ESCO's: How Local Authorities Can Choose the Right Vehicle for Change

In the fifth of his series of blogs for Clean Energy News on local authority Energy Services Companies (ESCOs), Stephen Cirell considers how a local authority can choose the right vehicle to deliver change.

It has already been mentioned that some local authorities have decided what kind of ESCO they want, often before properly considering the options. Nowhere is this more apparent than in the choice of legal structures.

So a Council will make it known that it wants a company, often relying on spurious reasoning, such as the reduction of legal and reputational liability in the venture. Choosing the vehicle that is the best one to deliver the chosen plans is a specialist task and one that can only be undertaken when it is completely clear what outcomes are required, and all of the relevant thinking, financial modelling and discussions between officers and members have taken place.

The obvious starting point is a company structure of one form or another. This might be a company limited by shares or by guarantee.

But there are many other legal structures in operation from Community Interest Companies, Community Benefit Societies (formerly Industrial and Provident Societies), limited liability partnerships, traditional partnerships and unincorporated associations.

Each structure will have different legal consequences and so the activities contemplated will be important in determining the best fit. Companies pay corporation tax, whereas local authorities do not pay tax; limited liability partnerships offer a middle route, where each partner is taxed on its own behalf (meaning that a local authority does not pay any). Companies offer limited liability whereas unincorporated associations do not. Community Interest Companies have an ‘asset lock’ and extra regulation. Complex trading activities are normally kept off the local authority’s balance sheet.

There are also considerable issues around costs and effort involved here. Setting up companies is expensive and extensive external legal assistance may be required. For energy, there is a vast regulatory framework of rules and regulations that need to be complied with, which also needs filtering into the mix.

On the organisational side, there will need to be a commercial structure if the ESCO is delivering services directly to customers, contractual arrangements will need to be put in place and relevant financial accounts created.

The level of local authority control and influence will also be a factor, and here the different ways in which Nottingham and Bristol City Council have created their entities offers an interesting comparison.

On the organisational side, the reason that outcomes need to be considered is that many arrangements do not need a separate legal entity at all. An agreement with another party can be entered and regulated by a simple contract. Contracts are well understood but can be restrictive if there are numerous parties involved and a complex operation included.

If it is a purely local authority party, then section 101 of the Local Government Act 1972 offers a special concession, to set up an ‘administrative arrangement’. This is where local authorities want to join together to act but the body has no separate legal identity. This means that it cannot contract or employ staff and this has to be done by a ‘lead’ authority.

Finally, there is the corporate structure. This is a separate legal entity from the Council entirely and therefore can enter into contacts in its own name and employ staff. The problem is that companies have to pay corporation tax, where local authorities do not, and so there are clear ramifications in establishing a company.

The other area often misconstrued about companies is that the establishment of a separate legal entity will protect them from failure of the venture. Whilst legal liability will be ring fenced to the new company, it is naïve to suggest that a local authority will avoid reputational damage via this route, as it will be very apparent who the owner and operator of the company was and who is therefore responsible for its failure.

Such matters have to be properly laid out and considered at the start of the exercise, so that the ramifications of each model can be properly assessed. Too often there is an obsession with legal structures in ESCO debates. The structure can be identified to suit the circumstances fairly easily once the purposes of doing this are clear. The hard work in the early stages is deciding what the aims are and the level of resource and money that the authority is prepared to put towards them.

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.