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SECTION 5: FORWARD LOOK ANALYSIS
5.1 This section of the report reviews two of the main issues which will influence how the initiative will develop over the next three years. Firstly the issue of funding for Public Private Partnership ( PPP) schools projects, and secondly a review of the funding requirements of the initiative, based on trends in existing levels of demand.
Inclusion of PPP schools projects
5.2 Projects currently eligible for funding through the initiative include households and community organisations. Community organisations have to be constituted as not-for-profit bodies, which means that new schools projects built through PPP contracts are not eligible for funding.
5.3 European State Aid rules restrict the level of government subsidy that can be given to private sector organisations. However, where initiatives support wider environmental rather than economic objectives, it would be relatively easy for the programme to be modified to ensure that PPP projects were eligible for financial support. Generally, European legislation permits the funding of individual projects up to a limit of £70,000 without a requirement to seek European Commission approval. In terms of specific legislation under which support can be given, the Community Guidelines on State Aide for Environmental Protection, adopted in December 2000, allow private sector businesses to access funding of forty per cent of eligible costs, if the scheme's main objective is environmental protection.
5.4 This legislation is used extensively across Europe to support the development of biomass projects, in particular, within the private sector. The DTIs Bioenergy Capital Grants Scheme also provides support of up to forty per cent to private sector organisations installing biomass systems.
5.5 One of the main concerns regarding the funding of PPP school projects would be the increase in demand for funds from the programme, which are already unable to meet current demand from existing not-for profit organisations. However, this is also a wider issue related to the general level of funding of the initiative, which is unable to commit funding to a large number of community projects that are currently at the developmental stage.
5.6 Information from our consultations indicates that there is an apparent reluctance on the part of PPP developers to invest in renewable energy projects due to the increased risks involved. There is a higher level of perceived uncertainty associated with renewable energy systems, which is a particular issue when negotiating PPP contracts. These risks need to be accounted for in the financial projections for PPP contracts, which result in a higher cost compared to conventional non-renewable systems. This means that even with the existence of grant support, there is still likely to be reluctance on the part of PPP developers and funders to invest in renewable energy systems. This would preclude biomass systems in particular, which would require wood fuel contracts to be negotiated over a long timeframe. In most areas, this market is currently not sufficiently well established for these types of contracts to be easily negotiated with individual suppliers.
5.7 This raises issues of equity between PPP and non PPP school projects (or indeed other projects) that are out with the scope of this study. However these are intrinsically different means of financing schools and rely on investment ratios to cover risk and financial inputs by the developer. An alternative view would be to consider that any uplift in price to cover an increase in risk (the risk premium), would have to be reflected in a grant award to meet any market failure, and is likely to adversely affect leverage achieved and value for money. Providing grant on the same basis as in conventional projects is unlikely to have a major impact on the viability of projects and 'best value'. Nevertheless, this should not necessarily be a reason for precluding private companies involved in PPP projects from bidding for SCHRI funding and the Scottish Executive may wish to reconsider the type of organisations that are eligible for grants.
5.8 One of the main means of encouraging investment in renewable projects in PPP projects would be to include an obligation on the part of the contractor to include renewable technologies in the development. However, the nature of PPP contracts means that it is best to specify an environmental output rather than the means of achieving this (such as through a renewable energy system). This allows the private sector to provide the most innovative and cost-effective means of achieving the output objective.
5.9 Current practice among a number of local authorities issuing PPP contracts has been to set carbon targets as part of the tender. This provides a benchmark against which developers can include specific measures in the plans including energy efficiency and renewable technologies. However, this means that it is not possible to specify that renewable energy is included in the PPP development. Contractors will decide the most cost effective means of achieving these targets, which may or may not include renewable energy.
5.10 Nevertheless, specifying carbon output targets is the most effective way of developing sustainable low carbon buildings. Carbon displacement is now a principal progress measure for the Scottish Executive, and establishing carbon targets as an output specification, is the most cost-effective means of achieving this in PPP public procurement.
Funding assessment
5.11 A total of £5.8 million has been allocated to SCHRI over its first three years of funding. Given the programme was established at the start of 2003, the programme operated for only one quarter within that financial year. During this initial period the advisory service was established and a very small number of grants were issued to community groups (Figure 5.1). As the initiative developed over the subsequent two years, development officers worked with community organisations to develop applications for funding, so that the community stream grants awarded increased substantially over the whole period, with just over two thirds of community stream funding allocation in the third year, 2004/2005.
5.12 Overall, the community stream grants have accounted for over 60% of total funding over the first three years, while the household stream has accounted for ten per cent. The remaining thirty per cent has been allocated to the advisory service as well as the management and administration of the initiative. This includes technical support, events, printing, training, legal fees, website, capacity building as well as the service provided by the development officers.
Figure 5.1: SCHRI funding allocation, 2002/2003 to 2004/2005
5.13 Although the household stream has accounted for only a small proportion of grants over the first funding period, the funding requirement in future years is likely to be significantly higher. The number of applications arising through the household stream has risen steadily over the past two years (Figure 5.2). Solar heating systems still account for the highest number of applications, although this has been closely followed by a more significant rise in applications for ground source heat pumps.
Figure 5.2: Number of household applications by technology, 2003 - 2005
Source: Energy Savings Trust
5.14 Projecting forward a linear regression trend in applications to the end of 2007/2008, suggests that ground source heat pumps will become the most popular technology funded through the initiative, while the demand for wind turbines and biomass systems will remain relatively flat (Figure 5.3).
5.15 However, the demand for wind turbines will be affected by the introduction of building mounted turbines which are being introduced to the market this year. Two Scottish companies have developed these systems, which are significantly lower in cost compared to existing free standing turbines. Estimates for the demand arising for these devices is not included in the trend projections but are discussed later in this chapter.
Figure 5.3: Projected trend in number of household applications by technology
Source: Halcrow
5.16 The increase in demand for GSHP will have a significant impact on the funding allocation required for the household stream. Given that the average GSHP grant is over three times that for solar heating, it is likely to constitute sixty per cent of the value of household applications by 2005/2006, three times its proportion in 2003/2004 (Figure 5.4).
5.17 The value of applications for the household stream is likely to rise significantly by at least £0.5 million per year. However, in practice, not all applications result in awards being made as some do not meet all of the funding criteria and in some cases the application is withdrawn by the householder. Overall, just under ninety per cent of household applications to date have had the grant approved, of which half had been paid by May 2005.
Figure 5.4: Project trend in value of household applications by technology
Source: Halcrow
5.18 The projected annual value of applications for the household stream shown in figure 5.5 include an estimate of 200 applications for building mounted wind turbines in 2005/2006, doubling to 400 in 2006/2007 and to 800 in 2007/2008. It is very difficult to asses the level of demand that will be generated for these devices although these estimates could be rather conservative.
5.19 One firm has already negotiated a deal with Scottish and Southern Energy to market and install 2,000 of their Swift turbines, while another is in the process of negotiating a joint initiative with British Gas. This will enable the roof mounted turbines to reach the domestic market via extensive and well established marketing and distribution channels. If the roof-mounted micro turbines generate much more significant interest in the general public, then the figure of £2 million of household applications by 2007/2008 could be even higher.
Figure 5.5: Projected value of applications for household stream to 2007/2008
Source: Halcrow
5.20 The programme has been allocated a further £6.6 million over the next three years to March 2008, which equates to £2.2 million per year. A projected rise in the value of applications for the household stream to £1 million by the end of 2005/2006, would account for a significant proportion of all grant funding.
5.21 This is a serious issue for how funds are managed for the programme. EST is currently in a position where rising demand from the household stream in 2005/2006, has resulted in significantly less money being made available for the community projects. The non-discretionary nature of the household stream, effectively means that this takes priority over funding community projects where funding is discretionary. However, this is less than satisfactory. The survey demonstrates that the community projects exhibit a higher level of additionality and lower deadweight than the household stream, and result in a much higher level of wider community benefit.
5.22 The community stream has also been subject to a significant rise in demand over the past year. In May 2005, HIE reported that there were a significant number of additional projects awaiting funding, amounting to £1.2 - £1.6 million for 2005/2006. EST had received eighteen community applications, totalling £747,000, that were currently on hold due to a lack of available funding. There were a further 35 projects, worth £700,000 in SCHRI funding, that were at the 'application being developed' stage.
5.23 There is a need to ensure that the community stream is not disadvantaged by rising demand for the household stream. Given that the future funding of the household stream arises primarily from increase demand in GSHPs, consideration could be made to lowering the grant for this technology, as the average SCHRI grant is 2.5 times the amount available through Clear Skies.
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