ESCO's: What they are, why they're important and how businesses can benefit

In the first of this series of blogs for Clean Energy News, Stephen Cirell considers the establishment of local authority Energy Services Companies (ESCO's) and their significance.

There has been much in the news recently about local authority Energy Services Companies (ESCOs) and they seem to be the flavour of the month. But what are ESCO’s and why would a local authority consider establishing one?

In this series of blogs Stephen Cirell answers these questions and examines why local authority ESCOs are considered by many to be the future.

The first problem is the name ‘ESCO’. Unfortunately, there is no specific legal definition of an ESCO and this means that they mean all things to all people. An ESCO can merely be the face of the local authority in relation to its green programme, providing only guidance and information with no corporate entity, right through to a fully licensed gas and electricity provider, selling energy directly to consumers. Or anything in between.

There are good examples that have been in existence for some time, such as the Aberdeen City Council ESCO, which runs its famed district heating scheme. This is a single purpose ESCO. Another example is Southampton and its geothermal plant.

Lately, though, much more extensive ESCO’s have been established, particularly in Nottingham City Council and Bristol City Council. Both have created wholly owned energy companies that have secured licences under the Electricity Act 1989 to sell energy directly to the public. Such ventures are much bigger and involve greater levels of risk and reward.

An ESCO can also be a company solely owned by a local authority, or it can be a collaboration between two parties. Ovo has entered into white lable deals with local authorities such as Cheshire East Council and Peterborough City Council. A collaboration could also be between more than one local authority, to share risk and costs.

So the starting point when considering ESCOs is to be precise about what we are talking about. What type of company is it? What will its role and functions be? Who will be involved? What is its central purpose?

It is only possible to compare ‘apples with apples’ and there are no companies that have yet been established that embrace the full range of functions under the green energy, even though latter ESCOs have been more adventurous and reaching.

The real question is how will the ESCO market develop and what sort of entities can we expect in the future? This series will look at those issues and cast an eye to the next few years.

Why Consider an ESCO?

The problem is that the UK electricity market is failing. There is huge criticism of the ‘big six’ suppliers and the Competition and Markets Authority has confirmed that domestic consumers have been overcharged for many years.

Local authorities are amongst the agencies that pick up the pieces of this situation. Fuel poverty is growing and has very real ramifications for local government and the NHS. Energy bills are increasing nationwide and this is causing anxiety – even amongst those households who can pay. But it is the ones who cannot who are most vulnerable.

And in a strange querk of the energy market, many of them are on pre pay meters and pay the highest tariffs. Only in this unreal world can paying in advance result in being prejudiced, rather than favoured.

Smart meters will help, but the major energy companies have no real incentive to drive this market forwards. Less energy use means lower profits, after all. Even on the general commercial front, local companies are concerned about energy bills and their inability to control energy price inflation. The financial health of those companies is, of course, closely linked to the general wellbeing of the local economy.

Then there are the local authorities themselves. Lots of buildings, lots of energy used and inexorably rising prices. Higher energy prices mean squeezed budgets and therefore less money for public services.

Despite the protestations of the big six, it is obvious that there is profit in energy, in generation, distribution and supply. Some local authorities have now realised that by bringing energy supply under their own control, they can improve the situation greatly for themselves, the fuel poor, other consumers and the commercial sector all in one go.

The way to do this is to establish an ESCO. If a local authority creates a wholly owned energy services company, then it controls pricing and can extract the full social value from the power it supplies. It can help itself, it can help consumers and it can help local companies.

ESCOs can be run on a non profit distributing basis, allowing special tariffs for the needy, local rates to help the economy and on the basis of not profit first, but public values.

Up until last year, this had been considered, but was thought to be too difficult a task. Then Nottingham City Council, closely followed by Bristol City Council showed all other local authorities the way. They took the really big step and established fully licenced ESCOs and are in the process of demonstrating how they can differ from traditional energy suppliers.

In the next piece I will look at why a local authority is the ideal body to create and operate an ESCO of this nature.

Stephen Cirell is an independent consultant on the green agenda specialising in local government and the public sector. He is author of A Guide to Solar PV Projects for Local Government and the Public Sector, the second edition of which was published in 2015.