ECO: Delivery risks – What you need to consider before you deliver

The Green Deal seeks to empower consumers by giving access to energy efficiency home improvements that may be funded (subject to certain conditions) by the Energy Company Obligation (ECO).

Currently the six largest energy suppliers are obliged to fund ECO and the Department for Energy and Climate Change (DECC) expects the obligated energy suppliers will deliver ECO through multiple routes including directly through their own delivery functions, through bilateral arrangements with third parties (e.g. service companies) and also through the ECO Brokerage system.  Ofgem will administer the discharge of ECO.

Under ECO, obligated energy suppliers receive the full credit for the full carbon or cost saving benefits of each measure that they promote the installation of (this in turn means that the obligated energy suppliers are incentivised to deliver their obligations as cheaply as possible and leverage in other types of funding (including Green Deal finance).  In order to gain the credit for the installation the obligated energy supplier will need to demonstrate to Ofgem’s satisfaction that the ECO supplied by the obligated energy company was a reason for the installation of the relevant Green Deal Measure.  Of course, Ofgem’s role here is critical as the obligated energy companies need to satisfy Ofgem that they have defrayed their portion of ECO by 2015 or otherwise they face a fine of up to 10% of their global turnover (the Turnover Fine).

Clearly ECO represents a significant opportunity for local authorities and registered providers on the one hand and for energy companies and third party contractors and service companies on the other.  The Turnover Fine facing each obligated energy company (should they fail to defray their ECO) also changes the traditional dynamic between the energy companies and local authorities and registered providers.  It is therefore no surprise that the big six energy companies are seeking to work directly with those public authorities who have housing stock to see what ECO can be applied to that stock (and thereby reduce their risk of incurring the Turnover Fine in 2015).  In an era of falling budgets and cuts to services, the possibility of delivering energy efficiency works to housing stock at little or no cost to the local authority or a registered provider looks compelling but are there reasons to be cautious?

If it sounds too good to be true…

The targets set by Government to reduce carbon emissions are tough and the state of Britain’s housing stock clearly needs addressing – particularly as energy prices are predicted to rise sharply over the next 5 years.  There are, however, a number of factors for local authorities and registered providers to consider carefully before taking the first offer made by an obligated energy supplier (or, indeed, a third party contractor) including whether the offer:

• infringes EU procurement rules; and
• strikes the best and most appropriate commercial deal. 
   

EU procurement rules

Given the scale of ECO, the state of some domestic properties and the Turnover Fine there are clear commercial drivers to doing a “quick” deal. However, increasing market and public awareness of the EU procurement regime means that public bodies should properly consider the applicability of the rules before entering in to arrangements with obligated energy suppliers or third party contractors.

When presented with ECO proposals, public bodies should not overlook the needs to consider public procurement issues because it is not directly incurring financial costs for the delivery of ECO measures. Depending on the arrangements between the public body and an obligated energy company, the implementation of ECO proposals may amount to a public works or a public services contract in some circumstances requiring a public body to fully comply with the EU procurement rules when appointing its ECO provider.

Whether the EU procurement rules apply or not will depend on the details of the arrangement taking into account factors such as:

• The nature and scale of ECO measures to be implemented
• The roles of each party
• The amount of ECO funding
• The financial arrangement between the parties and
• The legal obligations placed on each party.

Where an ECO arrangement involves the award of a public contract, conducting an OJEU tender process would comply with the EU procurement rules and allow the public body to identify the best offer available to it.  Failure to comply with the EU procurement rules, where required, could leave the procuring contracting authority susceptible to challenge and the risk that the contract could be set aside and damages awarded against it.

Commercial considerations

Where an ECO arrangement does not involve the award of a public contract, public bodies should still consider the possible means of achieving the best commercial position available to it.

When presented with ECO proposals, public bodies may overlook the fact that they have an enhanced bargaining position from which it may be able to extract further value (for example to deliver on wider strategic objectives).  It may, therefore be able to extract further value by conducting a competition or negotiations with all capable providers, in particular because:

• The Turnover Fine - ensures that obligated energy companies are keen to identify opportunities where they may defray their ECO. For this reason, public bodies should be mindful that obligated energy companies may be willing to match and better a competitor’s proposal in order to defray its ECO and reduce the risk that they will be subject to the Turnover Fine; and
• A wider market place – ECO schemes are not the sole preserve of the obligated energy companies.  Birmingham City Council’s landmark Green Deal procurement demonstrates that contractors and third party suppliers can deliver large Green Deal and ECO schemes by utilising arrangements with obligated energy companies and ECO Brokerage.  This is not, therefore, a closed market.