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A fully-licensed ESCO for London?

A fully-licensed ESCO for London?

Clean Energy News reported on 26 July that Sadiq Khan, the Mayor of London, may be backtracking on his promise to set up a fully licensed energy company for London, and instead be leaning towards a white label arrangement.

This is hardly surprising, bearing in mind the time, effort and money – not to mention risk – involved in establishing a fully licensed electricity company. Notwithstanding this, the two local authorities that have already traversed this path have done so successfully and it seems to be generally accepted that the result is worth the effort. London is certainly large enough to justify such an investment.

But many councils are simply not going to do this and so have considered the prospect of the white label. The problem is that the average view of what a white label is and what one does are far wide of the mark.

Many officers and members see a white label as some form of equal partnership, with the spoils being split equally and there being equality in the key decisions, particularly on the tariffs to be charged. This vision has little reference to the reality: in fact, a white label can be characterised as a way that a third party is used to get more customers for the licence holder. There is no equality, the licence holder is the dominant partner and makes all of the key decisions. The white label host also earns a very paltry amount of money from such an arrangement.

When this fact is made clear to officers and members, there is a visible deflating in enthusiasm for such a deal. Often it's the fact that there is no proper profit share that is the key factor. White label arrangements in a local authority area help the public living there (generally by offering cheaper tariffs) but do little for the authority itself.

However, local authorities are now starting to challenge this position, determined to find a half-way house between the standard white label option and the fully licensed company. Can this be done?

A popular aim is to enter into a white label arrangement which then matures into a fully licensed ESCO at some point in the future. This is where the leading edge thinking currently is.

There are a number of characteristics to the standard white label. Under this arrangement, the authority is paid a finder’s fee for each customer persuaded to join the new brand. This fee is usually in pence rather than pounds and the authority’s position is very much to simply promote the venture and align it with its strong local covenant. The council has no role in the running of the main company’s functions, principally the licence and therefore learns little about the operation of such a venture.

So the half-way house being considered in a number of different authorities is different. It is a genuine partnership between a licensed electricity company and the authority. It is entered on a transparent basis, with the goal being that the council will want to metamorphose the arrangement into its own fully licensed ESCO at the end of the term. The council will be involved in the licensed activities and will have a say in the choice of tariffs. Most importantly, it will have rights over the brand name and the ability to use the database of customers at the end.

The obvious question to be asked about this relationship is why would any licensed company want to enter such a deal? Perhaps for the private sector companies the answer will always be no, at least amongst those companies worth joining with. But the civic ESCO sector has different goals. These are publicly owned companies, commercially run but on public sector values. The social value is the key aim here – mainly fuel poverty - and so more authorities following suit and starting their own companies is not necessarily a fatal factor in entering such a deal.

However, it has to be recognised that if one ESCO is going to help another local authority to set up its own ESCO to effectively compete against it, then there will have to be a premium involved. Perhaps the success or failure of such ventures will settle on what that premium is.

If the Mayor did decide to go down the white label route, it is unlikely that a standard arrangement would be seen as acceptable. This would mean that considerable work would be required to examine and understand the ‘white label plus’ model. It might just be easier to stick to the original plan and go the whole hog.