedures... 51 7.4 Summary... 52 8. Key risks and mitigation for the whole programme... 53 8.1 Investment at a time of budget cuts... 53 8.2 Establishing and maintaining support from public and private sectors53 8.3 Securing the right expertise... 54 8.4 Generating a sufficient investible pipeline... 54 3 MLEI Business case for Cambridgeshire low carbon investment and delivery model

8.5 Project development risks... 54 8.6 Regulatory risks... 55 8.7 Financial and commercial risks... 56 8.8 Raising funds... 56 8.9 Placing funds... 57 8.10 Generating returns... 57 8.11 Refinancing... 57 9. Delivery Mechanisms... 58 10. Role of local authorities... 61 10.1 Finance requirements from investing LAs... 61 10.2 Strategic support no projects outside programme... 62 10.3 Governance... 62 10.4 Officer time... 62 10.5 Pipeline development... 63 11. Cambridgeshire stakeholders... 64 11.1 LEP... 64 11.2 Other public sector... 64 11.3 Business sector... 64 11.4 Community Groups... 64 11.5 Stakeholder management... 65 12. Summary of potential outcomes... 66 4 MLEI Business case for Cambridgeshire low carbon investment and delivery model

1. Executive Summary The Cambridgeshire authorities (Cambridgeshire County Council, Cambridge City Council, South Cambridgeshire District Council and Huntingdonshire District Council ) wish to work together to secure investment into local low carbon energy infrastructure to improve energy security for residents and businesses, mitigate against rising energy bills through the reduction of energy consumption and, in so doing, grow the local green economy by creating and supporting local jobs in clean energy technologies and exporting this expertise outside the county and UK. In doing this the authorities wish to address not just what they can do with their own assets but also what can be done to support all relevant sectors within the county. There is an investment requirement of 150m in non-domestic energy efficiency and over 2bn in renewable energy by 2030, if Cambridgeshire wants to reduce its energy consumption and generate 28% of its energy locally from clean technologies 1. Funding this investment is a significant challenge and it is proposed to set up a finance mechanism/fund that will invest in local energy projects to achieve this ambition. There are barriers to investment in energy infrastructure in Cambridgeshire. These are summarised below alongside possible solutions. It is important to highlight these investment challenges as energy infrastructure for Cambridgeshire is different to large urban areas such as London, Birmingham and Manchester and is significantly influenced by its geography, topography, demographic, rural nature and culture. Table 1-1 Issues and solutions Issue Significant numbers of smaller scale projects driving high transaction costs for investors Asset owners lack understanding, knowledge and confidence Solution Creation of local aggregation through a delivery unit that brings together small projects. Support this delivery unit with a revenue model that allows it to be financed in a self-sustaining way. The fee structure will be established in a manner that supports this unit so that it focuses on the projects required by the key investors. Development of simple financing and delivery mechanisms for each sector that can be applied without deep knowledge required by asset owners Leadership from local authorities to demonstrate that the solutions can be delivered By investing in a fund that pays a fee structure that cannot be recovered without delivery of projects, investing authorities are demonstrating to the wider market that they are committed to delivery. This will encourage a higher level of participation from all stakeholders and greater investment by them in time, 1 Cambridgeshire Renewables Infrastructure Framework, 2011 5 MLEI Business case for Cambridgeshire low carbon investment and delivery model

resources and capacity building. Piecemeal investment into energy infrastructure creating an uncoordinated approach Investors are focussed narrowly on technology and sectors Lack of understanding of economic and social value created by investing in the low carbon economy Creation of a coordinated long term investment strategy that brings projects and investment together to make a big impact over time Creation of local authority fund to finance low carbon projects that crowds in sector or technology focused finance on individual projects. Market failure is driving the need for the CLCDU so competition is expected to be limited. Focus on delivery mechanisms that provide work for local business and local people Quantification of the benefit case An investment fund is needed. It will provide a low cost source of investment for local authorities and the wider public sector to invest in their assets. It will also provide enabling finance or part-finance for other projects that otherwise would not go ahead. It will generate revenues (in addition to project fees and projects returns) that will support a new unit, called the Cambridgeshire Low Carbon Development Unit (CLCDU). It is important to note that any surplus funds will need to be reinvested or passed back to the relevant local authorities. The establishment of a fund demonstrates commitment to local stakeholders and private investors that Cambridgeshire is serious about moving towards a low carbon economy. In addition, it provides a mechanism to help secure the very important external investment which will drive the growth of a low carbon economy (the public sector cannot do this alone). It will help leverage European structural and investment funds and help attract public and private co-financing which will not be readily available without achieving sufficient scale and by presenting an ambitious and well managed finance vehicle. The aim of the Fund is to make a profit through demonstrating that Cambridgeshire energy projects are a viable and credible option for investors. It can also work hard to reduce transaction costs, spread investment risk, support a wide spread of projects and establish clear investment goals for investors and the development unit. Importantly it provides a clear and trusted mechanism to capture and channel new forms of finance such as Allowable Solutions linked to government s zero carbon development policy. The Cambridgeshire Low Carbon Development Unit (CLCDU) will establish a series of relationships with delivery partners (e.g. Energy Service Companies, Property Companies) using existing or new procurement frameworks. It will originate a pipeline of investible projects, aggregate these to reduce transaction costs, accelerate investment and capture local economic benefits. It will look to build local support from key stakeholders in order to provide confidence for both investor and those organisations involved in the project generation / commissioning. It will also build confidence by being knowledgeable and being able to demonstrate how implementation and funding will/can be done to the standard required by financiers and delivery partners. It will also manage the Cambridgeshire Low Carbon Investment Fund (CLCIF) to generate agreed levels of return for investors. 6 MLEI Business case for Cambridgeshire low carbon investment and delivery model

It is proposed to set up the fund and development unit in three steps: Step 1: Demonstration - Cambridgeshire County Council (CCC) (and its Local Authority partners where possible), set up a Local Authority Fund and an internal team act as the development unit on a temporary basis. The Local Authority fund will invest in its own projects and those within its direct influence, demonstrating returns on investment and building credibility with the public sector and wider business community. The investment strategy will initially focus on delivering finance to schools and other public buildings plus solar parks on the County farm estate. Step 2: Replication evolving the Fund structure to create a CCC/ERDF (European Regional Development Fund) fund for further investment in public sector assets but also starting to invest into community and private sector energy projects. The development unit will evolve and build a broader pipeline of project opportunities, coordinating their investment to facilitate delivery. It will provide either debt or equity but the base model assumes the fund will borrow from Public Works Loan Board and on-lend to projects, taking a margin. Step 3: Expansion procuring a Fund Manager, attracting private sector programme-level finance and moving the development unit to a corporate finance body. The Fund becomes a fully commercialised and externalised vehicle to CCC and its local authority partners and the investing authorities make a commercial decision on whether to keep their initial investments in the Fund and take a return or whether to withdraw their investment. This evolving approach to a Fund is expected to be possible within state aid limitations up to step 2, particularly when combined with ERDF in support of a strategic investment plan. As the fund moves into arranging private corporate finance, FCA or equivalent regulation is likely to be required or seen as a benefit. State aid restrictions on Step 3 should be manageable but will need further examination at the time, depending on the details of the funding being provided. What will success look like for the Fund and Development Unit? Measures of success will include the value and size of projects supported, the investment placed and leveraged, return on investment expected and local social, economic and environmental value created, measured by jobs supported, energy bills lowered, revenue generated and CO 2 abated. To achieve this, the development unit will need to be a central hub in Cambridgeshire coordinating the range of finance options available into projects, initiating projects, aggregating projects where appropriate, securing strong delivery partner arrangements and delivering a return for investors. Investment criteria for projects will include financial viability, technical viability, deliverability, operational viability plus social and economic benefits including the use of local businesses, products and skills. There are a number of options for fund structure. Initially, it is proposed that the fund will begin as a ring-fenced block of finance within the County Council and in due course will migrate to a separate legal entity managed by a third party fund manager. The legal form should be decided in conjunction with the fund manager. A Limited Liability Partnership is an example structure that has been used in similar local authority-driven funds. 7 MLEI Business case for Cambridgeshire low carbon investment and delivery model

There will need to be a management board and an investment committee to provide the rigour of project appraisal and good governance that is required to ensure the credibility of the fund and its ability to attract a range of investors. The business case for the Fund and Development Unit A self-sustaining business model is identified for the Fund and development unit. From Jan 2014-Aug 2015, it is proposed that set up costs of 600k could be met from existing and planned European funds from MLEI and European Regional Development Funds (ERDF). Additional revenue of 370k could be possible in this timeframe by recovering a 0.5% ( 75k) management fee on the 15m investment and a 2% ( 300k) project development fee could also be considered. Whilst the Fund and the projects are Local Authority based, this cost would only apply if different parts of an organisation were taking the benefit out of the Fund. If appropriate, the project development fees are paid by the project owner at key stages in line with measures of success. From 2016-2018 the unit can generate a surplus of circa 100k. The Net Present Value over the first 5 years is over 500k. By step 3, a fully commercialised Fund, indicative annual cashflow has been modelled for a 100m portfolio. This is built up through the fund placing 15m of debt into projects by 2016, rising to a cumulative total of 30m by 2017 and 54m by 2019 via CCC borrowing from PWLB, ERDF and other investments. The balance of the 100m is assumed to be private finance provided direct into projects but arranged by the CLCDU. After the initial 3 years there are strong net profits rising to typically 500k per annum. The Net Present Value of the fund is 3.3m. Next steps Specific tasks have been identified for each step. Key milestones are: Cabinet decision January 2014 Establish internal CLCDU May 2014 Procure EnPC and PV delivery partners July 2014 Financial close (tranche 1 projects) December 2014 Secure ERDF December 2014 Private fund manager + DU procured March 2015 Financial close (tranche 2 projects) July 2015 Total costs for the period January 2014 August 2015 have been estimated at 600k. These could be covered by the MLEI and ERDF investments. Should further revenues be needed there is the potential to levy management fees and project costs totalling 375k. All setup costs can be met with existing or planned EU grants. In summary, the establishment of a fund could deliver the following benefits to Cambridgeshire: 8 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Table 1-2 Summary of potential outcomes Measure of success Projects supported through development phase, to construction and operation Units of measurement 53MW renewable energy installed capacity 100m total investment into local projects Value invested by the fund 54m Value of investment leveraged from other funders 46m Net present value to local authorities Local economic benefits CO 2 savings contracted and delivered 3.3m 75,000MWh energy generated in Cambridgeshire 1.2million tonnes CO 2 over lifetime of the projects 9 MLEI Business case for Cambridgeshire low carbon investment and delivery model

2. Mobilising Local Energy Investment in Cambridgeshire 2.1 Purpose of this report The aim of this document is to lay out the proposed investment and delivery framework/model for energy efficiency and clean energy in Cambridgeshire up to 2030 with the MLEI project being the first part of the process. The MLEI project is being funded by the European Commission s Intelligent Energy Europe programme, Mobilising Local Energy Investment (MLEI) and the framework/model was drawn up by a consultancy team led by Verco, in consultation with a range of stakeholders both public and private. In this report we detail the roles of the two core structures in the model: The Cambridgeshire Low Carbon Investment Fund (CLCIF) and the Cambridgeshire Low Carbon Delivery Unit (CLCDU). Please note that these are temporary names being used until suitable public facing names are agreed. The report also describes the role of local authorities and associated stakeholders across the area and how they interact with the CLCIF and CLDCU. 2.2 The aim and scope of the MLEI project The Cambridgeshire authorities (Cambridgeshire County Council, Cambridge City Council, South Cambridgeshire District Council and Huntingdonshire District Council) wish to work together to secure investment into local low carbon infrastructure to improve energy security for residents and businesses, mitigate against rising energy bills through the reduction of energy consumption and, in so doing, grow the local green economy by creating and supporting local jobs in clean energy technologies and exporting this expertise outside the county and UK. In doing this the authorities wish to address not just what they can do with their own assets but also what can be done to support all relevant sectors within the county. The MLEI project must both deliver at least 17m (~ 15m) of investment by August 2015 as part of its contract with the EU and pilot finance and delivery mechanisms that provide a longer legacy for investment which will ultimately attract 2-6bn of renewable energy investment and 140million into energy efficiency, into the county over the next 10-20 years.. A domestic energy efficiency programme is being covered by Government s Green Deal policy and so this programme covers: Energy efficiency and renewable energy in buildings Non-domestic public buildings such as schools, public services etc. Non-domestic commercial buildings Heat networks with or without Combined Heat and Power (CHP) Community renewable energy programmes Large scale renewables Community energy efficiency projects on buildings or groups of homes A key objective is to aggregate projects to achieve the scale and longevity of opportunities to unlock the significant scale of investment required. 10 MLEI Business case for Cambridgeshire low carbon investment and delivery model

3. Project Vision Cambridgeshire is seeking to position itself at the forefront of the low carbon economy. It recognises that energy prices are rising and becoming an increasing burden on local households and businesses. Furthermore, the UK remains committed to delivering against its carbon budgets. Improved energy efficiency and local clean energy generation can simultaneously drive down costs for the economy, secure local energy supplies for critical services and reduce carbon emissions whilst providing local sustainable investment opportunities. The Cambridgeshire Renewables Infrastructure Framework (CRIF) (Verco 2012) established that 2-6bn investment is needed in order for the county to deliver 28% of its energy from local generation. In 2012, the Cambridgeshire market for energy efficiency was estimated at around 880m, covering both domestic ( 640million) and non-domestic buildings ( 140million). Unlocking this potential will help deliver affordable energy for Cambridgeshire businesses and communities, secure local energy supplies, help the management of price volatility and reduce energy consumption. It will also help grow the local economy through working with local businesses to create local jobs. Cambridgeshire would also be making significant contributions towards meeting national and international carbon reduction targets. In order to unlock this potential it is important that there is action in each sector public, commercial and communities to bring forward energy projects for investment. The public sector has a significant role in creating demand and providing the right context and leadership for this significant transformation to take place, moving from fossil fuel dependency to an energy infrastructure that reflects the low carbon economy. Creating the context and opportunities for change, need not cost the Local Authorities - it can be delivered at zero net cost and generate additional income at a time of spending cuts, simply through capital investment and using assets more efficiently. Without these capital investments further revenue cuts might have to be made and without them the benefits to the local economy will be missed. Cambridgeshire is committed to delivering these outcomes and is using the MLEI project to create a workable model which has local buy-in, a strong and enduring delivery framework/model and the ability to attract the necessary finance. 11 MLEI Business case for Cambridgeshire low carbon investment and delivery model

4. Development of a finance and delivery framework to attract investment This section sets out the local investment requirements, investment barriers to be overcome and recommendations for how this is achieved. 4.1 Investment requirements The transition to a green economy will require significant investment across the county with over 150m to be invested in non-domestic energy efficiency and 2-6bn in clean energy generation by 2030. This will be spread across a range of technologies including wind, solar, biomass and energy from waste. Whilst Cambridgeshire is an active county for large scale renewable energy projects (notably wind farms) there is significantly more that needs to be done to unlock investment into smaller scale projects and energy efficiency across all sectors public, private and community. The 2-6bn is required to be invested across the county by 2030 but the MLEI Project requirements are for ~ 15m to be invested by August 2015. 4.2 Addressing the core barriers to investment The first report 2 reviewed the barriers to the delivery of a large scale low carbon investment programme understanding the market failures and other issues that needed to be addressed. In designing the proposed approach key structures and activities have been incorporated into a finance and delivery model that addresses these issues. 2 MLEI Cambridgeshire low carbon investment and delivery model, Verco, October 2013 12 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Table 4-1 Issues and solutions Issue High transaction costs of small scale projects - Asset owners lack understanding, knowledge and confidence Solution Creation of local aggregation through a delivery unit that brings together small projects. Support this delivery unit with a revenue model that allows it to be financed in a self-sustaining way. The fee structure will be established in a manner that supports this unit so that it focuses on the projects required by the key investors. Development of simple financing and delivery mechanisms for each sector that can be applied without deep knowledge required by asset owners Leadership from local authorities to demonstrate that the solutions can be delivered By investing in a fund that pays a fee structure that cannot be recovered without delivery of projects, investing authorities are demonstrating to the wider market that they are committed to delivery. This will encourage a higher level of participation from all stakeholders and greater investment by them in time, resources and capacity building. Piecemeal investment into energy infrastructure creating an uncoordinated approach Investors are focussed narrowly on technology and sectors Lack of understanding of economic and social value created by investing in the low carbon economy Creation of a coordinated long term investment strategy that brings projects and investment together to make a big impact over time Creation of local authority fund to finance low carbon projects that crowds in sector or technology focused finance on individual projects. Market failure is driving the need for the CLCDU so competition is expected to be limited. Focus on delivery mechanisms that provide work for local business and local people Quantification of the benefit case 13 MLEI Business case for Cambridgeshire low carbon investment and delivery model

4.3 Summary of recommendations from initial report It is proposed to establish a Cambridgeshire Low Carbon Development Unit to develop a pipeline of investible projects and co-ordinate investment. It will draw in public sector funds and crowd in coinvestment from the private sector by bundling projects to achieve scale, reducing transaction and delivery costs and mitigating project and commercial risks. Acting as a self-financing unit, it will generate income from projects through development / arrangement and long term management fees. It will be fast and nimble, able to navigate the decision making processes of public and private sectors with both finance and project competencies. All Cambridgeshire local authorities, investing or otherwise, will support the unit through bringing forward projects and facilitating delivery. It is also proposed to set up a Cambridgeshire Low Carbon Investment Fund which could be seeded with public money (via prudential borrowing or reserves) and/or other sources of funding. It invests alongside structural funds (e.g. ERDF) and development banks e.g. European Investment Bank (EIB) or Green Investment Bank (GIB) and levers private sector funding (debt or equity). Funding is provided as a using debt and/or equity for a mixture of short, medium and long term projects of up to 25 years. Once the fund has placed its initial investments, the authority can retain the fund to generate income, invest in further projects, grow the fund further, or potentially exit the fund by selling the portfolio of investments, (i.e. refinance, via community share offer, bond issue or sale to a third party fund) to re-invest in more projects. The CLCIF has four roles: To provide a source of funds for investing in local authority and other public sector buildings, so avoiding the use of higher cost capital from the private sector To provide enabling funds that finances or part-finances projects that would not otherwise go ahead. This may require the fund to invest at a level below private sector returns through a mixture of debt and equity which clearly will require a thorough risk review. It will also need to meet state aid rules. To generate revenues that can be used to pay for the delivery of the programme with excess funds being passed to investing authorities to be used as they see fit. To demonstrate to local stakeholders and the private sector a long term local authority commitment to the programme objectives A key objective of the development unit would be to develop a portfolio of projects in the county across a range of sectors and technologies. Initial focus, to ensure short term income, will be the public sector estate including local authorities, fire, police, health and schools. Working with strong delivery partners and using a range of delivery models, the development unit will establish energy services and performance contracts that are bankable and pass risks to those that are best placed to manage them. It will apply its expertise to unlock investment in commercial buildings, energy infrastructure and community renewables, as well as enabling public and private investment into larger scale energy projects. The CLCDU is needed to manage the overall programme. Initially the MLEI technical assistance grant supports a small team that pulls together delivery partners and activates public sector projects. This will then need to grow and evolve - the opportunity to generate an income stream through the 14 MLEI Business case for Cambridgeshire low carbon investment and delivery model

financing and delivering of projects will need to be established.. This means that the fee structures must be evolved so as to first pay for the CLCDU and then deliver investment returns. As the CLCIF grows and evolves, attracts private sector funds, to support the unit through fee structures, the unit will need to generate a much higher return on capital and build a larger investment pipeline. To keep costs down the development unit will develop and operate market efficient business models or mechanisms to aggregate projects. These mechanisms, which need to cover public and private sector projects, include use of procurement frameworks (such as RE:FIT and Blue Sky Peterborough), commercial Green Deal and community energy build and transfer programmes. It is important to realise that over the medium-to-long term the CLCIF will only deliver a small proportion of the total finance required to achieve the ambitions of the authorities, but it is needed both for supporting pre-construction development activities (without this fund the CLCDU would need to be funded directly out of LA revenue funding) and for building confidence in the private investment market to attract capital investment into projects. There is an investment requirement of 140m in non-domestic energy efficiency and over 2bn in renewable energy. It is proposed to establish a Cambridgeshire Low Carbon Development Unit to develop a pipeline of investible projects and co-ordinate investment. It will reduce transaction costs, improve confidence of asset owners, support a range of required technologies and work to maximise local benefit. It will manage a Cambridgeshire Low Carbon Investment Fund, seeded with local authority and EU money that will lend to and invest in projects to generate a return. 15 MLEI Business case for Cambridgeshire low carbon investment and delivery model

5. The business case for the Cambridgeshire Low Carbon Delivery Unit This section describes how a development unit would operate, the costs it would incur and the revenue streams that would sustain it. It sets out the staffing and support requirements plus options for legal structure and governance. Cash flow modelling is presented, based on the development of a 100m portfolio of projects over 5 years. Conclusions are drawn on the financial viability. 5.1 CLCDU set up and operation The CLCDU would initially be set up as an in-house delivery unit hosted by Cambridgeshire County Council on behalf of the MLEI Partnership and using the MLEI technical assistance grant to support staff to procure delivery partners, aggregate projects e.g. schools and activate the public sector pipeline of projectsthis delivery unit will evolve and develop and be spun out as a separate independent venture without any revenue account or grant funding from local authorities but some seed finance from ERDF as the pipeline of projects needs building. This venture could be a not-forprofit venture or could be a full commercial venture. (See section 5.2.7 for more details). In an ideal world the in-house stage would not be required but it is considered that this incremental step is needed to ensure delivery of 15million investment into projects by August 2015 to deliver contractual obligations. The members of the delivery unit are expected to be co-located, working, initially at the main council offices but moving into rented offices as the fund evolves greater independence from the Local Authority. Whilst this will increase the overall costs, it signals clearly to the development unit and other stakeholders (particularly investors and delivery partners) that the long term intention is that of independence and outside council revenue funding requirements. 5.1.1 Developing business models or delivery mechanisms The private sector concentrates on large profitable projects whether that might be 20m+ renewable energy programmes, 1m+ building retrofits or 0.5m+ biomass projects. However, many of the projects across Cambridgeshire will be smaller than this and so the CLCDU is being set up to aggregate smaller projects at a manageable cost. It will do this by employing a small team that uses existing or develops new delivery mechanisms whereby small projects can be aggregated for investment and delivery. These mechanisms are detailed in Section 9 and cover the following sectors Building retrofit and renewables, covering local authority, other public sector, commercial and community buildings Off building renewables covering local authority, other public sector, commercial (large and small) and community renewables These delivery mechanisms cover both finance and delivery, ensuring that private sector funding is available and the projects are delivered using as much local skills, businesses and products as possible. In order to implement these delivery mechanisms, the development unit will need to have finance solutions, development and arrangement skills and suitable accreditation. It will be the role of the 16 MLEI Business case for Cambridgeshire low carbon investment and delivery model

CLCDU to find the best ways to finance a range of projects including renewable heat solutions for schools, solar PV roof-rental solutions for commercial buildings or other emerging models, and then find the finance sector companies that will take up these models. Of course some models will be developed elsewhere in the country and so the unit will need to be suitably networked into what is happening elsewhere.. It is important to remember that whilst the initial 15m of funding would come from local authorities the role of the CLCDU is to ensure that the 2-6bn is invested in the county over the coming years from private investment and that this initial investment is the first part of a large jigsaw puzzle. It is important to understand that the MLEI Project is one part of the jigsaw puzzle - it needs to link with other initiatives such as Cambridge Retrofit to ensure the overall finance and delivery framework/model can be populated and delivered. 5.1.2. Originating a pipeline of investible projects The delivery of a pipeline of investible projects is critical to the success of the programme but the CLCDU will not be able to generate all these projects itself. These will come through private sector partners engaged through the delivery mechanisms, through local authority support and through visibility of the programme. The CLCDU will need to ensure that the delivery mechanisms deliver projects that are suitable for LA and private sector investment, whether the latter is available from the start or in the future. It will therefore need to look beyond the initial challenge of deploying 15m of investment and to take a view on what is required to attract large scale private sector funding to a variety of different types of projects and programmes. In fact it should merely use this 15m investment as an initial building block for the more ambitious delivery programme. 5.1.2 Bundling and aggregating to reduce transaction costs It will be critical to keep the costs of the CLCDU to a level that does not impact the returns on the projects nor eat into the excess funding desired by the investing authorities. This can be achieved by bundling by delivery mechanism and/or aggregation by asset owner. Groups of projects will in turn be delivered by working through procured delivery partners rather than have the CLCDU implementing them directly. These delivery partners will generally be large scale companies which are acceptable to the private sector investment community but also capable of working with smaller Cambridgeshire based firms as part of their supply chain. They will work to standard contracts using standard documentation to keep down costs using a straightforward due diligence process that can be easily be reviewed by the CLCDU and supporting CLCIF investment committees. 5.1.3 Accelerating investment The CLCIF will not employ any staff but instead will outsource its management to the CLCDU once it evolves to an external Fund. The CLCDU will deploy the funds in line with the objectives described in 6.6.1, leveraging it to bring in other investors or funders. This could be directly into projects using bank debt or equity; indirectly by co-investing in a third party fund or investment could be attracted into the fund at the top level. This may include securing senior bank debt, the raising of funds locally or the sale of investments to the private sector directly to a fund or through the issue of a private bond. None of these can be guaranteed as these are only emerging market activities. What will be critical is that the CLCDU is able to plan for these activities keeping its options open through the design of the delivery mechanisms, legal structures and the investment in suitable assets and then deliver them as required. 17 MLEI Business case for Cambridgeshire low carbon investment and delivery model

5.1.4 Capturing local economic benefits A critical role for the CLCDU will be to ensure that the investment benefits are captured locally. This is done by ensuring that the delivery mechanisms chosen and developed have this built into their design. For example, it would support the local supply chain, actively encouraging local SME s to engage and deliver through their contracts with delivery partners. The use of the CLCIF will ensure that some of the returns are made for the investing authorities rather than exported to private sector investors and this will be enhanced if local investors can be attracted through local share issues or bond sales. 5.1.5 Continuing to engage key stakeholders with the Cambridgeshire Low Carbon Programme The CLCDU will be at the centre of the local low carbon programme and as such will be able to assess its progress and identify future issues and risks. Early feedback into the business case from stakeholders indicated that continuing to monitor progress and updating its delivery plans to address risks and issues are key roles for the unit. It should also provide updates to the key stakeholders as part of its governance procedures, enabling dialogue that will continue encourage and facilitate effective joined-up delivery and growth of its services that will maximise additionality and leverage. It is suggested that communications should include an annual meeting with local stakeholders. 5.2 It has a self-sustaining operating model The programme has been designed to ensure that after an initial investment, it becomes selfsustaining through the generation of project and finance revenues. This is because the proposition is based upon low carbon moving from being seen as a cost activity to a revenue generator whist delivering the long term economic and environmental goals of the local authorities. Sufficient and sustained revenue generation will enable the establishment of an enduring organisation which is essential if the 2-6bn ambitions are to be achieved. Examples of this self-financing approach to the delivery of energy projects in the public sector include the NHS Carbon and Energy Fund (CEF) and the roll-out of the RE:FIT programme by Local Partnerships. 5.2.1 Scope of works The scope of works has to be designed not only to achieve the objectives of the programme but also to be suitable for the longevity of the CLCDU. This means that it will have to establish agreements with lead delivery partners and then manage these contracts so that they achieve the desired outcomes. The CLCDU is not a hands-on or on the ground operator. That is the role played by the procured private sector partners. Instead it acts as a commissioning agency and manager of those partners supporting them as they work with local project owners in both the private and public sector. The diagram below, representing the final expanded version of the investment and delivery strategy shows its central position within the supply chain. The steps for establishing this structure are discussed in Section 6.6. 18 MLEI Business case for Cambridgeshire low carbon investment and delivery model

There is a risk that the CLCDU becomes embroiled in the detail of generating the local pipeline of projects or addressing individual issues. It will not be resourced to do this and its ability to work through private and public sector partners will be critical. The whole concept of the CLCDU and Fund is predicated on close cooperation and buy-in from public sector asset managers to identify pipeline and private sector asset managers. This means an engagement plan is critical for the programme. The CLCDU is also contracted to provide fund management services (either wholly or in part) for the CLCIF. The latter will not employ any people and will be separately governed. 5.2.2 Commercial model The CLCDU s objective is to be self-sustaining but it will require seed funding for the first 3 years before it is comfortably cash positive on an annual basis. This funding could be provided as a loan (e.g. from Cambridgeshire County Council) which can be paid back over the 3 years or if the funding were to be provided as grant funding e.g. ERDF then the CLCDU would be self-sustaining within 2 years. However, the recommendation is that it is covered through the fee structure agreed with the CLCIF which is discussed below. Once it is viable then investing authorities will start to receive a return on their investment. Until that date they will only have received enough income so that they can service their own finance costs expected to be through payments to the PWLB. This could either be interest only payments or an amortising loan. 5.2.3 Revenue sources During the initial set up period to August 2015, two thirds of the CLCDU s income could come from European grants and a third from fees. After this initial setup period, all the CLCDU s income will be from fees. These can include: Development, construction and contract management fees from delivery partners for the development of a pipeline, which might in turn be collected from private and public sector end users. Fund management and arrangement fees for arranging additional finance not immediately available through the delivery mechanisms. 19 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Revenue is expected to grow as follows over the first five years based on the following revenue models: Grants 400k remaining from MLEI grant (available to support staff time and developing the pipeline projects from Feb 2014 to Aug 2015) and 200k project proposal submitted to the Greater Cambridge and Greater Peterborough Local Enterprise Partnership (GCGPLEP) for ERDF LA funding assumed not required Project fees based on the following success fee staged payments Table 5-1 CLCDU revenue sources Stage Project development Procurement Installation Operational contract management Fee 1% of capex 1% of capex 0.75% of capex 0.5% of annual revenue Fund management fees these are assumed to initially (in 2015) be annual fees of 0.5% of funds committed, rising to 0.75% thereafter. It is assumed that half of these fees can be retained by the CLCDU with the balance passed to third party fund management partners. Figure 1 Breakdown of revenue sources for the CLCDU Jan 2014 - Aug 2015 20 MLEI Business case for Cambridgeshire low carbon investment and delivery model

5.2.4 Operating costs The CLCDU will incur 600k set up costs and then operating costs of around 500k per annum, rising to 1m per annum by 2018 as the unit moves from being an in-house team to an independent unit developing a larger portfolio of projects. All set-up costs can be met from existing and planned EU grants. Annual operating costs can be met by revenue from fund management fees and project fees. Further details are provided in the Excel based financial model. Set-up costs are limited given the initial in-house approach but include legal, resourcing and IT costs plus payment of fees to procurement frameworks for access to delivery partners such as Energy Performance Contractors. On-going direct costs are mainly people costs covering delivery mechanism design and delivery (where existing mechanisms aren t available or suitable), contract management, stakeholder liaison and private finance sector engagement. Team members will be managing the investment process and supporting the investment governance of the CLCIF. Rental payments for offices will also have to be paid. Finally a third party loan book or investment management provider will be procured / contracted to manage repayments from the investments to the fund. Indirect overhead payments will be made to Cambridgeshire County Council as the anchor authority for services covering HR, finance services and other administrative support at least in the initial phase. No payments are expected to be made to any local authorities for their role in governance or pipeline development but local project developers might require a fee for the delivery of projects, which will come out of project fees. It is estimated that around a third of the CLCDU s costs will be for outsourced services. 5.2.5 Staffing requirements To deliver this programme a full time team of five is required structured around the project types and delivery mechanisms. Unit Director responsible for the operation of the CLCDU and the delivery of its objectives. S/he will also be responsible for managing the key relationships with local authorities, delivery and finance sector stakeholders and will be the contract owner for the management of the CLCIF. Three delivery managers covering off the following sectors responsible for development and sign-off of delivery mechanisms, management of procured contractors, relationships with pipeline generators and development of financial solutions. o Public sector buildings o Community and private sector buildings o Off building renewables focusing on community energy but working also with large site developers 21 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Office manager/administrative support ensuring compliance with legislation, management of governance requirements, both CLCDU and CLCIF, management of third party support especially the investment management system, and measurement of progress against plans. A culture of independence and can do will be developed from the start by having a separate unit in a separate office staffed by the right people. They will require a strong understanding of how both the public and private sector operates and the ability to overcome barriers as they emerge. These barriers could be issues raised by public sector staff, local communities, or private sector delivery partners. They will not have the power to enforce or mandate and so will need good interpersonal skills to persuade. A thorough understanding of the delivery mechanisms and how other authorities are proceeding around the country will be important. Whilst Cambridgeshire is leading the way on the overall model other authorities are focusing on one or more sectors and there is much can be learnt from sharing ideas and experiences. Remuneration is pitched at below private sector corporate finance levels, at private delivery sector levels for appropriate roles. 5.2.6 External support requirements In order to keep headcount down, activities that do not require full time headcount will be outsourced as a service. There are four requirements. A fee to a third party loan book or investment management company to ensure that payments are received from projects in line with expectations or reacted to if this does not happen. Administration costs via a service agreement for legal and finance management support paid to Cambridgeshire County Council as the anchor authority or a third party as appropriate. A retainer paid to a third party to ensure that the CLCDU is kept up to speed on what is happening in the wider market. This will cover inputs from other authorities, how the finance sector is investing in the local low carbon economy and the impact of incoming policy. Contract and project-related payments to consultants, legal and other professional advisors on the use of delivery mechanisms and the implementation of projects. 5.2.7 Legal structure Initially it is proposed that the Cambridgeshire MLEI Partnership Project Team (comprising MLEI Project Director, MLEI Project Manager, MLEI Business development Manager, LGSS finance and delivery officers from the MLEI Partnership) effectively act as the CLCDU supported via the MLEI technical assistance grant monies and deliver the public sector investment programme. Whilst it does this is, it should explore its future legal structure as an independent unit covering a range of options: 22 MLEI Business case for Cambridgeshire low carbon investment and delivery model

Table 5-2 Options for CLCDU legal structure Option Advantages Disadvantages Subsidiary of Cambridgeshire County Council Joint owned by investing authorities Not for profit Employee owned Controlled by the county who will be main investor Clarity on governance Top up funding, if required, does not require procurement Greater buy-in from across all authorities Top up funding, if required, does not require procurement Acceptable positioning to local community Top up funding if required more acceptable Employees incentivised In line with government policy to support the creation of public sector mutuals. Challenge to operate at arm s length Employee terms and conditions might not align Accounted for as part of revenue expenditure at a time of cuts Governance challenge Employee terms and conditions might not align Accounted for as part of revenue expenditure at time of cuts Employee terms and conditions might not align Procurement might be needed Financing needs to be on commercial terms Private sector owned Broad based support available Financing needs to be on commercial terms Procurement might be needed A further evaluation of the advantages and disadvantages of different legal forms is presented in Section 6.6.6. The recommendation is that eventually after stage 1 of the set-up process (see section 7) the CLCDU does not sit within the local authorities so as to avoid any costs sitting on local authority budgets or detracting from statutory service delivery. By outsourcing to one of the three third party options then funding is provided through a capital budget which is anticipated to be under less pressure than local 23 MLEI Business case for Cambridgeshire low carbon investment and delivery model