Briefing note for councils and leisure providers – mitigating the impact of rising utility costs on leisure services

This briefing note provides information, good practice and examples of practical support to help ensure service continuity and avoid failure/closure of leisure services during the cost of living and energy crisis.

The purpose of the note is to share information and examples of the measures and collaborative working some areas are taking to mitigate the impact of rising utility costs. As with the COVID-19 pandemic, strong partnership working and open and constructive dialogue between councils and providers will be critical to understanding the options available to ensure service continuity.

It builds on our earlier Briefing note for councils – the impact of rising energy costs on the leisure sector | Local Government Association and covers the recent Government announcement about the energy price cap for businesses, drawing on the information provided to us and Sport England by both councils and operators on the likely impact of that on their bills. We continue to work closely with the Department for Digital, Culture, Media and Sport (DCMS) and Department of Levelling Up, Housing and Communities (DLUHC) on this.

We recognise that many councils and providers are already working closely together to protect their services and that some of the measures listed will not be new. However, at the time of writing, there has been a lack of information about what tools and options are available. We therefore hope that this briefing provides support for those who need it.

We recommend that this note is read in conjunction with the National Energy Category Strategy for Local Government 2022 – energising procurement, which is designed to help councils optimise the way they manage energy. It includes good practice examples and case studies related to all areas of local government energy procurement.

Please note that this is not guidance or legal advice. Each council will need to consider its own options, including taking legal advice where appropriate.

The leisure sector faces an unprecedented challenge from the energy and cost of living crisis, with current projections indicating large scale failure of services as a direct result of the situation. Leisure assets are by their nature energy-intensive buildings, with both cooling and heating costs, with the latter being exacerbated by the onset of the winter season. At the same time councils expect an extra £2.4 billion in cost pressures this year rising to £3.6 billion next year and are having to make tough funding decisions, whilst continuing to support the most vulnerable.

Operators providing public services on behalf of councils tend to operate on very small profit margins, with Sport England data suggesting 1 per cent profit margins are common. They often do not have the level of reserves built up that are required for unforeseen circumstances such as the energy crisis. Figures from the National Leisure Recovery Fund show that providers used almost £125 million of reserves to sustain themselves through Covid, leaving them too depleted to last through this period of high energy prices. are common. They often do not have the level of reserves built up that are required for unforeseen circumstances such as the energy crisis. Figures from the National Leisure Recovery Fund show that providers used almost £125 million of reserves to sustain themselves through Covid, leaving them too depleted to last through this period of high energy prices.

Small numbers of leisure facilities have already begun to close, some permanently and some only for the winter, while others are looking closely at options including reduced opening hours and staff reductions.

Challenges exist on both sides, with providers struggling to respond to external factors, making it difficult to meet existing contractual obligations. In turn, councils are often juggling many wider council buildings in addition to leisure stock, with similar challenges and extensive cost of living pressures affecting services right across the spectrum from adult social care to children’s services. As witnessed during COVID-19 it is essential that we continue to work in partnership to secure the best possible solution to ensure the viability of public leisure moving forward.

Overall, feedback suggests that:

A quarter of the sector is stable for the next three to four months, due to hedged utility contracts, setting-up of low carbon facilities/equipment etc. However, councils and operators may wish to consider discussions to confirm these protective features are in place and to discuss joint plans for managing impact after the hedged period comes to an end, based on an assumption that energy prices will continue to be higher than 2021 for some time.

Approximately 65 per cent of the sector are seeing significant extra costs in the short-medium term. Feedback from our members suggests that the average leisure service is expecting to pay between £1 million and 1.5 milion extra in energy costs in 2023/24, but they are also facing other significant financial pressures. These include the increase in the National Living Wage and associated pay differentials, the need to pay more to recruit and retain skilled personnel, ongoing recovery and rebuilding confidence from COVID-19, and wider inflationary pressures in terms of the cost of goods, services and chemicals.

While these costs do not pose an immediate threat to closure, they are likely to inform decisions being made in terms of opening hours, concessionary rates, and programming.

For the remainder of the sector, there is an immediate threat to facilities. These tend to be older, energy-inefficient facilities in areas of the community with lower disposable incomes. Rural facilities with limited public transport access are also likely to disproportionately fall into this category.

In these instances, strategies will be more significant and will include temporary or permanent closure of some facilities. This may be the most energy intensive part of a facility, such as a swimming pool, while the remainder remains open, or it may be closure of a whole facility and directing customers to facilities elsewhere in the council area, or potentially in a neighbouring authority where this has been jointly agreed.

Where providers fail or withdraw from a contract, councils will wish to refer to our guidance on the emergency insourcing of leisure services. Please note that this is not necessarily the most cost effective response.

At the time of publication, the Government has announced a financial support package for communities and businesses to assist with the rising energy costs - the energy price cap. However whilst welcome, the energy cap only applies to the wholesale price of gas and electric and not the total price that organisations will pay to energy providers. (e.g. commodity discount, rather than non commodity discount). Our research with the sector has shown that even with the Government energy wholesale price cap in place it does not offset the significant utility cost increases that has occurred through the preceding twelve months.

For example, even under the Energy Bill Relief Scheme, one Freedom Leisure pool has seen its bill go from £180,000 per year to over £600,000 per year.

It should also be noted that the energy cap is only confirmed to be in place until 31st March 2023. This leaves the sector highly vulnerable and some services potentially unviable. Further information is to be provided by Government regarding the details of the energy cap, the impact on councils and providers, and any further support that may become available. The LGA and ukactive are working closely with Sport England and the Department for Digital, Culture, Media and Sport to ensure they are aware of the latest evidence from the sector.

The approach to managing the impact of higher energy costs and the mitigation actions contained within this note remains crucial given that the cap will not be sufficient to offset previous escalation of costs nor prevent future wholesale utility cost rises beyond March 2023.

For commissioned services, good practice suggests both parties establish the impact of increased utility costs on operational budgets and determine what these are as a proportion of their turnover (e.g. 2019 utilities made up between 10 per cent - 15 per cent of operational expenditure compared to a forecast 25 per cent - 30 per cent in 2023). In-house services may establish a benchmark in comparison to previous years.

1. Collaborative action

Feedback from our survey work suggests that councils and operators consider the following options:

• Work together to establish the impact of increased utility costs on operational budgets and determine what these are as a proportion of their turnover.
• Work in partnership to exit from any relief (i.e. COVID-19 loan schemes) or service changes as soon as reasonably possible, including agreeing contract variations if operational requirements have changed significantly.
• Work in partnership, openly and pragmatically, during the transition to ensure contracts are still relevant and sustainable whilst delivering value in the medium and long term.
• Work within a joint understanding that the economic conditions of the current service is not consistent nor compliant with the conditions when service contracts were entered into.
• For operators that submit data through Moving Communities, using your local reports to present social and economic impact alongside your financial costs to ensure a comprehensive understanding of the impact of any services changes informs your decisions.

2. Service sustainability

Options for securing service sustainability in the short-medium term will include difficult political and operational choices, and good practice suggests full discussion is had in both spheres, and with relevant partners like public health, before a final decision is made.

The list below reflects a menu of options which have been tried in local areas – they will not all be appropriate for every area and each area will need to take an informed decision about what works for them:

• A variation in management fee, if affordable for the council in order to keep the whole service delivered despite the huge escalation in costs.
• Deferment or waiver of management fees paid to councils or bringing forward fees to be paid to operators to assist with cashflow.
• Review concessions against your council’s own policies for your communities. Ensure concessionary pricing is effectively targeted at those groups who cannot afford to pay standard rates and help to meet social outcomes. This may require you to make difficult decisions about to whom concessions are applied and the scale of concessions offered to ensure that they are being applied equitably. You may also identify groups who were not previously receiving support but should now receive it.
• Review prices and programming, including opening hours, to ensure facilities are being effectively utilised and income from fees and charges is optimised.
• You may consider it appropriate to allow your operator(s) to apply a price supplement for those activities that take place in energy intensive facilities, such as swimming pools, and provide the public with transparency as to the impact of energy costs on provision.
• Consider the option for compressed hours of opening; particularly during the winter months where utility demand is greatest, costs remain at their highest and pressure is on the national total energy usage.
• Review the temporary closure of energy-intensive facilities within leisure centres during the winter months (pools, health suites). This could also be where a balance of appropriate activity opportunity can be retained across the council area, or through collaboration with neighbouring councils with good transport links. 
• Review the temporary closure of older, more energy and net carbon inefficient buildings, whilst newer energy-efficient facilities retain services.
• Monitor the impact of any adjustments in pricing and concessions on footfall and participation especially with regard to accessibility and local community representation.

3. Consider contract negotiations

The impact and risk associated with the energy cost crisis is wide reaching and councils are facing considerable financial pressures. As leisure services are reviewed alongside other services, the wider implications their loss will have on local health and productivity may inform that discussion. From a practical perspective, it is highly unlikely that a change of operating model will solve the challenges of rising energy costs so working to manage these risks with your current operator can be helpful in the short-term.

Renegotiating your contracts to share some of the utility cost impacts could include the following measures:

• Supporting a more consistent approach to allocating risk around utilities within contracts, whereby operators continue to carry utilities consumption risk and councils carry utilities tariff risk above defined thresholds. This could also include purchasing of in line with the council’s own procurement.
• Looking to renegotiate contracts to accept some share of utility tariff risk for a defined period (where there is no such provision within a contract) in return for securing reductions in energy consumption and investment in energy saving measures.
• Giving careful consideration to any proposed changes in your contracts to ensure the council is complying with its duties under the Public Contract Regulations, including working with procurement and legal colleagues.
• Reviewing your overall provision, including non-facility based activities.

4. Further Measures

If applying the above measures is not sufficient in moving a contract into a sustainable position, you may be forced to seriously consider the future of your least financially viable and/or most energy intensive facilities (e.g. swimming pools, ice centres, sauna suites).

The ageing nature of a large part of the public sector estate means that the fabric of many buildings is unable to support the changes required to reduce energy usage or add renewable power systems to it. Equally, many of the designs are no longer meeting the needs of the community.

There are significant levels of funding available through the Public Sector Decarbonisation Fund, and it may be appropriate to bring forward any plans for transformation to tackle one of the most energy-intensive parts of a council’s estate. For older buildings that need replacing, it may be necessary to reduce and rationalise the estate in order to fund a new, low-energy facility that will meet the needs of the community for decades to come. This is not without its challenges and political leadership and clear communication with communities will be vital if this route is to be followed.

In these scenarios, councils could consider:

• Carrying out feasibility studies to explore the impact of rationalising their provision and/or upgrading and/or replacing financially unviable and energy inefficient facilities where there is sufficient community demand to support this provision. If you are considering having to remove facilities from your contract(s) and permanently close them, are you are satisfied that there is sufficient alternative provision available within a reasonable travel time, accepting that this may not be possible in every circumstance?
• Working with neighbouring councils to review provision jointly where possible.
• Carefully considering the costs and potential wider implications for physical and mental wellbeing for your local communities and other critical council services, in the event of any closures or reduced opening hours, using any available social value figures such as Moving Communities data.

We would hope that any reduction in overall availability of community leisure facilities is the last resort and only made after the full implications of both the economic and social costs are assessed as well as the economic and social impact on other critical services such as social care, primary care and community safety, social prescribing; and if this is assessed and agreed as critical to the continued provision of the rest of your service for community leisure provision.

The intention of this briefing note is to serve as a support to addressing the situation locally. Should you require any further support please do not hesitate to reach out to [email protected] Adviser, Local Government Association or [email protected], Head of Partnerships at ukactive.

Sport England is making consultancy support available for councils needing additional resource to consider these issues. Please contact [email protected], Director of Capital Investment for more information.