Local Authority Funding Guide

When considering how to finance low carbon activities locally you need to consider whether this will
be direct funding by the council or whether you require private sector finance to support the
delivery of these programmes. You also need to consider whether you are looking for generalist
funds or specialist funds.
The local authority funding guide outlines different sources of funding to support the development
of low carbon activities, specifically energy efficiency and renewable energy retrofit measures for
council-owned buildings and for the wider housing stock of all tenures, and for district energy/
combined heat and power schemes.
This includes:
Local authority generalist funds
o Overview of funding
o Capital funding
o Revenue funding
o Borrowing powers
Commercial/ private sector funds for low carbon/ retrofit activity
Low carbon/ retrofit funds
European low carbon/ retrofit funds
If you wish to find out more information on European and National low carbon/ retrofit funds please
see the Local Authority Funding Database.
(http://www.energysavingtrust.org.uk/england/Professional-resources/Funding-andfinance/Funding-database )
The funding database contains details of a wide range of funds available to local authorities and
housing associations. This searchable database contains details of around funds for energy efficiency
improvements, the installation of renewable energy and other initiatives to reduce emissions of
carbon dioxide. The database includes information about funding from Euro, national and local
sources of funding from across the UK and contains information such as application procedures,
grant limits and funding deadlines and contact details.
This is a central resource for local authorities and communities to search for funding available to
them for sustainable energy projects.

Figure 1 gives an overview of how to view different low carbon/ retrofit financing options.

Figure 1

Top left Local authority generalist funds

This is from where a council treasury department generally sources funds. These funds may be used
to support the development of low carbon programmes. For example Birmingham Energy Savers are
prudentially borrowing to finance the first phase of Birmingham Energy Savers III (insert link)
Top right Local Authority low carbon funds
This is where much of the focus has been to date in terms of how local authorities have financed the
delivery of low carbon projects and programmes.
There is now a shift in how low carbon activity will need to be financed in order to deliver at scale in
order to meet our national carbon targets towards the use of private sector finance through the
creation of finance vehicles.
Bottom left Generalist private sector funding available within a local authority backed finance
vehicle. These are sources of capital which any project can seek to access dependant on its state of
development; and how the finance sector views risks and returns on their investment
Bottom right Low carbon private sector funding available within a local authority backed finance
vehicle. Within the finance sector there are specialist players who finance low carbon programmes.
2

However, there are not many of them and some sources of finance, such as social impact bonds are
very new .
Those sources of funding available through a local authority finance vehicle have the potential of
being self-financing, not requiring access, to LA revenue accounts. However, they cannot be done
without risk. This means that a local authority might have to decide how much risk it is prepared to
take on rather than how much budget you can find - a different way of looking at environmental
issues.

Local authority generalist funding

This section covers how local authorities finance their expenditure. Local authority spending can be
split into two broad categories: revenue expenditure and capital expenditure. Revenue expenditure
includes running costs such as staff related expenditure and other types of expenditure such as rent,
heating, lighting, and cleaning, as well as products and services used during the year. Capital
spending refers to money spent on buying assets, constructing or improving infrastructure assets
such as roads and buildings. It could also include, IT related expenditure and buying vehicles etc.
Revenue and capital spending are usually funded in different ways.
Revenue spending can be further sub categorised into: spending on council housing, and spending
on all other local authority services. Due to the different relationship that exists between housing
rents and housing spending, housing spending is funded and accounted for separately.
The main sources of income/ funding available to local authorities are:
Council Tax
Council Tax is charged on all domestic properties in the councils area and will vary according to
which band the property has been placed in. Discounts will be applied to the charge if there are
fewer than two liable adults living in the property.
Redistributed non domestic rates
Non-domestic rates, also known as business rates, are a property tax on businesses and other nondomestic properties. Business rates are set nationally but collected by local authorities. They are
paid in to a central pool and then redistributed to local authorities through the local government
finance system.
Government Grants
Central government provides local authorities with grants to fund non-housing revenue spending.
Formula grant, which includes redistributed non-domestic rates, is distributed to local authorities
through the local government finance system. It is given to authorities on the basis of relative need,
socio-economic and demographic characteristics of an area as well as an authoritys ability to raise
income through Council Tax. Local authorities are guaranteed a minimum percentage increase in
formula grant through the local government finance system, and are free to spend this grant on any
service.
Specific grants are paid outside of the local government finance settlement although they may be
announced at the same time. Some of these grants are allocated to a particular service or activity
3

such as low carbon activity. This means that local authorities do not have the freedom to decide
what service they spend this money on. These are known as ring-fenced grants. Other grants paid to
local authorities are not ring-fenced and local authorities can decide how to spend this money.
Sales, fees and charges
Local authorities raise income by charging for some of the services they provide, like leisure facilities,
car parking, property searches and planning applications.

Housing revenue
Spending on council housing is mostly funded by housing rents. The amount of money an authority
has to spend on housing is adjusted by the housing subsidy system. Every year the Government
calculates how much money each authority should expect to get from housing rents, and how much
they should spend on council housing. If they need to spend more than they will get in rent, the
Government will use the housing subsidy system to make up the difference. If the authority doesnt
need as much money as they will collect, they pay the surplus to Government for distribution to
other authorities. The funding for housing and non-housing services cannot be used to subsidise
each other.

Local authority accounts

Revenue accounts annual expenditure and income from annual budget designed to deliver
benefits and services within the year of expenditure. There will be income also in these accounts
based on local taxes, central government grants and other sources of funds.
Capital accounts expenditure on capital projects which deliver benefits over future years.
Housing Revenue Account ring fenced account for housing which in the past has been managed
centrally but is now being decentralised with local authorities given more freedom to manage their
finances in exchange for taking a share of historic housing debt. The changes are proposed to take
effect in April 2012, subject to Royal Assent of the Localism Bill and will only have an effect on those
local authorities that still retain housing stock. Further consultation is due to take place in November
2011 and more information can be found here
http://www.communities.gov.uk/housing/socialhousing/councilhousingselffinance/ .

Capital funding
Capital spending by local authorities is mainly spent on the following physical assets:

Buildings schools, houses, libraries and museums, police and fire stations etc
Land for development, roads, playing fields etc
Vehicles, plant and machinery including street lighting, road signs etc

It also includes grants and advances made to the private sector or the rest of the public sector for
capital purposes, such as advances to Registered Housing Providers.
Authorities finance this spending in a number of ways including use of their own revenue funds,
capital receipts, borrowing or grants and contributions from elsewhere.
4

From 1 April 2004, capital spending has been financed in the same ways as above except that:
Central Government no longer issues credit approvals to allow authorities to finance capital
spending by borrowing. However, it continues to provide financial support in the usual way,
via Revenue Support Grant or Housing Revenue Account subsidy, towards some capital
spending financed by borrowing that is Supported Capital Expenditure (Revenue) SCE(R)
Authorities are now free to finance capital spending by self-financed borrowing within limits
of affordability set, having regard to the 2003 Act and the CIPFA Prudential Code
The concept of Provision for Credit Liabilities (PCL) was carried forward into the new system,
although authorities which were debt-free and had a negative credit ceiling at the end of the
old system could still spend amounts of PCL built up under the old rules

Revenue Funding
Local authorities are able to use revenue resources to fund capital projects. 1

Section 106
Section 106 (S106) of the Town and Country Planning Act 1990 allows a local planning authority
(LPA) to enter into a legally-binding agreement or planning obligation with a landowner in
association with the granting of planning permission. The obligation is termed a Section 106
Agreement.
These agreements are a way of delivering or addressing matters that are necessary to make a
development acceptable in planning terms. They are increasingly used to support the provision of
services and infrastructure, such as highways, recreational facilities, education, health and
affordable housing.

Allowable solutions
Details of what will be considered an allowable solution is still to be defined. However in theory a
developer will eventually be required to build to Zero Carbon. If they are unable to do this within the
development site they will be required to meet the difference through allowable solutions. This
could include off site renewables or payment in to a fund.

Community Infrastructure Levy

The Community Infrastructure Levy is a new levy that local authorities in England and Wales can
choose to charge on new developments in their area. The money can be used to support
development by funding infrastructure that the council, local community and neighbourhoods want
- for example new or safer road schemes, park improvements or a new health centre. The system is
very simple. It applies to most new buildings and charges are based on the size and type of the new
development.
The Department for Communities and Local Government has recently published proposals, including
draft regulations on the reform of the Community Infrastructure Levy for consultation. They are
available here:
1

http://www.warwickshire.gov.uk/Web/corporate/pages.nsf/Links/A9C38F8DCA0DFEF080256FEF004ABACC

http://www.communities.gov.uk/publications/planningandbuilding/cilreformconsultation

Business rates retention

The Government intends to bring forward legislation with a view to introducing local business rates
retention from April 2013. The proposals are currently out for consultation (Local Government
Resource Review: Proposals for Business Rates Retention closes 24 October 2011).
Billing authorities (district councils, unitary authorities) will bill and collect business rates, as now,
but instead of contributing all business rates into the central pool and receiving formula grant, under
these proposals, some business rates would be retained locally. County councils will receive a share
of business rates revenues from the districts in their area (and a top up from other areas if relevant),
rather than receiving formula grant. A levy is proposed to prevent disproportionate benefit accruing
to individual authorities.
Two proposals within this broader framework are of particular interest:
1. Business rates retention from renewable energy projects
Business rate revenues from new renewable energy projects will be kept by the local
authorities within the area of the project, and those revenues will be discounted in the
calculation of any levy that might be applied to growth in business rate revenues. This would
mean that authorities would keep all of the business rates generated from new renewable
projects. It is proposed that at least the greater proportion of this funding should go to the
level of the local planning authority to maximise the community benefit.
2. Tax Increment Financing (TIF)
Tax Increment Financing is to be implemented as a way of funding infrastructure investment
to unlock economic growth and regeneration. TIF has been used in other countries to
capture the value of uplifts in local taxes that occur as a result of infrastructure investment.
In effect, TIF allows that uplift to take place by borrowing against the value of the future
uplift to deliver the necessary infrastructure.
Local retention of business rates will remove the most important barrier to Tax Increment
Financing schemes, namely that local authorities are currently not permitted to retain any of
their business rates and therefore could not borrow against any predicted increase in their
business rates. Borrowing for TIF schemes would therefore fall under the prudential system,
allowing local authorities to borrow for capital projects against future predicted increases in
business rates growth, provided that they can afford to service the borrowing costs out of
revenue resources.

Business Improvement Districts

A Business Improvement District is a partnership between a local authority and the local business
community to develop projects and services that will benefit the trading environment within the
boundary of a clearly defined commercial area. Although most UK BIDs are currently in town
centres, there are also BIDs established in industrial estates.

Once the BID is established, businesses vote on the measures they want to invest in and all
ratepayers contribute through a levy on business rates. The local authority collects the BID levy in a
ring-fenced account. There is no legislative restriction on the projects or services that might be
provided using the BID revenue, so this could be used for low carbon and other environmental
improvements. See http://www.ukbids.org/index.php for more info.

Public health budgets

There is strong evidence that investment in energy efficiency and fuel poverty measures improves
health of the population so impacting public health budgets. This means that funds might be
available from this budget to help with fuel poverty programmes.
The report Reducing the impact of Fuel Poverty on the Health Services prepared for the Welsh
Government by NEA Cymru in February 2011 states the cost benefits of improving the warmth of
homes are well documented. BRE have used information about the costs of mitigation works in
homes and the costs to the NHS of treating conditions caused by cold and damp homes to calculate
that poor housing costs the NHS in excess of 600 million a year in England alone. The BRE suggest
that this cost is around 40% of the total cost to society, giving a total cost figure of 1.5bn a year.
The National Housing Federation carried out a slightly different calculation considering factors like
the costs of GP consultations, associated treatments, hospital in-days and hospital out-day referrals
where it was assessed that a prime causative factor for the ailment was housing related. Their
assessed cost to society totalled nearly 2.5 billion in England.
Funding might also be available from NHS/ PCT/ other health budgets for projects that encourage
cycling/walking. Improvements to local authorities own buildings and in the local area (esp.
housing) can improve access and encourage greater participation, thereby reducing transportrelated emissions and producing health benefits (tackling obesity, reducing respiratory problems
caused by air pollutants, improving general fitness). Cycle Blackpool is a good case study
http://www.idea.gov.uk/idk/core/page.do?pageId=23314450

Local authority borrowing

Balance sheet borrowing
Local authorities can borrow from banks and other financial institutions to ensure they manage their
cash flow throughout the year or to finance long-term projects.
They can also issue bonds but these are expensive and need to be of a large size (>100m). However,
there is recent evidence that this is now cheaper than other sources of capital. The Local
Government Group are working on a model whereby local authorities come together to raise bonds;
Lloyds has also set up Special Purpose Vehicles (SPV)s to help make this happen. The SPV are tax
efficient which suits the pension funds who might buy the bonds.

Own reserves
This balance sheet item is a source of funds whereby the council has saved money rather than spent
it. All councils will have reserves and they can choose to either drawdown from them if they need
money in excess of income, or they can borrow.

Prudential borrowing (from Public Works Loan Board or other)

The Local Government Act 2003 allows an individual authority to borrow money to fund capital
spending subject to plans being prudent, affordable and sustainable in line with the Chartered
Institute of Public Finance and Accountancy (CIPFA) prudential code for capital finance.

Public Works Loans Board (PWLB)

This is a means of accessing debt from central government and from an administration point of view,
is relatively easy to access and has been the most popular source of funds over recent years.
However in the 2010 Comprehensive Spending Review2 the government increased interest rates on
PWLB loans to 1% above UK Government gilts2 and so this source of borrowing is now becoming less
attractive to local authorities. More information is here:
http://www.dmo.gov.uk/index.aspx?page=PWLB/Introduction).

Bank borrowing
Local authorities can borrow from commercial banks at commercial rates.

Lender Option Borrower Option (LOBO)

The underlying loan facility is typically long-term (40-60 years) and the interest rate is fixed. In the
LOBO facility the lender has the option to call on the facilities at pre-determined dates, such as every
five years. On these call dates, the lender can propose or impose a new fixed rate for the remaining
term of the facility and the borrower has the option to either accept the new imposed fixed rate or
repay the loan facility. There have been some issues around pricing transparency and significant
refinancing risk with LOBOs in the past 3

Invest to Save
An authority may also set up its own invest to save fund, using its own reserves, Government or
borrowed finance to kick-start the scheme, and using the savings achieved and/or Feed-in Tariff
payments to reinvest in future projects (and service any loan) or be rolled back into the fund to
additional works etc.

Capital receipts
Money from selling capital assets is an additional source of funding for a capital programme.
- NHS Blackpool contributed 400,000.

2010 Comprehensive Spending Review

Gilts are central government issued bonds
3
http://www.insidehousing.co.uk/lobos-explained/6502500.article
2

Commercial and private sector funding for low carbon/ retrofit activity
In the first section we covered local authority borrowing as a source of funds whereby the local
authority accesses finance. This section advises on sources of funds that can go directly to low
carbon activity without the liability always being taken on to local authority balance sheets.
For this to happen the low carbon activity will often have to be conducted by and independent
company. This could be a subsidiary of the authority, an independent profit making vehicle or a not
for profit venture. Legal advice and accounting advice is important on this to ensure the right
governance structures in place and to have clarity on authority liability.

Local authority lending

A local authority can lend to an independent or subsidiary venture. The rates at which it can do this
will be subject to state aid rules and the risk profile of the venture.

Banking lending
Bank lending breaks down into a number of types.
Secured lending the bank lends money to a venture with security provided by the local
authority. This can be through a bank guarantee or against particular assets. This will
impact the balance sheet liabilities of the authority it is prudential borrowing limits and it
will generally easier for the local authority to lend to the programme directly
Non- recourse debt/ project finance this finance is secured against future cash flows from
the programme with no subsequent liability for the local authority. Given the exposure to
banks this generally comes with some quite tough conditions and due diligence. The cost of
this due diligence is high and most banks will not consider lending unless they size of the
loan is at least 40m. Furthermore that loan is protected from first loss risk by equity or
other investors or lenders with often a high ratio of debt to equity. Typically one should
start with a view that this will be at least 70% debt:30% equity. Banks will fix the interest
rate for this lending, but probably for no more than 25 years, if that
Mezzanine finance this finance sits between the debt layer and the first loss equity layer.
It is often expensive than straight lending but cheaper than equity. Sometimes it is
structured so that it can be converted into higher returns equity
Junior debt junior debt is the debt that takes the first hit if payments cannot be made.
Normally it is protected by equity, but in the Birmingham and Newcastle Green Deal
programmes the local authorities are providing junior debt without that protection

Debt funds
There are not many debt funds available although this new area is slowly growing given the lack of
financing by banks. These generally lend to low risk projects and take a higher return than banks.
Venture debt funds fund new companies to take them through to being cash positive and debt funds
generally fund projects that roll out proven technology.

Bond finance
Bonds are not generally suitable for the initial direct financing of low carbon vehicles given that they
require track record on performance. They, however, could be used to refinance a project or to
9

bring in additional finance should there be sufficient certainty of cash flows. There are three types
of bonds that could be considered at this stage

Corporate bonds issued by the financing vehicle these are large, liquid bonds that are
tradable in the market and need to be 300-500m in size
Private bonds these are smaller bonds targeted at the institutional investor market and
can be less than 100m. However, there are a limited number of buyers in this market and it
would be challenging to market anything new in this space
Retail bonds small retail bonds of say, 15m, are in theory possible targeting the private
investor. However, they are often bought out of customer/ brand loyalty (cf Ecotricity)
rather than straight investment returns and so the issuer needs to be suitably strong in this
area.

Equity Finance
Equity finance is finance provided by investors who take a share of ownership in the company and
expect a suitable return for the risk they are taking on. They do not require regular payments so as
debt providers but expect in time to make a return. This can be through payment of dividends or
through the sale of the company through a public share offer or trade sale (exit strategy). With
ownership they expect suitable controls and governance, including decision making capability
depending on their size of investment.
Equity can be raised through the following sources

Private direct investment private individuals can invest as business angels into a company
Venture capital venture capital funds (including tax efficient private investor funds such as
VCTs and EIS Enterprise Investment Schemes) can put some of their funds into a
programme. They will generally look for a 30% return on investment (IRR) and invest when
a business is cash generating, but before it is profitable
Infrastructure funds these invest in projects where the technology is proven and finance is
required to roll out measures such as wind farms. They are will look for pre-tax returns of
about 15% IRR
Private equity funds these buy into or buy out existing companies and are not generally
applicable to new low carbon vehicles

Social finance
Social finance is an emerging class of investment made by High Net Worths and foundations. They
should be viewed as investors who want to receive a return on their funds but want their
investments to deliver social and environmental benefits. They may accept lower returns than with
other investments and there are three ways in which their capital can be used.
Loan finance provision of low cost loans
Social finance bonds purchase of bonds where bond payments are made contingent on
delivery of social and environmental benefits
Equity finance as with equity above

10

Philanthropic funding
Philanthropic funding provides grants to programmes that deliver social and economic benefits.
The focus on a wide range of areas but are reluctant to provide support when they think the activity
is the role of government.

Energy Performance contracting

The idea here is that future guaranteed energy savings finance improvements required today. There
is no upfront investment or capital expenditure and no additional expense to local authority
revenue accounts. An ESCO (Energy Services Company) takes the performance obligation and
finance risk.
The ESCO performs an in-depth analysis of the property, designs an energy efficient solution, installs
the required elements, and maintains the system to ensure energy savings during the payback
period4. The savings in energy costs is often used to pay back the capital investment of the project
over a five- to twenty-year period, or reinvested into the building to allow for capital upgrades that
may otherwise be unfeasible. If the project does not provide returns on the investment, the ESCO is
often responsible to pay the difference.

Private Finance Initiative (PFI)/ Public Private Partnerships (PPP)

PFI/ PPP are a way of funding public infrastructure projects with private capital. PFI and its variants
have been adopted in many countries driven by an increased need for accountability and efficiency
for public spending. To date, the PFI contracting structure has not been used extensively to deliver
energy efficiency and retrofit projects. The contracting structure lends itself to projects that require
significant capital investment in defined assets eg energy from waste plants, schools, hospitals.
Greater Manchester Waste Disposal Authority PFI Contract April 2009
This was a waste and renewable energy project, managing 1.3 million tonnes of waste per year with
total potential energy generation approaching 130 MW. Total PFI construction cost of 405m and an
additional 235m for the associated energy from waste plant at Runcorn. Viridor invested 85m plus
further possible mezzanine debt of up to 40m in 2010.

Revolving/Refinancing/exit
After a programme has been up and running then advantage can be made of its generated cash flow
and the reducing risk profile over time.

Revolving fund
A revolving fund becomes self-sustaining by re-using the financing generated to finance more
programmes. This not only enables more low carbon programmes to be financed but additionally
allows an initial restriction on project types to be removed (London UDFs and Manchester
Evergreen Funds).

http://en.wikipedia.org/wiki/Payback_period

11

However, funds are only available to re-invest as they are repaid and so it is not suitable for long
term investment programmes and the initial investment will not be recovered. It is not therefore
available for large scale programmes using private investors.

Refinancing
Refinancing occurs when the project swaps one form of finance for another and so does not wait
until the project is finished. This often happens to bring in lower cost capital once the project has
reached a steady state when high cost equity and project finance debt can be replaced with lower
cost debt, or even if the project is large enough with bonds.
However, what it also does is free up capital for the initial funders so that they can deploy their
funds elsewhere. Thus local authority lending can be refinanced with other debt or bonds, so that
they can lend to other programmes so managing the overall level of prudential borrowing by the
authority

Aggregation/ warehousing
In some financial markets such as car loans, mortgages or credit cards finance vehicles called bank
warehouses are set up to aggregate loan books across multiple originators by buying the existing
loans. These warehouses which are financed by bank debt, when they have reached a certain
volume, then issue a bond to the institutional investor market.
One refinancing strategy that might come available to local authorities or associated ventures is to
sell off the loans to a warehousing company in return for more finance.

Exit
Funders generally want to exit from a programme at some stage and whilst this can be achieved
through some of the refinancing approaches described above, there will generally become a stage
when any equity providers wish to free up their capital and attract in more capital for growth. This
can be achieved by either a trade sale to large company or a listing on the stock market through and
IPO (initial public offering).
If no exit is required then a company can become cash positive, pay down its debt and live off its
own balance sheet.

Low carbon/ retrofit funding

Salix finance
Salix has in the past had public funding from the Carbon Trust and uses this in two forms:
A recycling fund, whereby a public sector body is given match funding for a number of
projects. The client can continue to recycle energy savings returned to the fund into
more projects, always maintaining the value of the fund at a constant level. Money is
returned to Salix only when no more suitable projects can be found.
Loans targeted at specific projects, which when completed repay their costs to Salix
from the energy savings.
12

All of the funding allocation for England has been allocated. Please check the Salix website for
further details: http://www.salixfinance.co.uk/home.html

Regional Growth Fund

The Regional Growth Fund (RGF) is a 1.4bn fund operating across England from 2011 to 2014. It
supports projects and programmes that lever private sector investment creating economic growth
and sustainable employment. It aims particularly to help those areas and communities currently
dependent on the public sector to make the transition to sustainable private sector-led growth and
prosperity. Further details can be found here: http://www.bis.gov.uk/RGF
BIS are looking at running a third bidding round for the Regional Growth Fund, if required subject to
review in September 20125.

Carbon Emissions Reduction Target (CERT)

CERT is a statutory obligation on the six largest energy suppliers to reduce emissions of carbon
dioxide in the domestic sector. CERT came into effect on 1 April 2008. In February 2009 the
Government proposed amendments to CERT and this has now been extended to 2012.
CERT is the principal driver of energy efficiency improvements in existing homes in Great Britain. In
addition to the energy efficiency measures suppliers are able to promote microgeneration measures
(to those considered most vulnerable), biomass community heating and CHP and other measures for
reducing the consumption of supplied energy. CERT maintains a focus on vulnerable consumers and
includes new approaches to innovation and flexibility. 68% of the total target must be achieved
through installed insulation measures therefore there will be a focus on funding these measures
over others.
Each of the six major energy suppliers run their own programmes providing funding for energy
efficiency measures directly to householders. In addition, local authorities and housing associations
can work in partnership with the energy suppliers to develop schemes in their area. Local authorities
and housing associations are key partners for the energy suppliers in accessing households.
Currently energy companies are exposed to not achieving their targets which means that they will be
keen to work with local authorities to achieve them, otherwise face a penalty of 10% of their global
turnover.

Community Energy Saving Programme (CESP)

CESP represents a statutory obligation on the largest gas and electricity suppliers, in a similar way to
the Carbon Emissions Reduction Target (CERT) and represents 350 million of funding to target
households across Great Britain to improve energy efficiency standards and reduce fuel bills.
One of the key aims of CESP is to target areas of low income. These areas have been identified using
the Income Domain of the Indices of Multiple Deprivation (IMD). Those areas which are ranked in

http://www.bis.gov.uk/assets/biscore/corporate/docs/b/11-p104e-bis-structural-reform-plan-update-may2011

13

the lowest 10 per cent in England and 15 per cent in Wales and Scotland will qualify for CESP
funding.
CESP has been designed to promote a 'whole house' approach and to treat as many properties as
possible in defined areas. CESP will be delivered through the development of community based
partnerships involving local authorities. It is estimated that around 100 schemes will be funded over
the course of the programme.
The CESP target is 19.25 Mt (lifetime) CO2, including score adjustments/ bonuses. As with CERT
above, if the energy company fails to meet their individual targets they are faced with a fine of 10%
of their annual turnover.

The Energy Company Obligation (ECO)

ECO is the new supplier obligation that will be rolled out from Jan 2013, underpinning the Green
Deal (see below)6. Details will come available during Q4 2011 but it has already been announced that
it will cover two areas:
The needs of the lower income and most vulnerable; and
Those properties needing the next most cost-effective measures that do not meet the
Golden Rule for example, solid wall insulation (SWI).
ECO will not be like previous obligations with carbon goals able to be achieved across all households.
From the outset, the targets will only be achieved within a certain householder group (lower income
and vulnerable households where Green Deal is less likely to work) and/or with certain property
types, such as those needing SWI. The two targets are separate and energy companies have to work
on both.
Local authorities using the Green Deal model developed by Birmingham and Newcastle provide
attractive partnerships to energy companies with the delivery of their obligations. Energy
companies will be able to match-fund with the green deal finance the delivery of hard-to-treat
measures which means that they will be able to achieve their targets at a low cost than working on
their own.

Income generators
Feed-in Tariffs (FiTs)
As of April 2010, individuals, local authorities, housing associations and other organisations that
install low carbon electricity generating technologies have been eligible to receive FiTs. The
introduction of FiTs represents a real opportunity for public bodies to create environmental benefit,
coupled with a range of economic benefits. In addition to carbon emissions reduction, the
installation of renewable energy technologies can create local jobs, reduce fuel poverty and
contribute to the local economy. Setting up Feed-in Tariff schemes can help local authorities and
housing associations to maximise income streams, reduce carbon emissions and tackle fuel poverty
in both social housing and the private sector.

http://www.decc.gov.uk/en/content/cms/tackling/green_deal/green_deal.aspx

14

The revenue from Feed-in Tariffs currently is higher than the cost of capital, although this will be
reviewed in March 2012. There are three ways that local authorities can roll out solar PV
programmes
Self-financing through prudential borrowing (Birmingham Energy Savers 1 and 2)
Mixed financing of prudential borrowing and bank finance in an Special Purpose Vehicle
(South West Sunroofs)
Roof-rental models whereby local authorities and social housing providers lease their roof
space to third party companies/financers who finance the programme. The companies
provide benefits through access to zero cost electricity during daylights and sometimes
sharing of the revenues received by the company from the FITs

Renewable Heat Incentives (RHI)

In the first phase, long-term tariff support will be targeted in the non-domestic sectors, at the big
heat users the industrial, business and public sector which contribute 38% of the UKs carbon
emissions. Under this phase there will also be support of around 15 million for households through
the Renewable Heat Premium Payment.
RHI will provide annual payments to house holders and other building owners for the delivering of
renewable heat to their property. The amount will vary according to the technology used. This is
currently under consultation and it is not clear yet whether a roof-rental type approach can be
used.

Green Deal
The Green Deal legislation allows upfront payments in public sector buildings, commercial buildings
and private and social housing to be made by a financing vehicle and then be repaid with interest
over a period of up to 25 years. This income can more than cover the cost of borrowing and
managing such a programme.

European low carbon/ retrofit funding

European Regional Development Fund (ERDF)
The ERDF aims to strengthen economic and social cohesion in the European Union by correcting
imbalances between its regions. In short, the ERDF finances:
Direct aid to investments in companies (in particular SMEs) to create sustainable jobs
Infrastructures linked notably to research and innovation, telecommunications,
environment, energy and transport
Financial instruments (capital risk funds, local development funds, etc.) to support regional
and local development and to foster cooperation between towns and regions
Technical assistance measures

A change to the European Structural Funds ERDF Regulation, proposed by the European
Commission, to allow the inclusion of energy efficiency measures in social housing as activity eligible
for support under ERDF programmes, was approved in May 2009. An allocation of 4 million ERDF
funds was made available for the call.
15

Projects must show how they can progress and stimulate market developments in new, developing
and innovative technologies; supporting low carbon ways to generate energy from multiple sources7.
They will also need to show a whole house solution to overcoming barriers to energy efficiency. The
project must be showcased in social housing domestic settings, encouraging other small and
medium sized enterprises to learn from the findings.
Funds have been allocated to energy efficiency programmes but have largely been limited to social
housing. These have generally been used as grants to finance the local energy efficiency sector.
Birmingham has been using its ERDF funds to test innovative housing measures.

Life+
LIFE+ is the European financial instrument for the environment and has a total budget of 2.143
billion for the period 2007-2013. The Commission launches one call for LIFE+ project proposals per
year. The LIFE programme has funded areas such as energy production and distribution; green
buildings and eco-friendly homes.
LIFE+ Environment Policy & Governance projects are pilot projects that contribute to the
development of innovative policy ideas, technologies, methods and instruments. In 2011, of the 399
proposals received, the Commission selected for funding 104 projects from a wide range of public
and private sector organisations. The winning projects, based in 18 Member States, represent a total
investment of 286 million, of which the EU will provide some 109 million. Projects targeting waste
and natural resources account for the lion's share of this funding (some 143 million for 51 projects).

European Social Fund

The European Social Fund (ESF) is one of the EU's Structural Funds, set up to reduce differences in
prosperity and living standards across EU Member States and regions, and therefore promoting
economic and social cohesion. The ESF is devoted to promoting employment in the EU. It helps
Member States make Europe's workforce and companies better equipped to face new, global
challenges.

Joint European Resources for Micro to Medium Enterprises (JEREMIE)

JEREMIE is an initiative of the European Commission developed together with the European
Investment Fund. It promotes the use of financial engineering instruments to improve access to
finance for SMEs via Structural Funds interventions.

Joint European Support for Sustainable Investment in City Areas (JESSICA)

JESSICA is an initiative of the European Commission developed in co-operation with the European
Investment Bank (EIB) and the Council of Europe Development Bank (CEB). It supports sustainable
urban development and regeneration through financial engineering mechanisms.

http://www.eeda.org.uk/4492.asp

16

JESSICA in London: the London Green Fund8

This is a 100m fund set up to invest in schemes to cut Londons carbon emission. This was the first
JESSICA Holding Fund in the UK and is made up of 50m from the London ERDF programme, 32
million from the London Development Agency (LDA), and 18 million from the London Waste and
Recycling Board (LWARB). The European Investment Bank manages the London Green Fund on
behalf of the LDA and LWARB.
The waste UDF, which is known as the Foresight Environmental Fund, is now operational, and 35
million has been allocated to it from the LGF. It is being managed by Foresight Group LLP which will
secure additional funding and decide which projects are funded. Funding will be in the form of
equity or equity-type investments.
The London Energy Efficiency UDF is managed by Amber Infrastructure. Manchester has a similar
fund, the Evergreen Fund, and Scotland is launching SPRUCE

European Energy Efficiency Fund (EEE-F)

The EEE-F will invest in energy saving, energy efficiency and renewable energy projects, particularly
in urban settings, achieving at least 20% energy saving or GHG/CO2 emission reduction. The fund will
offer a wide range of financial products such as senior and junior loans, guarantees or equity
participation to local, regional and (where justified) national public authorities to promote
sustainable energy investments. There also is a technical financing programme similar to ELENA.

European Local Energy Assistance (ELENA)

ELENA support covers a share of the cost for technical support that is necessary to prepare,
implement and finance the investment programme, such as feasibility and market studies,
structuring of programmes, business plans, energy audits, preparation for tendering procedures - in
short, everything necessary to make cities' and regions' sustainable energy projects ready for EIB
funding. Birmingham and Bristol both have applications to access these funds for the low carbon
work.

Intelligent Energy Europe (IEE)

IEE offers a helping hand to organisations willing to improve energy sustainability and will run until
2013. It aims to create better conditions for a more sustainable energy future in areas as varied as
renewable energy, energy-efficient buildings, industry, consumer products and transport.
The expectation is that by doing this, Europe will also boost its competitiveness, security of energy
supply, and innovation standing for the years to come.9

The European Renewable Energy Fund I (EREF I)

This gains financial help from the EIB of up to around 40 million. It is a pan European fund which
makes equity investments in European renewable energy projects and business. It is expected
mainly to finance wind projects although other technologies are also expected to be. The majority of
the clean energy projects in which EREF I will invest will be primary assets. 10
8

http://www.london.gov.uk/erdf/jessica-london-green-fund
http://ec.europa.eu/energy/intelligent/about/index_en.htm
10
http://www.eib.org/projects/pipeline/2009/20090199.htm
9

17

Seventh Framework Programme (FP7)

FP7 bundles all research related EU initiatives together under a common roof playing a crucial role in
reaching the goals of growth, competitiveness and employment. The broad objectives of FP7 have
been grouped into four categories: Cooperation, Ideas, People and Capacities.

SmartCities
SmartCities is based around the digitisation of cities. City of Edinburgh Council and Norfolk County
Council are Government partners to the scheme.
The Smart Cities partnership is made up of 13 partners from six countries in the North Sea region.
The project aims to create an innovation network between governments and academic partners
leading to excellence in the development of e-services and e-government.11

11

http://www.smartcities.info/files/Understanding%20e-government%20in%20Groningen.pdf

18

Energy Saving Trust, 21 Dartmouth Street, London SW1H 9BP

Tel: 0207 222 0101
energysavingtrust.org.uk
2011. Energy Saving Trust. E&OE
This publication (including any drawings forming part of it) is intended for general guidance only and not as a substitute for
the application of professional expertise. Any figures used are indicative only. The Energy Saving Trust gives no guarantee
as to reduction of carbon emissions, energy savings or otherwise. Anyone using this publication (including any drawings
forming part of it) must make their own assessment of the suitability of its content (whether for their own purposes or those
of any client or customer), and the Energy Saving Trust cannot accept responsibility for any loss, damage or other liability
resulting from such use.

19