ADD413 Licence Lite Due Diligence

Type of decision: 
Assistant Director's decision
Code: 
ADD413
Date signed: 
06 April 2016
Decision by: 
Patrick Feehily, Assistant Director, Environment

Executive summary

The GLA has applied to the regulator Ofgem for a ‘junior’ electricity supply licence (Licence Lite, LL) whereby, with the support of a fully licensed supplier, it will purchase the output of low and zero carbon electricity generators and supply it to public and commercial electricity users in London under terms that support the development of decentralised energy in London. 
An IPB report is being submitted for the 19th April 2016 board seeking a recommendation for a MD to authorise, amongst other things, the licence lite business case, the formation of a supervisory board and for the project to proceed to the operational stage.  The decision to enter into operation will be subject to a satisfactory due diligence report from independent financial advisors to be presented to the proposed supervisory board that will make that decision.
This ADD to seeks to establish an Environment budget of £30,000 to meet the costs of carrying out the due diligence using an expert consultancy, with £30,000 being transferred from the budget of the Executive Director, Development, Enterprise and Environment this financial year.

 

 

Decision

That the Assistant Director of Environment approves the expenditure of up to £30,000 to carry out the Licence Lite due diligence through the appointment of a consultant from the appropriate TfL or London Waste and Recycling Board consultancy framework.

 

Part 1: Non-confidential facts and advice

Introduction and background

1.1    The Licence Lite project is designed to support the development of decentralised energy in London and when operational the licence lite project would fall within the Energy for London project, to be established pursuant to Mayoral Decision MD1542. The GLA’s application to Ofgem for a licence lite licence was approved by Director Decision DD897, as varied by Director Decision  DD1416, on the basis that an MD is obtained before any commitment to supply electricity is made.

1.2    Licence Lite addresses a market failure preventing decentralised energy generators adequate access to the electricity supply market. Licence Lite will allow local generators to sell their electricity at better prices increasing their income and as a result, improve investment opportunities in decentralised energy schemes. 

1.3    The expected outcomes from the LL project are: 
•    the more certain and accelerated delivery of the Mayor’s Climate Change and Energy Strategy targets including the target to supply 25% of London’s energy demand from decentralised energy by 2025; 
•    the increased uptake of more investment in decentralised energy systems in London, bringing forward in excess of an estimated £300 million of additional investment, with the accompanying short term construction jobs and permanent jobs in operating the energy centres and networks; and thereafter larger amounts of investment and numbers of jobs as the potential for decentralised energy in London is realised.

1.4    The GLA is in the best position to rectify the market failure. The GLA has the knowledge and expertise to implement the licence lite route to market and although there is strong interest in licence lite amongst the smaller generators, they have been held back from taking a lead both because of the complexity involved and apparent unwillingness to risk time and money on a new venture that will benefit their competitors as much as themselves. Once the first licence lite operation is established, licence lite applications can be made by others on a relatively standardised basis, using the same basic documentation and implementation procedures.

 

Objectives and expected outcomes

2.1    This project is to carry out independent due diligence on the Licence Lite business plan. The advice will inform the LL Supervisor Board in its decision to authorise the project to enter into the necessary agreements and arrangements and to enter into operation provided the Board has been empowered to do so pending the proposal to be presented at 19th April 2016 IPB and for Mayoral Approval shortly after.

2.2    The project has been developed by GLA officers with assistance from the GLA’s Decentralised Energy Project Delivery Unit, energy market consultants and energy lawyers. The business plan forecasts a turnover initially of approximately £2.2m, with a target of £5m by the end of the first year  At this level of activity, it is wise to carry out an independent review (due diligence) of the business plan to determine its efficacy.

2.3    Due diligence will be conducted by an independent commercial and financial expert experienced in the field of UK energy markets and regulation. The expert will be tendered through the appropriate TfL consultancy framework and the costs are expected to be no more than £30,000. 

2.4    The expert will review the completeness of the business plan, the commercial terms and conditions of the various agreements, to ensure the GLA is adequately protected in terms of commercial exposure and compliance with regulation. The expert will review the financial model and advise whether it is fit for purpose, carry out spot checks on calculations, and comment whether the business forecast is realistic and achievable. The risk register will be reviewed to establish whether the significant risks have been identified and that all risks are adequately mitigated.  

 

Equality comments

3.1    The consultant will be tendered through a TfL or LWARB consultancy framework whose procurement required, amongst other things, acceptable equalities policies in order to qualify for the framework.

 

Other considerations

4.1       Key risks and issues are set out below:

 

Risk description (cause, 'risk event', potential impacts)

Probability (1-5)

Impact   
(1-5)

RAG

Mitigation/Risk response (state if the response is done or pending)

GLA Owner

1

Consultants not interested

2

5

 

R

Establish consultant interest prior to tender. Tender through framework based on three written quotes.

PKN

2

Fee insufficient

2

3

A

Request increased budget.

PKN

3

Negative report conclusions

1

5

A

Withdraw EfL business plan IPB submission.

PKN

 

4.2       The links to Mayoral strategies and priorities

The Mayor of London has set a target to meet 25 per cent of London’s energy supply from decentralised energy by 2025. The Decentralised Energy Capacity Study (GLA 2011) confirmed this target as being achievable based on both renewable and low carbon energy sources and that it represented an £8 billion investment opportunity.

The Licence Lite project has been designed to support the development of decentralised energy in London by allowing local generators to sell their electricity at better market prices. 

 

Financial comments

5.1    Assistant Directors approval is being sought for expenditure of up to £30,000 to carry out the due diligence on the Licence Lite business plan. This is to be funded from Executive Director, Development, Enterprise and Environment (DE&E) 2015-16 Minor Programme budget, however work will be completed in 2016-17;

5.2    As the £30,000 will be from 2015-16 DE&E Minor Programme budget the Environment team will need to request a budget carry forward from 2015-16 to 2016-17 and should note that the carry forward of budget is subject to year-end carry forward approval process. Should the carry forward not be agreed then the £30,000 costs will need to be met from within existing 2016-17 Environment budget.

Planned delivery approach and next steps

The LL Due Diligence will be tendered through an appropriate TfL consultancy framework.

Activity

Timeline

Start procurement process

20th April 2016

Issue invitation to tender

2nd May 2016

Award contract - start date

1st June 2016

Draft report issued

27th June 2016

Final report issued

4th July 2016

Recommendation to LL Supervisory Board

11th July 2016