Many local authorities are looking at the potential for establishing an Energy Services Company (ESCO). This trend has been fuelled by Nottingham and Bristol City councils each establishing a fully licenced ESCO under the Electricity Act 1989. Hitherto, many believed that it was not possible that a local authority would be willing or able to establish a full electricity and gas supply company.
Those other authorities looking at doing likewise have three basic choices: the fully licenced ESCO, in similar vein to the two pioneers; some form of white label arrangement; or the route of Licence Lite.
Most other authorities are put off by the huge time, effort and risk required to establish a fully licenced company, even if the several million pounds of investment capital can be found (which is unlikely). The struggles of the GLA to establish a Licence Lite arrangement, which have still not borne fruit after a number of years, are also leading to that avenue being rejected.
So this leaves the white label option, which is where most of the interest seems to lie. Here, there are two sub options: a white label with a private sector company, or a white label with a civic ESCO. The private company route was heavily promoted by OVO Energy, but this work has not led to more than a handful of deals being signed across the country. Not much is known about these, as OVO requires those authorities that have entered into arrangements to sign non-disclosure agreements.
I could not comment on the OVO deal, because I have never seen the agreement, however it cannot be sufficiently attractive an offering or more local authorities would have signed up since it was launched a couple of years ago.
But now the two civic ESCOs have been established, there is the possibility of a local authority to local authority deal. This has been recognised in many councils, and Bristol and Nottingham have been deluged with enquiries about entering into white label arrangements with other authorities. But this may not be as simple as it seems.
The first point is that both companies have been established by their respective councils with an aim and a business plan in support. In both cases it is the social purpose that is key and the need to deal with fuel poverty. This means that they have to attract a certain number of customers to become fully viable. Neither company has yet reached its desired total and so they are both working hard to do this. Let’s call this ‘the day job’. Obviously, they have to do the day job to justify the investment that their councils have made and to protect the company for the future. By definition, any external approach by another local authority is a distraction from the day job.
Secondly, both companies are staffed in a different way to the big six energy companies and intend to keep overheads to a minimum. This means that they do not have limitless resources to deal with queries from other local authorities. Tyre kickers, to coin a phrase, are not helping in that they are using up scarce resources to field repetitive questions about how they did it.
And there is a wider point here too. Dealing with those authorities just interested in finding out more about how they did it is one thing, but fully dealing with those councils who are serious about a deal is quite another. As resource is scarce, this cannot involve intensive and long running discussions over every detail, simply because those resources are not available.
This means that it is inevitable that both companies will want to take the ‘sheep dip’ approach, whereby each white label entered is essentially on the same terms. That way, it maximises efficiency and minimises complex and expensive time input.
So the potential for a white label with a civic ESCO is two way street. That being so, how does a local authority make itself attractive to one of the civic ESCOs in terms of a white label deal? Firstly, it has to be accepted that a fully tailored solution to your authority, that is unique in its offering, is unlikely to be possible. While it sounds harsh to say that it's a ‘take it or leave it’ deal, this is not far off the truth as little else is realistically possible.
Secondly, each authority needs to demonstrate that it understands the energy market and what needs to be done to encourage customers to switch to the white label deal. The value of the partner is in the holding of the licence, not the knowledge it has of your authority and its potential customer base. The more work that has been done in this direction, the more likely a new offering is to succeed and therefore the more attractive a deal with your council will be.
Resources will also be key. It is simply unrealistic to expect a civic ESCO, which only has a small staff itself, to provide all of the resources. These are not deals for those authorities that want it all done for them.
Finally, there is a clear link to other activities in the green agenda. If a council has not done anything in terms of climate change or sustainability strategies, investing in renewable energy and assessing its area for potential, then it has to be questioned whether this the right deal to be doing. There are many easier steps to be taken before developing an ESCO, which is normally one of the later stages in a process of green agenda progression.
There is, of course, a much wider – but very important – point here for local government. The public sector badly needs the two pioneer ESCOs to succeed and demonstrate that a greater intervention in the energy market is possible. It would be ironic if the sheer number of other authorities asking them for white label deals caused them to take their eye off the ball and affected their ability to deliver their core business plans. That cannot be in the interests of local government as a whole.
So before approaching one of the civic ESCOs for a potential white label deal, each council should go through an exercise to test its readiness for such an arrangement, the relevant data available and its ability to fully understand what will be required of it. By doing so, it will help ensure the future success of this most important strand in the development of the public sector energy market.