Public Energy Company: business case requirements

Section 1 – Background and Context

1.1 The First Minister has publicly set out the Scottish Government’s aspirations for a public energy company; particularly in terms of tackling fuel poverty through the offer of a fair price for energy supply.
1.2 Building on the strategic outline case (SOC) published in April 2018 (https://www.gov.scot/Resource/0053/00533962.pdf) the Scottish Government has developed its thinking on how such a public energy company could be developed. To best balance risks and opportunities, and align with the Scottish Government Energy Strategy’s local energy principle, a Local Authority led model would be preferable.
1.3 The Outline Business Case (OBC) will assess the best way in which the Scottish Government could work with Local Authorities to deliver the public energy company.

Section 2 – Scope

2.1 The Contractor will prepare and produce an OBC to examine the models for a public energy company and recommend the optimal model including details of the approach to implementation and how the Scottish Government could support Local Authorities to do this.
2.2 This will be conducted along the lines of HM Treasury Green Book guidance and will build on the Strategic Outline Case, and subsequent consideration and development of options. The 5 Case Model should be used, providing detail on the potential Strategic, Economic, Commercial, Financial and Management cases.
2.3 The OBC needs to be sufficiently developed and detailed, with a clear preferred option, to allow the Scottish Government, potentially after further consultation, to make a decision on which option to take forward and proceed to procurement without need for a further options appraisal.
2.4 The OBC will:

• Confirm the most appropriate approach for the given objectives and identify the option which optimises value for money;
• Develop the preferred option to a stage of development where it can be progressed into the procurement stage;
• Provide sufficient information on the delivery vehicle, nature and quantum of funds required in order to support the raising of funding and on-going management arrangements.

2.5 At least two public consultation events will be carried out during the preparation of the OBC with the purpose of gathering stakeholder views.

The Strategic case

2.6 The OBC will develop the strategic case in the SOC to set out the objectives of establishing a public energy company and update the case as required to reflect the increased focus on locally delivered solutions.
2.7 The strategic case of the OBC will detail the case for change, including the scope, constraints and dependencies of a Public Energy Company, high level outputs, impacts on stakeholders, including energy consumers and particularly those in fuel poverty, and highlight risks as well as proposals for mitigation or management. It will need to consider the role of the public energy company within the existing commercial delivery market to inform the assessment of risks and opportunities.

The Economic Case

2.8 The SOC presented a number of options for delivery, the economic case of the OBC will present developed variations of the ‘federal model’ described in the SOC and provide a detailed analysis of these options and the Scottish Government support that would be effective in facilitating Local Authorities to deliver them.
2.9 The OBC will assess the options to identify a preferred option and to assess potential value for money, affordability and deliverability and to identify/update critical success factors.
2.10 Options for the delivery arrangements for a public energy company could include:

• Do nothing – which will provide a baseline and help highlight the impact of the current situation on fuel poverty, this may consider whether existing and planned public sector or market activity impacts on the need for a public energy company (“business as usual”);
• Providing support directly to Local Authorities to engage in White Label energy supply activity by March 2021;
• Establishing a Local Authority led, publicly body to support local government White Label energy supply activity by March 2021;
• Assessing the scope to broaden the activity of this body, possibly from 2023 onwards, into direct supply activity linking into generation and economic development (“federated plus”).

2.11 The analysis needs to clearly identify the benefits each of the above interventions could make and the risks to the deliverability of these.
2.12 The Scottish Government offer to support Local Authorities will be investigated.
2.13 The contractor should identify any potential state aid issues associated with the various options, and how these could be mitigated or overcome.
2.14 From such an initial focus the level of public sector activity is expected over time to lead both to the delivery of local energy systems and to associated economic development opportunities.
2.15 As part of its assessment, the OBC should consider whether a target number of customers will be required to establish a financially sustainable scheme.
2.16 Market assessment should consider recent decisions by the CMA and Ofgem – i.e. since the SOC was undertaken. It should consider both domestic and SME business customers.
2.17 The OBC should include a detailed description of business scope and service outputs/requirements for the preferred option, including;

• Consideration of governance and appropriate roles and responsibility.
• Likely costs and benefits to individual partners, not just local authorities; including additionality associated with existing schemes and responsibilities.

2.18 From the shortlisted options a preferred way forward should be highlighted based on net present costs/net present value findings, benefits appraisal, risk assessment and sensitivity analysis. The optimal structure for the organisation should be investigated and identified.

The Commercial Case

2.19 This case will assess whether the proposed Publicly Owned Energy Company is attractive to Local Authorities in order for them to take up the offered support. Furthermore, it will assess whether the resulting Local Authority supply company/companies would be attractive to the retail energy market, can be procured and are commercially viable.
2.20 The contractor will assess at what cost the electricity could be offered to customers and whether this would be attractive to the customers. Income forecasts should be developed and tested robustly showing the forecast charge to users, how many users will adopt the new service and anticipated costs.
2.21 The commercial case will also include an exploration of the scope, risks and timescales for the Public Energy Company. Accounting and classification for a Public Energy Company should also be explored.
2.22 Analysis of the commercial models of existing suppliers which prioritise social benefit and what lessons are applicable to the shortlisted options will strengthen this commercial case.

The Financial Case

2.23 Overall affordability should be included in the financial case. Affordability analysis should set out the costs of the Public Energy Company and sources of funding.
2.24 The financial case should address the set up costs and include an assessment of the on-going operating costs and taxation issues for both the Scottish Government and Local Authorities– e.g. VAT, direct tax.
2.25 The case will allow Scottish Government to be able to clearly demonstrate the Scottish Government’s potential required financial commitments and which budgets these would call on.
2.26 The case will include potential capital requirement, and potential impact on income and expenditure accounts.

The Management Case

2.27 The OBC will develop the management case for supporting a Local Authority led energy supply company, including the management of tensions or synergies associated with existing schemes and responsibilities. This should include outline arrangements required for:

•  Programme and project management;
•  Change management;
•  Benefits realisation; and
•  Risk management.

Section 3 – Required Outcomes and Key Deliverables

3.1 Upon completion of the OBC the Scottish Government would expect to be in a position to consult on the identified Value for money solution with a view to progressing to a full business case that will provide a fully-costed approach.
3.2 The Scottish Government will require:
  1. Attendance at consultation events, the contractor will input into the design of these events, assist with facilitation and incorporate findings into the on-going OBC.
  2. An interim draft report delivered at week 10 to allow Scottish Government review and comments before finalising.
  3. A written report in electronic format suitable for publishing, written in plain English, covering the scope as set out above, to be delivered at week 12.
  4. An oral briefing to Scottish Government officials delivered at week 12 of the contract.