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Energy supply contracts for PFI projects

The Carbon Reduction Commitment Energy Efficiency Scheme  which came into force in April, contains a number of unclear and potentially expensive issues. The scheme involves complex calculations, and even those participants with relatively simple property arrangements are confused or unaware of the impact CRC will have on their bottom line.

In PFI projects, the scheme becomes a minefield as the guidance issued by DECC was that the responsible party would be the organisation that pays the bill. However, in most PFI/PPP projects a facilities management contractor or similar is often named on the bills and pays for the supply. The situation is further complicated by the existence of volume risk and unitary payments, which are built into contracts covering the operational period of the leased asset. So how can existing contracts be renegotiated, and how should new contracts be set up?

Following calls for clarity, the User Guidelines were revised in March 2010 introducing four key questions to establish whether a direct supply to another organisation could be demonstrated:

1.     Is there agreement between two parties that one will supply electricity to the other?

2.     Is the electricity supplied via a fiscal meter?

3.     Is the payment for the received supply based on the fiscal meter reading?

4.     Does the party receiving the electricity via the meter use some or all of the electricity?

If the answer to these questions is yes, then a direct supply exists and the organisation receiving that supply is the responsible party.

Unfortunately, the confusion does not end there. The Guidelines within the Detailed Guidance for the Public Sector state:

“In the case of Private Finance Initiative (PFI) schools, where the PFI contractor is responsible for the energy supply, the PFI company will be responsible for that school when determining qualification for, and participation in the Scheme.”

On some projects, the four questions provided for clarity above can be answered ‘yes’ but they are seemly classed as a special case simply because they happen to be operating a school rather than a hospital or prison.

Many stakeholders are appealing to DECC for clarification on this situation. A working group consisting of members from DECC, the Environment Agency and Infrastructure UK are currently working on more detailed guidance for PFI projects. And they hope to have a draft set of guidelines out for consultation within a couple of months.

Currently, we recommend that PFI clients refer directly to the wording of the Order rather than following the User Guidelines to the letter.

Ultimately, once the accountable party has been determined, we move onto the question of how to measure and continuously reduce CO2 emissions year after year. That’s what the Carbon Reductions Scheme is really all about.

Mark Henning is director of PFI/PPP at Appleyards