The Priority School Building Programme could provide opportunities to save money by reducing energy costs. But who will benefit? It depends on what source of data you choose

Campsmount school

01 / Introduction

In July 2011, the coalition government launched the Priority School Building Programme (PSBP) to renew, repair and refurbish some of the county’s most out-of-date schools. This new private finance initiative (PFI) programme is an overhaul of the previous Building Schools for the Future (BSF) initiative and takes on board the recommendations of the James review of how capital investment should be allocated across schools. The PFI element of the PSBP will invest £1.75bn into fit-for-purpose educational facilities while claiming to offer greater value for money than BSF. The PSBP will be centrally-procured by the Education Funding Agency (EFA) on behalf of the Department for Education.
In November last year, the draft PSBP “Project Agreement” was released for consultation and to give industry an indication of how the revamped school PFI would share risk - and reward - between the public and private sectors. As expected, it is largely based on the BSF standard form of December 2007.
It is worth noting that the full suite of draft PSBP documentation has not been released, so the construction industry is still relatively in the dark regarding how exactly these proposals will work in practice.

02 / Risk

One risk area for PFI contracts is predicting likely operational costs over the lifetime of the 25-year contract. From a sustainability perspective, future utility payments (gas, electricity, water) will be a major element of uncertainty.

The PSBP Project Agreement specifically states that the “unitary charge” (fee payable by the local authority to the contractor over the life of the PFI agreement) will include energy andutilities costs, to encourage whole-life costing in orde to achieve resource efficient procurement. In other words, the contractor is required to minimise the combined capital and operational expenditure over the 25-year contractual period.

This is based on the principle of “invest to save” - additional spending on design enhancements that yield energy savings for the completed school.

Typically, the energy efficiency of a building will be specified to meet a combination of Building Regulations, local planning requirements, client targets and funding conditions. Cost is obviously a factor and all necessary targets will be in the most part met for the lowest possible cost. Under PFI, there exists the opportunity to invest in improved energy efficiency standards through fabric, building services and renewable energy technologies, in order to reduce annual utility payments once the school is up and running.

Predicting the annual utility payments is difficult to get right. This uncertainty relates to the key components that comprise these payments:

  • Total consumption (i.e. “volume risk”)
  • Energy tariff paid per unit of energy/water consumed (i.e. “price risk”)

Each risk is eplained further below.


Campsmount school

03 / Consumption

Annual energy consumption depends on two key factors (ignoring any exceptional weather patterns):

  • Efficiency of the building fabric, mechanical and electrical services (including IT and small power) and renewable energy technologies installed
  • How the school is run, including hours of operation, temperature set points, control settings and use of the space by the building occupants.

Under BSF, the contractor was able to set and agree the annual consumption target for the whole contract period after the first year of operation. If actual consumption was up to 10% more than the target, then the contractor was liable to pay the extra amount rather than pass it on to the school through the Unitary Charge. The reverse was also true - up to 10% less and the contractor would be the sole beneficiary. If actual vs target consumption was outside these limits then the contractor and local authority would share the pain and gain accordingly.

However, this approach was open to exploitation whereby the first year’s energy consumption was inflated, to set an artificially high target going forward. This meant that all energy bills thereafter were less than the forecasted amount and the contractor would therefore realise a yearly saving.

The PSBP now refines how the annual consumption target is set and the new approach attempts to address this problem. There is now a three-step process to setting the annual consumption target:

The Initial Baseline Energy Model is based on energy modelling produced at IPDSB (Invitation to Participate in Dialogue with Selected Bidder) stage using assumed default weather, orientation, standard equipment profiles and use patterns.

The contractor has to demonstrate that the design of the building is capable of meeting or improving upon the following energy consumption standards:

  • carbon rating of less than 40 KgCO2/m2, equivalent to a DEC rating of C
  • total fossil fuel energy consumption of less than 60 kWh/m2
  • total electricity consumption of less than 50 kWh/m2
  • total electricity consumption in the case of an all-electric school of less than 90 kWh/m2 .

The next step is the Final Baseline Energy Model (FBEM), developed from the initial baseline model. This model is included within the contractor’s proposals and sets out the predicted energy consumption of the school. It will allocate to the various sub-meters to be installed in the school the anticipated energy usage values that will provide the initial estimate of energy and utility costs for the initial period.

The FBEM will include an energy analysis of all of the equipment to be installed, based on predictions and equipment surveys. The unitary charge/payment will include the initial estimate of energy and utility costs based on the FBEM.

The in-use energy model is the calibrated FBEM, taking into account allowable adjustments, such as weather, occupancy and hours of use. Any allowable adjustments are to be made in accordance with the International Measurement and Verification Protocol (IPMVP) for measuring and reporting on energy and water consumption, which is an established benchmarking system. The in-use energy model is agreed with the authority and then forms the basis for all future energy payments.

Thereafter, the outputs of the agreed In-Use Energy Model are compared against actual energy use (once allowable amendments have been made). The In-Use Model together with the Measurement and Verification Plan will identify if any excessive energy use is the responsibility of the school and allocate costs accordingly. In principle, this removes the consumption risk from the contractor. However, their ability to make ongoing savings as a result of an artificially high consumption target will be greatly reduced.

Economics 03


04 / Price

Under BSF, the annual gas and electricity tariffs for the first year (or “initial period”, in the scheme’s terminology) were explicit in the payment mechanism. For subsequent years, the tariffs to be applied were agreed between the contractor and local authority before the start of each year. Effectively this was a pass-through arrangement with any price risk firmly on the side of the local authority rather than the contractor who would be responsible for procuring the energy supply to the school. Arguably, this was not an effective incentive to encourage the contractor to negotiate deals out in the market place to offer the local authority the greatest value for money.

The position under PSBP appears to be largely unchanged based on initial indications from the EFA. Exact details are not known but the opportunity to incentivise the contractor to procure the lowest tariffs seems to have been overlooked.

As mentioned, there is a specific focus in the PSBP for contractors to consider the whole-cost implications of each school as a basis for demonstrating overall value for money. The trade-off between capital and operational expenditure is a critical one and requires the projection of energy prices over the next 25 years. So, what reliable price forecasts are there available to assist? The Department for Energy and Climate Change (DECC) freely publishes gas and electricity prices for the residential, services and industrial sectors up to 2030. Although peer reviewed and deemed reliable enough to be used across Whitehall for the purposes of informing policy, the DECC’s projections can appear to be rather low compared with historic price increases and other sources of data.

Given the extreme challenge of forecasting prices into the future and the market intelligence required to set something vaguely realistic, it is not surprising that other reliable sources of data command a premium.

 

05 / Case study

Using a new-build secondary school (9,400m2) built to meet 2010 Part L Building Regulations and the PSBP energy targets stated previously, the sensitivity of potential energy prices on whole-life costs can be seen in Table 1 (below). Two scenarios have been considered: the first using DECC’s October 2012 Updated Energy and Emissions Projections; the second based on historic oil prices as a proxy for electricity and gas price trends.

The potential variance in how energy prices will increase over the next 25 years makes a significant impact on the total cost of utilities paid. In this example, 69% additional cost.
The energy costs shown in the tables are as “present value” costs, having been discounted to reflect an investor’s perceived future value of money. A discount factor of 8% has been used, which is arguably on the high side to reflect the increased risk for private financiers in the economic downturn. So is there a case for an upfront investment in energy efficiency to hedge against this energy price uncertainty and in turn provide better value for money to the authority? A whole-life cost approach is required to assess how much could be invested now to mitigate the risk of future energy prices.

Using the same school example, a £1,400/m2 build cost has been assumed, which is the expected capital cost cap under PSBP. The Part L improvement percentages and capital cost increases have been taken from the 2013 Consultation Impact Assessment issued by the communities department in January 2012.

Tables 2 and 3 (below) compare the capital cost to improve the energy efficiency of the schools with the estimated total energy saved over 25 years. If the value of the energy saved is more than the initial capital cost then the investment is worth it. The whole-life cost of the school will therefore be lower, meaning better value for money overall.

As expected, invest to save is more appealing under the higher price scenario compared with the DECC scenario. DECC’s projections indicate that an 11% improvement would provide a positive business case over the contract period and therefore be a worthwhile action. Targeting a 14% or 20% improvement would only be viable if the contractor or local authority had the view that energy prices would increase more sharply than those predicted by the DECC. The 11% improvement on Part L under the historic oil price scenario also provides a good return and should be a good target to set at the outset of a project.

This illustrative analysis shows that the principle of invest to save is viable for the PSBP programme but highly dependent on the energy price projections adopted. A specific analysis for each school should be a prerequisite to determine the appropriate improvement measures that could be implemented and the likely capital cost and savings potential. This analysis at an early project stage can lead the development of the design and be monitored through energy modelling.

However, with the local authority taking on all the price risk, there is still limited incentive for the contractor to adopt this approach unless specifically directed by the local authority. Lower whole-life costs will be attractive to the local authority but will require a higher capital allocation. The capital cap is also likely to place a challenge on designers and contractors to meet the requirements of the output specification. Therefore, an upfront investment in enhanced energy efficiency at the cost of better educational facilities is not likely to happen.
In the interests of energy security and increasing CRC liabilities and the like, authorities are increasingly taking reduced operational energy costs seriously and a contractor who can offer a robust invest to save solution and lower costs overall might just swing the project selection in their favour.


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Table 1

ScenarioGas price inflationElectricity price inflation25-year energy costNotes
DECC price1.2%3.2%£785,000DECC Central retail price projection for
services sector (average)
Historic oil price7.8%7.8%£1,324,000Brent Crude Oil index (average)

 

Table 2: DECC price scenario

Improvement on Part LCapital cost increase25-year energy savingWhole-life saving/cost
11%0.4% £52,600£86,400£33,800
14%1.0% £131,600£109,900- £21,700
20%1.3% £171,000£171,000- £14,000

 

Table 3: Historic oil price scenario

Improvement on Part LCapital cost increase25-year energy savingWhole-life saving/cost
11%0.4% £52,600£145,600£93,000
14%0.4% £52,600£185,300£53,700
20%1.3% £171,000£264,800 £93,800

 


Register for BFE

Building Future Education, with talks on priority schools, is taking place on 7 May at the Park Plaza in London. To register go to buildingschools.conference-websites.co.uk