Financing Green Ambitions

Financing Green Ambitions cover
The LGA and Local Partnerships have produced this green finance guide to provide both practical guidance and examples of good practice to support councils in England to find the most appropriate and affordable ways to finance their green ambition.

Foreword

Ongoing concern about the changing climate is high amongst councils and the wider public. In response to this most councils have either declared a climate emergency or formally debated the issue and expressed their concern.

There is a clear need to act, but we are working against a backdrop of 10 years of austerity and budgets depleted further by the economic impacts of the COVID-19 pandemic. The Local Government Association (LGA) undertook a member survey in March 2020 at which time the overwhelming issue most councils were concerned with when tackling climate change was the ability to fund the measures necessary.

Over the last couple of years, the Government has made a series of announcements which impact green finance for councils. Most significantly these include the establishment of the UK Infrastructure Bank (UKIB), announced in November 2020, the response to the Public Works Loan Board (PWLB) consultation in November 2020 and the Net Zero Strategy in autumn 2021. It will be refreshing its Green Finance Strategy (GFS) during 2022.

The LGA and Local Partnerships have produced this Green Finance Guide to provide both practical guidance and examples of good practice to support councils in England to find the most appropriate and affordable ways to finance their green ambition.

This is an updated version of the guide, originally published in December to provide additional information in relation to the UKIB and updated information on grant funding.

We hope you find this guide helpful and that it will support the delivery of a wide range of local authority projects.

Executive summary

1.1 Background

According to the National Audit Office almost two thirds of councils in England are aiming to be carbon neutral 20 years before the national target and 91% of councils have adopted at least one net zero commitment.

Through its work with its member organisations the LGA is aware of significant pressures on delivery of these targets amongst councils. The most frequently reported barriers were amount of funding (97 per cent to a great or moderate extent), accessibility of funding (94 per cent), lack of workforce capacity (92 per cent), internal skills and expertise (77 per cent), conditions of funding (87 per cent), and reliability of funding (74 per cent).

Since the introduction of the Prudential Code for Capital Finance in 2003, the Public Works Loan Board (PWLB) has been a mainstay of local authority capital programmes. In October 2019, the Government announced a review PWLB: future lending terms aimed at finding proportionate and equitable ways of preventing councils from using PWLB loans to buy commercial assets primarily for yield. The review was followed in March 2020 with a consultation. The outcome of the consultation was published on 26 November 2020, together with revised lending terms aimed at preventing investment purely for yield. A key change introduced as a response to the review required councils looking to access PWLB to demonstrate that their borrowing supports service delivery, housing, regeneration or preventative action. The requirement to limit borrowing to investments directly relating to delivery of public services and the function of the local authority is now embedded in the updated Prudential Code. This means that borrowing must be primarily and directly for public services relating to the function of the local authority, irrespective of whether the borrowing is sourced from the PWLB or any other provider of debt such as a bank, bond issue or investment fund.  

The UK Infrastructure Bank (UKIB) was launched in June 2021 and has been lending to its first schemes since Q4 2021, it will be publishing its lending strategy in summer 2022. The UKIB provides access to funding for both councils and private sector organisations. For councils the funds accessed through this source will be cheaper than through PWLB but are only available for larger projects (>£ 5m) which are aligned to the UKIB’s purpose of net zero and local economic growth.

1.2 Central Government

In bringing forward the GFS (GFS) Government has recognised two key objectives:

  • to align private sector financial flows with clean environmentally sustainable and resilient growth, supported by Government action
  • to strengthen the competitiveness of the UK financial sector.

There are three strategic pillars to the strategy to support these objectives:

  • Greening finance – which centres on ensuring climate and environmental factors are integrated into mainstream financial decision making.
  • Financing green – where the focus is on accelerating finance for clean and resilient growth and improving access to finance for green investment.
  • Capturing the opportunity – which aims to cement the UK’s position as a global leader for green finance and ensure the UK is at the forefront of green financial innovation, data and analytics.

Whilst the GFS is not focused on local authority investment, it signals a clear view from the Government that the UK’s net zero emissions target will not be met without tapping into the significant private sector funding available. The GFS is due to be refreshed in 2022, which may involve more specific commentary in relation to councils and it is likely there will be consultation in the coming months inviting input from the sector.

1.3 Measurement and verification

Green finance refers to the financing of new and existing public and private investments with sustainability objectives. Sustainability objectives include renewable energy and zero carbon energy generation and distribution, energy conservation measures, climate adaptation works, migration of activities away from fossil fuel sources, conservation and sustainable agriculture.

Green finance can take many different forms, including green bonds, green loans, a green revolving credit facility, green hire purchase, green lease and asset loans, green grants and mechanisms to create market certainty.

A key feature of green finance is the need to be able to verify that the project has produced the environmental benefits set out in its original business case. The measurement and verification process can take a number of forms, but all should be clear, transparent and auditable. For some schemes there are national or international accreditations that would be a key part of demonstrating environmental benefit. Where these schemes are not available there is a need to develop clear and auditable measures.

In addition to the audit of the benefits delivery there is increasing focus on the emissions produced during project delivery. In June 2021 the Government introduced Public Procurement Note (PPN) 06/21 (Taking account of Carbon Reduction Plans in the procurement of major government contracts) with the aim of reducing carbon emissions in central government procurement. Whilst PPN 06/21 is not mandatory for councils it provides a useful starting point for an evaluation set and is likely to be a requirement for any borrowing from the UKIB.

1.4 Equity and grant funding

Equity covers both direct capital contributions and the leverage of land and other assets in additional finance. Some councils have access to equity funding from reserves, and property assets can also be used as a form of equity.

In addition to equity and assets there are many potential sources of grant funding. Green grants cover areas as diverse as building energy efficiency schemes, flood adaptation work, afforestation and the installation of electric vehicle charging facilities. Grants are used by the Government either to stimulate growth or a particular activity, or to develop a market prior to full commercialisation.

1.5 Debt funding

Green Finance is often used to refer to debt funding of green investment. In addition to PWLB funding, councils are starting to see the emergence of new funding sources which can compete with PWLB, in particular Community Investment Bonds and the UKIB.

When considering debt funding, councils should consider a number of factors as set out in Table 1 below.

Table 1: Characteristics of debt funding sources

Form of debt

Cost of borrowing

Borrowing amount

Security

Proposed due diligence

Comments

Public Works Loan Board

Depends on lending term. 25 Year Annuity Rate at around 3% in April 2022

100%

Lending against revenues of the local authority

Extensive board and council member approval process for project.

 

The PWLB application process is currently deliberately permissive but requires submission of a three year capital plan and s151 officer sign off that borrowing does not include projects primarily for yield.

Borrowing cannot be primarily for yield and must support local authority objectives in service delivery, housing, regeneration or preventative action. (Although this requirement is also applied to any lending not sourced from PWLB and can impact a council’s ability to borrow PWLB in subsequent years for other purposes if it is not adhered to)

UK Municipal Bond Agency (UKMBA)

Highest costs are similar to PWLB, with lowest being around 50bps above gilts (currently 2.5% to 3%)

£ 250m+. The UKMBA will aggregate the requirements of several councils and the sum can relate to delivered projects and future requirements

Against the covenant strength of the local authority. Single authority bonds will require a credit rating score. Pooled bonds require a credit assessment (not published as a rating)

Due diligence focus around the financial standing of the local authority.

Bonds can be expensive and time consuming to put in place, but potentially provide access to long term cheap debt.

Shorter term ‘note’ arrangements can be provided for interim finance whilst a sufficiently large pipeline is developed.

Minimum size for pooled investments is around £5m for a local authority.

Green reporting / verification is tailored and works to utilise existing criteria.

Green lenders

 

Most expensive form of lending at rates equivalent to private sector projects

Typically, up to around 80% of a steady state project

Lending against the project assets

Extensive technical, financial and legal due diligence undertaken by green lender.

As for PWLB, in addition green loans are likely to be specific to both the local authority and the project.

Most likely applicable to joint venture or more commercial projects

Crowdfunding/ Community Municipal Bond (CMB)

Potential to provide capital on terms which are equal or better than PWLB – currently around 3% at April 2022

Potential for 100%, although local authority CMBs above £1m not yet tested

Securing funding against the local authority credit rating, unlike PWLB this may require a credit rating.

Extensive board and council member approval process for projects.

Process that emulates the ease of use of PWLB

As for PWLB

Examples include West Berkshire and Swindon Councils.

 

Salix

Interest free loan

100% no-maximum loan value but amount dependent upon payback period

Lending against the local authority

Compliance tool and business case to assist in application. Responsibility and competence requirements placed on local authority.

As for PWLB

Assurance/audit process post project delivery

UKIB

Gilts + 60bps, at around 2.6% at April 2022.

Project specific

Secured against the covenant of the local authority

Project specific

There will be a requirement for benefits recognition and reporting and potentially for compliance with PPN6/21#

 

The UKIB, UKMBA, PWLB, CMBs and Salix all have a strong role to play in the financing of councils’ green projects. Private sector green finance outside of these avenues is generally more expensive and more restrictive than these instruments in the current state. Unless there are significant market developments it is unlikely that private sector debt will be an attractive alternative for most public sector projects outside of the routes discussed without further aggregation of project pipelines.

1.6 Conclusions

Green finance is ultimately about the funding of sustainable projects, regardless of the source of the finance. It is important that, whatever the source of finance, local authority green projects are able to provide transparent and reliable verification of the non-financial benefits and have an understanding of how they can manage carbon emissions during their delivery stages.

Councils are well placed to access cheap debt finance, both through PWLB, the UKIB, the UKBMA and through the emerging CMB market (see West Berkshire Council example in section 5.4). Financial terms for PWLB and CMBs are likely to be similar going forward, with CMBs providing the opportunity to connect local people to projects in their area but are unlikely to raise all the funding necessary for larger projects. CMBs and PWLB can be blended to support projects where both local connection and larger funding packages are required. The cheapest source of potential funding will be either through the UKMBA or the UKIB, but this is only for larger projects needing to borrow £ 5 million or more.

Other than where partnership working with the private sector is envisaged, there is rarely a need for councils to engage with the more complex and expensive private sector green finance.

The Government has a range of support mechanisms in place including grants and price support mechanisms to some sectors. It is possible that this will be supplemented during the course of the current Government’s term of office.

1.7 Recommendations

Councils looking to invest in green projects should consider the following.

  • Can the project demonstrate it primarily supports the function of the local authority?
  • How will the project’s sustainable benefits be measured and verified?
  • Is there a source of grant funding available for the project? It should be noted that these change from time to time, so it is important to keep up to date.
  • Recent grant funding for energy efficiency projects may be repeated in subsequent years. In order to access funds, it may be necessary to move quickly, so preparing schemes in advance is an advantage when looking to secure grants, if grants are not available this will also assist in seeking alternative means of funding. Councils should also consider using existing energy performance framework agreements to ensure speed of delivery, certainty of benefits and compliance with procurement law.
  • Access to alternative routes for funding have an administrative burden (for example enhanced levels of project specific due diligence) which need to be considered as part of the funding decision.
  • Councils have access to both grant funding and cheap finance, providing a competitive advantage over the private sector where there is competition for assets (such as in the purchase of renewable energy generation capacity).
  • Where councils are offering finance into joint venture projects or to utilise their land assets to leverage projects the implications of state aid and more complex procurement need to be fully factored in alongside the potential benefits of new sources of capital and expertise.

Introduction to green finance

Over the last few years around 75 per cent of councils have declared a climate emergency, with many of these also committing to becoming net-zero emitters of greenhouse gases. Meeting these commitments will require both significant investment into low-carbon infrastructure and the decarbonisation of heat. Even if global greenhouse gas emissions are contained to 2C above pre-industrial levels, the UK will experience a significant increase in temperature, more frequent extreme weather events and rising sea levels. Measures to adapt to a warmer climate will be far reaching and will require significant investment.

In publishing a GFS, the Government has recognised the need for a comprehensive approach to greening financial systems, mobilising finance for clean and resilient growth, and capturing the resulting opportunities for UK firms. The challenge for both the local government sector and the providers of that finance is in finding appropriate mechanisms that provide competitively priced funds and programmes of sufficient scale and resilience to attract them.

Meanwhile the measures taken by councils in support of the response to the COVID-19 pandemic have strained local authority budgets. Green finance will be a key focus of both the recovery and renewal programmes for many councils following the COVID-19 pandemic, and to the future deployment of green infrastructure projects.

From a recent survey of members, the LGA has established that councils face a range of challenges to enacting climate change action. Securing the required resources and staff capacity, including overall funding needs, short-term funding cycles, and lack of clarity on goals or instructions for implementing successful climate change related projects.

LGA Member survey key findings

  • Over four fifths of respondents stated that the limited amount of available funding was a barrier to their authority tackling climate change to a great extent, and no respondents said that amount of funding was not a barrier at all.
  • 49 per cent of respondents said Short-term funding necessitates 12-month contracts.

Barriers to tackling climate change

Respondents were asked the extent to which a variety of factors were a barrier to their authority tackling climate change and found the most frequently reported barriers were amount of funding (97 per cent to a great or moderate extent), accessibility of funding (94 per cent lack of workforce capacity (92 per cent), internal skills and expertise (77 per cent), conditions of funding (87 per cent), and reliability of funding (74 per cent).

Whilst funding appears to be a barrier to the delivery of green ambition, it is the need for long term cheap finance that is prepared to engage in a wide range of projects with long term and variable returns that is needed.

This guidance has been produced to provide practical advice on how councils can access and utilise green finance to meet economic recovery goals and climate emergency ambitions, drawing on examples both from the United Kingdom and international case studies. In authoring this guidance our focus has been on the mobilisation of green projects and we have therefore looked at wider financial measures as well as the various forms of green debt finance available. We have considered both the projects a local authority might directly fund, but also those it may wish to support or stimulate within its geographic area.

2.1 What is green finance?

Green finance refers to the financing of new and existing public and private investments with sustainability objectives. Sustainability objectives include renewable energy and zero carbon energy generation and distribution, energy conservation measures, climate adaptation works, migration of activities away from fossil fuel sources, conservation and sustainable agriculture. Green finance can take many different forms, including green bonds, green loans, a green revolving credit facility, green hire purchase, green lease and asset loans, green grants and mechanisms to create market certainty.

Green financial instruments are very similar to traditional brown finance in that they are defined more by the specific purposes that they can be used for, rather than by any differences in how they operate. The key distinction for green finance is how it can be demonstrated that the investment is producing the environmental benefits it set out to deliver and some products may have penalties linked to failure to verify such. Green finance may also have more stringent requirements attached relating to the decarbonisation activities and ambitions of suppliers responsible for project delivery.

Chapters 4 and 5 of this guidance set out a brief description of green finance options that are available to councils. It is possible to use traditional ‘brown’ finance for green projects and in particular councils should be mindful of specific requirements to audit or certify green benefits or any penalties that apply in the event that this is not achieved.

2.2 UK Government GFS

On 2 July 2019, HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) published the GFS, which establishes the Government’s direction on financial markets intervention against the backdrop of the UK’s statutory commitment to reduce greenhouse gas emissions to net-zero by 2050. The GFS has two key objectives:

  • to align private sector financial flows with clean environmentally sustainable and resilient growth, supported by Government action
  • to strengthen the competitiveness of the UK financial sector.

There are three strategic pillars to the strategy to support these objectives:

  • Greening finance – which centres on ensuring climate and environmental factors are integrated into mainstream financial decision making.
  • Financing green – where the focus is on accelerating finance for clean and resilient growth and improving access to finance for green investment.
  • Capturing the opportunity – which aims to cement the UK’s position as a global leader for green finance and ensure the UK is at the forefront of green financial innovation, data and analytics.

Of interest to councils is the financing green strand of the strategy which seeks to mobilise and accelerate private capital flows into clean growth and environmental sectors to support the delivery of the UK’s carbon targets. The Government recognises that public sector funding alone will not be sufficient to deliver the transition to environmentally sustainable growth, and as such is focused on mobilising private finance and removing associated market barriers. It is anticipated that this strategy will be updated during 2022.

2.3 Role of institutional investment

A lot of attention is placed on the role and influence that institutional investors can have in delivery of a GFS, largely due to the scale of funds at their disposal. The latest data from the Office of National Statistics indicates that the total assets held by insurance companies, pensions funds and trusts in the UK is approaching £5 trillion. Within that, from a local government perspective, the 88 funds that make up the Local Government Pension Scheme had assets approaching £340bn as at the end of March 2021.

These investors have a primary responsibility to their clients and members in terms of being able to generate growth and returns that can meet their obligations as they fall due. Inevitably, this has meant and continues to mean holding investments in businesses reliant upon fossil fuels, ranging from multinational oil and gas companies to firms involved in carbon intensive manufacturing.

However, institutional investment is seeking to reduce its exposure to carbon as a result of the policy and legislative shifts of governments in response to climate change, the demands of their clients whose funds they are holding and the corporate recognition of their fiduciary duty to be a responsible investor. This is manifesting itself in a number of ways such as using influence as shareholders to ensure de-carbonisation plans are delivered and increasing investments in renewable energy initiatives. If this is to become a long term sources of direct finance to publicly sponsored green project delivery then there will need to be better means of aggregation for project pipelines to develop the scale necessary to deliver affordable finance.

In January 2021, the All-Party Parliamentary Group for Local Authority Pension Funds launched an inquiry into the role pension funds can play in helping the economy transition to a net zero position in a way that is fair and just. This is considered to involve balancing both the environmental and social considerations including, for example, the impact on workers and places who rely on carbon intensive industries.

From a finance perspective, the report recommended that funds need to give due weight to ‘just’ transition risks in their capital allocation and that policy statements should be used to guide investment decisions, including those of fund managers.

How such funds allocate capital and the type of investments they make will vary according to yield requirements. The principles set out in the next section of this guide equally apply to institutional finance whether that is provided on a debt or equity basis. Examples include purchasing portfolios of operational assets; partnership ventures involved in earlier stage project development and indirect investment through specialist infrastructure funds.

Underlying principles

Finance is fundamentally a combination of equity and debt, i.e. money you own and money you borrow.

3.1 Risk and finance

There is a direct relationship between risk and the cost and availability of debt finance, this applies to green finance as it does to any other form of finance.

The more that risks can be reduced, the lower the rate of interest that will apply and the easier it will be to obtain debt finance. The blend between equity and debt is usually driven by a combination of the risks associated with the project and the covenant strength of the borrowing party. The higher the risk the greater the proportion of equity likely to be required.

Some projects may not be fundable for debt and equity as the associated risks are deemed to be too high. The examples below set out why this might occur and various instruments that have been employed by the Government to avoid market failure.

  1. An initiative is new or emerging and there is not a tried and tested delivery model. An example of this would be the introduction of wireless charging for electric taxis where the Office for Zero Emission Vehicles (OZEV)  intervened to provide some grant funding for a pilot project to prove the concept and support more widespread rollout.
  2. Financial returns are insufficiently certain. An example of this would be large scale renewable energy generation where the Government has put in place the Contracts for Difference (CfD) mechanism to provide price certainty (without providing subsidy).
  3. The market is not sufficiently developed or there is no guaranteed route to market. An example of this would be small scale renewable energy generation where the Government has put in place the Smart Export Guarantee (SEG) scheme. This provides a guaranteed route to market for small scale renewable energy projects, without providing either price certainty or subsidy.

3.2 Evolution of project risks

Total risks within a project reduce and evolve as it progresses from concept through feasibility to procurement and construction and onto steady state operation. Different types of finance will be applicable to different stages of the project. The cost of finance; and the terms of finance can be subject to change at each phase. It is common to change the finance in commercial projects once they become operational. An example of this is the refinancing of PFI projects. Figure 1 shows this in more detail.

All private sector finance will follow these principles, however some public sector finance, such as the PWLB is based on the statutory status and strength of the local authority, as opposed to the risks associated with any particular project or programme.

An understanding of private sector financing mechanisms is important where the local authority is acting as a partner or guarantor in a scheme. Where this is the case, the local authority should check carefully whether such arrangement is permissible under subsidy control regulations.

 Finance type and availability through project phases
Figure 1. Finance type and availability through project phases

3.3 Transaction structures

A local authority may need to consider potential transaction structures for a number of reasons. These are likely to include:

  • the need or desire to put a project at arm’s length to the local authority by virtue of it involving commercial trading activity
  • the local authority working in partnership (either formal or by other arrangement) with external parties – which may be public or private sector
  • the local authority extending support to a third-party scheme through the inclusion of assets, finance or funding.

Aside from specific requirements of individual parties to a project, the overall transaction structures are largely shaped by risk and tax factors and will need to be considered on a project specific basis.

In partnership projects, the local authority with its access to capital finance can decide on what funding role it wishes to play at each stage, dependent on the risks and opportunities. If the project involves partners alongside the local authority, then limited liability partnerships have become the favoured vehicle because of their tax transparency with each party’s share of profit being assessed for tax as part of their respective corporation tax position. For councils, it means their share of profit is not reduced for tax as they are not liable for corporation tax.

3.4 Differences between public and private sector financing

Private sector financing

Typically, private sector financing will be a combination of debt and equity, with the debt being layered according to the level of risk as follows:

  • Senior debt – up to around 80 per cent of a steady state project may be fundable through senior debt. Interest rates are lower reflecting the security that it has in the event of project failure and payment default.
  • Junior debt (sometimes referred to as mezzanine finance). This can be used to reduce the amount of equity required to fund a steady state project. Junior debt has a second call on resources in the event of project failure (behind the senior debt) and the interest rate is higher to reflect the higher level of risk.
  • Construction finance – private sector finance during a construction phase is generally significantly more expensive than either senior or junior debt. Typically interest rates are four or five times higher to reflect the greater project risk prior to completion and commissioning.
  • Project development finance – this is specialist and often not available in isolation, it is more often found when accompanied by a project development service. Where development finance is available, the interest charged is generally very high and based around a share of the overall value of the asset created. The risk profile for project development finance is similar to that of equity.
  • Equity – almost all projects will require a degree of equity funding. As the project progresses through the development phases and certainty increases, the proportion of equity required falls from 100 per cent initially to as low as 5 per cent on some heavily geared projects. Equity always takes the highest level of risk and consequently expects the highest rate of financial return.

Private sector funding is generally project specific and looks to secure lending against the project assets. It is common for private sector projects to refinance once they have achieved steady state. This enables senior debt to be drawn in and equity released for other projects. The ratio of debt to equity is known as gearing and can produce significantly higher returns for the retained equity investment.

For example, if a £10m investment produces an overall return of 8 per cent then an equity investor would receive an annual return of £800,000. If however, the project was geared at 80 per cent with debt funding borrowed at 4 per cent interest then the equity investor’s cash investment would be reduced to £2m and the annual return would be £480,000 after paying interest – representing a return of around 24 per cent on the retained equity investment whilst also releasing £8m to invest in new projects.

Public Sector debt funding

Typically, councils take a different approach to borrowing and will use their overall standing and covenant strength to borrow and fund a programme of activity. The borrowing is secured against the authority rather than against specific projects.

This approach usually provides cheaper overall finance with fewer hurdles to draw down funding than private sector alternatives. Long term interest rates available to councils are similar to senior debt finance rates.

The relatively low interest rates and ease of securing the lending mean that there need to be specific reasons why a local authority project would want to consider private sector debt funding.

3.5 Measurement and verification

A key feature of green finance is the need to be able to verify to project stakeholders that the project has produced the environmental benefits set out in its original business case.

The measurement and verification process can take a number of forms, but all should be clear, transparent and auditable. For some schemes there are national or international accreditations that would be a key part of demonstrating environmental benefit.

Recognised verification standards

Recognised verification standards vary from time to time and it is important to check at the point of committing to a project what the current standards for that type of project are. Recognised schemes provide some form of auditable and widely accepted methodology to provide a high degree of confidence to investors and customers that the scheme delivers the green benefits it promises.

Some currently recognised verification standards in the UK which would be applicable to green finance include:

  1. Renewable Energy Generation of Origin (REGO) certificates. REGOs are provided by the Office of Gas and Electricity Markets (OFGEM) and provide certainty that electricity has been generated from renewable sources. These are useful for the generator in relation to verification, they can become more problematic for a consumer as the scheme allows the REGOs to be traded independently of the electricity units supplied.
  2. The Woodland Carbon Code (WCC) is the UK’s voluntary carbon standard for woodland creation projects. It provides reassurance about the carbon savings that woodland projects may realistically achieve through the issue of Woodland Carbon Units (WCU). WCUs can also be sold as part of an offsetting scheme to generate additional income.
  3. National Cycle Network accreditation through Sustrans.

Other forms of verification

Where there is no accredited verification scheme there are often still clear and straightforward means of verification. Examples would include:

  1. Changes in units of fuel consumed (e.g. kWh of electricity, or litres of diesel). This would need a baseline to work from and ongoing measurement and verification post implementation. Integrating Measurement and Verification into an Energy Performance Contract (EPC) brings standardisation and transparency, and certainty to the project outcome. It is increasingly recognised as a way of boosting stakeholder confidence in energy efficiency projects, particularly where services are funded through the financial value of the savings achieved. For example the Re:fit Framework (see section 5.8.2) suggests the use of International Performance Measurement and Verification Protocol to verify the savings achieved by Energy Services Companies.
  2. Changes to waste and recycling rates in an area measured in tonnes collected.

Verification can be bespoke to a project – but needs to be specific, measurable, achievable, realistic and timely and aligned to the original purpose of the project. Verification reporting should always be public.

Equity

4.1 Forms of equity

Reserves are the most commonly cited form of equity for councils, together with capital assets. Grant funding can also be considered as a source of equity for some projects.

Grant funding has some of the characteristics of green debt, especially in relation to the measurement and verification of outcomes. In pure finance terms it may not require security over the project assets or other financial recourse in the event of project failure and no interest payments are due. Grants often have a ‘clawback’ clause which recovers grant funding in the event that the project or scheme is discontinued or deviates from its original purpose to the extent that it would be unable to deliver the benefits originally envisaged. The clawback is similar to the financial recourse provisions of debt funding but applied in more specific circumstances. The interaction between any recourse and clawback provisions on a project need to be carefully thought through.

4.2 Equity and associated sources of funds

Definition and application

Equity represents ownership in a project and the level of ownership adopted by a local authority will be determined by a number of factors including the investment choices available. Conventionally, equity may be offered to raise funds but if the local authority holds the role of project originator, it would not need to share equity solely for those purposes given its ability to access capital. It may, however, wish to share equity as part of managing risk e.g. the local authority may seek a development partner with expertise and experience that it cannot source internally. Furthermore, it may need to share equity with partners by virtue of circumstance in order for the project to proceed e.g. for a renewable energy project the local authority may not own the land on which the project is sited or hold the grid connection offer. Our separate guidance (Renewable Energy Good Practice guidance for the LGA) discusses these issues in more detail.

Potential sources of equity

Local authority reserves are the main source of local authority equity for projects, although some authorities have also developed Section 106 planning policy (s106) which has allowed them to collect funds from developers for green projects and this is a further potential source of equity funding. Funds generated from this source will require spending within five years of collecting and must be used in compliance with the s106 policy.

It is possible that any future changes to the planning regime may impact the ability of councils to collect and direct s106 funding.

Other forms of equity contribution might include use of resources without recharge, or the contribution of land or other assets to a project. Where land assets are involved there will be a need to demonstrate that the project provides best value.

When grant funding is available this can supplement or replace a direct equity contribution.

4.3 Sources of grant funding

Post European Union (EU) Exit the Government is likely to be the source of most grant funding available to UK councils. The Government typically offers grant funding in one of the following situations:

  • There is a need to prove concept and build investor confidence. This may be for research work or project pilots etc.
  • There is a need to stimulate a particular section of the market, especially where there is market failure or market change is desirable, but not happening quickly enough.
  • To provide economic stimulus through the direct procurement of goods or services, but where the Government is unable to procure them directly.

Where grants are provided this is generally for a specific period and they are then closed or withdrawn. Examples of green grants currently available are set out in the sections below. These are not exhaustive, and it is important that a local authority looks for current grant funding when developing a scheme. There have also been further funding announcements in the Ten Point Plan for a Green Industrial Revolution and whilst the specifics of how these funds can be accessed is not yet clear the following additional funding was identified:

  • £200 million to create two carbon capture clusters.
  • £500 million for hydrogen projects.
  • £525 million for new large and smaller-scale nuclear plants.
  • £1.3 billion for electric vehicle charging infrastructure.
  • £582 million support for the purchase of ultra-low emission vehicles.

Heat networks

The Government is committed to achieving net-zero greenhouse gas emissions by 2050. Meeting this legal commitment will require virtually all heat in buildings to be decarbonised, and heat in industry to be reduced to close to zero carbon emissions. Presently, heat is responsible for a third of the UK’s greenhouse gas emissions. As such, heat networks are a crucial aspect of the path towards decarbonising heat. In the right circumstances, heat networks can reduce bills, support local regeneration and can be a cost-effective way of reducing carbon emissions from heating.

There is already a growing heat network market in the UK which is supported by Government commitment. This is through the Heat Network Investment Project (HNIP) of up to £320m and the work of the Heat Network Delivery Unit (HNDU), supporting councils and project developers in the early phases of scheme development.

Heat Networks Delivery Unit

The Heat Networks Delivery Unit (HNDU) was established as part of the Government’s decarbonisation strategy. The Unit provides funding and specialist guidance to councils who are developing heat network projects, supporting them through a number of project development stages. All councils in England and Wales can apply for support. Since its inception in 2013, HNDU has awarded support to over 250 schemes across over 150 councils in England and Wales, including £23m of grant funding.

HNDU grant funding can provide up to 67 per cent of the estimated eligible external costs of heat network development studies (where ‘eligible external costs’ means the money paid by the local authority to third parties to deliver the heat network development stages). The local authority will need to demonstrate in their application that it has secured at least 33 per cent in match funding. HNDU grant funding can also provide up to 100 per cent of the cost of estimated externally procured project management support.

Since its inception, HNDU has run 11 funding rounds. Round 11 closed on 31 December 2021. More information can be found on the HNDU guidance page on the .gov website.

Heat Networks Investment Project (HNIP)

In tandem with HNDU, the Government is investing up to £320m through HNIP to support the commercialisation and construction of heat networks across England and Wales. This provision is through capital grants and loans.

To date, HNIP has funded over £150m for over 30 projects across England. The HNIP delivery partner (Triple Point Heat Networks Investment) has a dedicated investor relations team that engages with the investor community and broadens the reach of heat networks investment by raising third party finance for projects applying to HNIP. For more information visit the HNIP overview and application page.

Green Heat Network Fund (GHNF) transition scheme

To capitalise on the progress made by HNIP, and to support the development of low and zero carbon heat networks the GHNF has been created. It is a capital grant open to public, private, and third sector applicants in England. The GHNF was launched in March 2022, with funding rounds taking place on a quarterly basis with award notifications anticipated two months after application. The timing of funding rounds and further information can be found in the Green Heat Network Fund guidance.

One Public Estate (OPE) – ninth round (now closed)

The OPE programme is an established national programme delivered in partnership between the Office of Government Property in the Cabinet Office, the LGA and the Department for Levelling Up, Housing and Communities (DLUHC). Their joint aim is to bring public sector bodies together, to create better places by using public assets more efficiently, creating service and financial benefits for partners and releasing land for housing and development.

The ninth round of funding placed particular emphasis on the Government’s commitment to level up. For more information and to keep on eye on future funding from OPE please visit One Public Estate and Land Release Fund prospectus.

Governments £1bn Public Sector Decarbonisation Scheme (PSDS)

BEIS launched the PSDS on 30 September 2020 delivered by Salix Finance. There have since been two further rounds of funding, totalling £3.175bn over the period to 2024/25. The scheme allocates grant funding for capital energy efficiency and heat decarbonisation projects within public sector non-domestic buildings including Government departments and arm’s length bodies in England with the aim of delivering the following objectives:

  • deliver stimulus to the energy efficiency and heat decarbonisation sectors, supporting jobs
  • deliver significant carbon savings within the public sector.

The purpose of the grant scheme is to help make eligible buildings more energy efficient and install low carbon heating measures, for example, insulation, glazing, heating controls, and heat pumps (eligible technologies are split into 4 different categories). The cost to save a tonne of carbon (CO2e) over the lifetime of the project must be no more than £500, which is automatically calculated by the support tool in the grant application form.

The scheme allows public sector bodies to apply for a grant to finance up to 100 per cent of the costs of capital energy-saving projects that meet the scheme criteria. For more information about the scheme and to monitor the potential for future phases please visit the Salix Finance website.  

Local Partnerships and the Greater London Authority own and run the Re:fit 4 Framework which is a procurement initiative for public bodies wishing to implement energy efficiency measures and local energy generation projects on their assets (see section 4.8.2). Current Re:fit Framework users can use the opportunity to review existing project briefs and develop projects eligible for BEIS grant funding, particularly projects that were previously discounted (such as insulation and glazing) because of long pay back periods (25 years plus). Local Partnerships can also support councils’ preparation for grant applications in this respect.

These grants and the Green Homes Grants have been offered as part of a COVID-19 economic stimulus package. The 2019 Conservative Party manifesto committed to a larger sum of public funding for energy efficiency in buildings than has currently been announced (£9bn as opposed to the £4 billion announced to date). It is possible that further iterations of this funding may become available in future years.

Public Sector Low Carbon Skills Fund (now closed)

The Public Sector Low Carbon Skills Fund was available alongside the Public Sector Decarbonisation Scheme. It provided grants to help all eligible public sector bodies to source specialist and expert advice to identify and develop energy efficiency and low carbon heat upgrade projects for non-domestic buildings, before preparing robust and effective applications to the Public Sector Decarbonisation Scheme. Two rounds of funding have closed. If there are future rounds of the Public Sector Decarbonisation Scheme there may be future rounds of this fund which it is anticipated would be detailed on the Salix website.

Energy Company Obligation Flexible Eligibility (ECO FLEX) grants

Energy Company Obligation (ECO) is a Government energy efficiency scheme to help reduce carbon emissions and tackle fuel poverty. ECO 4 is a £1bn programme and is available from April 2022 to April 2023. The aim of the scheme is to install energy efficiency measures in properties that are currently energy inefficient which in turn reduce households’ fuel bills. ECO provides qualifying residents the opportunity for potential improvements such as a new central heating system, upgrades to the existing heating system and/or insulation measures.

The ECO scheme is only available through energy providers, it is not available to councils to deliver home energy efficiency improvements. However, under the ECO FLEX, councils are permitted to identify and designate households as eligible under the Affordable Warmth Scheme. £500m of the total budget for ECO 4 will be assigned to ECO FLEX. 

To participate in the ECO FLEX scheme councils must publish a Fleixble Eligibility Statement of Intent which identifies an income threshold, cost or vulnerability criteria at a local level, ensuring that funding reaches those communities that are often least engaged with the energy market. Once households are identified, the declaration confirms the eligibility against the statement of intent’s criteria.

Further details of how to apply are available of the OFGEM website, and councils are encouraged to follow the guidance on the BEIS website

The Green Homes Grant – Local Authority Delivery (LAD)

The LAD scheme was launched in August 2020 and aims to raise the energy efficiency of low income and low energy performance homes with a focus on energy performance certificate ratings of E,F or G. It was delivered in phases, with phase 1A and 1B aiming for delivery of projects to be concluded by March 2022.

Phase 2 of the funding saw £300m funding allocated between the five Local Energy Hubs, to then be distributed to councils to deliver energy efficiency upgrades in low-income homes across England by the end of March 2022.

Local Partnerships was commissioned by BEIS via the five regional Energy Hubs to produce this Local Authority Housing Retrofit Handbook to provide practical advice to councils in England. It brings existing resources together in one place, and to find out what’s going on in your area, please visit your local net zero hub at the links below:

Tree planting

Current grants for tree planting include the Local Authority Treescapes Fund and the Urban Tree Challenge Fund, the Local Authority Treescapes Fund and the Urban Tree Challenge Fund.

Over £9 million will be allocated to successful applicants across these funds.

Local Authority Treescapes Fund

Now in its second round, successful applicants to the Local Authority Treescapes Fund will be allocated a share of £5.4 million for the planting of up to 650,000 trees in 2022/23. Projects will support councils to establish trees in different ways, from natural regeneration (where trees are left to naturally develop) to traditional planting. Community engagement is encouraged, and councils can bring together local residents, schools and environmental groups to restore trees in areas outside woodlands. These include riverbanks, parks, beside roads and footpaths, and within vacant community spaces – areas where treescapes are often highly degraded due to neglect or disease.

Urban Tree Challenge Fund

Trees make our towns and cities healthier and more pleasant places to be, helping to moderate temperatures, reduce pollution, decrease flood risk and improve people’s quality of life. If successful, applicants to the fourth round of the Urban Tree Challenge Fund will be awarded a share of more than £3.8 million – enough to fund the planting of over 28,000 large trees in both urban areas, and where rural and urban areas meet. This funding aims to grow the number of trees in and around deprived urban areas to bring people from all socio-economic backgrounds closer to nature.

There are several key differences between the Local Authority Treescapes Fund and the Urban Tree Challenge Fund. You can read a Forestry Commission blog outlining these differences and offering guidance on how to apply for both funds.

Applications for both funds are now open until 11:59pm on Tuesday 31 May 2022.

For more information and to apply, go to Local Authority Treescapes Fund and the Urban Tree Challenge Fund pages on the gov.uk website.

Tree Production Capital Grant

The Forestry Commission will open a new Tree Production Capital Grant this spring. The Tree Production Capital Grant will provide funding to increase the domestic production of tree seed and saplings, supporting investments in expansion, automation and mechanisation of facilities and equipment. This will help improve not only the quantity but also the quality, diversity and biosecurity of supply.

Applicants will be able to apply for up to 50 per cent of the costs for capital projects and equipment such as: intelligent transplanting systems; polytunnel infrastructure and equipment; irrigation systems and infrastructure; seed trays; grading machines; biosecurity investments such as water treatment and refrigeration equipment.

The grant will enable suppliers to bolster production at pace and has been designed to complement the innovation outputs of the Tree Production Innovation Fund, which provides support for research projects that will enhance UK tree production methods. 

To be eligible for funding, applicants must be UK-based and will need to demonstrate how the grant will be used to increase English tree seed or sapling supply.

To receive the latest news on the grant, sign up to the Forestry Commission’s e-alert. For more information, please contact tpcg@forestrycommission.gov.uk or read the Forestry Commission’s latest blog on the Tree Production Capital Grant.

Woodland creation funding and grants

There are various sources of funding available for woodland creation in the UK, which are summarised below. Further information can also be found in the leaflet on responding to the climate emergency with new trees and woodlands.

Woodland Creation Planning Grant (WCPG)

The WCPG provides funding to help cover the costs of producing a UK Forestry Standard compliant woodland creation design plan, which can support applications to other funding sources for woodland creation, such as the Woodland Carbon Fund (see below).

This grant contributes to the costs of gathering and analysing information needed to make sure that any proposal for productive multi-purpose woodland (over 10 hectares) considers impacts on biodiversity, landscape, water, the historic environment and local stakeholders. The grant scheme operates in two stages, which in total will provide £150 per hectare, up to £30,000 per project.

Woodland Carbon Code (WCC)

The WCC is the national standard for verifying and validating carbon savings from afforestation projects in the UK. Accredited schemes have the opportunity to sell ‘carbon credits’ which represent CO2 savings generated by the new woodland. This can provide an additional source of revenue if, for example, a project is not cost-effective with Woodland Carbon Funding WCF funding.

Woodland Carbon Guarantee

In November 2019 the Government announced a new £50 million scheme, the Woodland Carbon Guarantee, aimed at promoting afforestation, whereby the Government would agree to purchase WCC carbon credits from a participant at an agreed price set by auction. Instead of a grant or loan towards the cost of woodland creation or maintenance, this scheme offers WCC participants a guaranteed income over a 35-year period, although they may choose instead to sell carbon credits on the open market.

The next WCG auction will take place in 2022. The date will be published on the WCG webpage. In order to apply you must first register your project with the Woodland Carbon Code.

England Woodland Creation Offer

The England Woodland Creation Offer (EWCO) provides landowners, land managers and public bodies the opportunity for support to create new woodland, with possibility of receiving over £10,000 per hectare. For more information view the Woodland Creation's leaflet.

Green vehicle related funding

The Government offers grants to support the wider use of electric and hybrid vehicles via the Office of Zero Emission Vehicles (OZEV). The total funding committed to support the transition to zero emission vehicles is £3.5 billion. £620m has been targeted for electric vehicle grants and infrastructure, with a focus on local on-street residential charge points.

The Government’s new UK Electric vehicle infrastructure strategy was published in March 2022, confirming £1.6 billion of public funding for charging points. £450m of this will be used to create a Local Electric Vehicle Infrastructure Fund (LEVI), under which councils will be able access funding to install charging hubs and on-street charging points. A £10m pilot scheme has been launched for the fund and is anticipated to fund between three and eight projects. Councils and partnerships in England can apply for funding under the pilot scheme. To apply you must send an expression of interest email to Energy Saving Trust with the email subject LEVI expression of interest and the completed application must be submitted by 11:55pm, 17 June 2022.

For more information on the LEVI, its eligibility criteria, and details on how to apply visit the LEVI guidance page.

The pilot fund is complementary to the existing On-Street Residential Chargepoint Scheme (ORCS). whereby councils can apply for funding to help with the costs of procurement and installation of on-street charging points for residential use. Councils are able to receive a grant to part fund (75 per cent) of the capital costs. OZEV will provide up to £6,500 per chargepoint installation, and each project should not exceed more than £100,000 in OZEV funding. More information can be found here.

The Workplace Charging Scheme is a voucher-based scheme that provides support towards the up-front costs of the purchase and installation of electric vehicle charge-points, for eligible businesses, charities and public sector organisations. You can apply by completing the Workplace Charging Scheme application form.

The Department for Environment Food and Rural Affairs (DEFRA) Air Quality Grant Programme provides funding to eligible councils to help improve air quality. It is focused on air quality issues (such as NOx and particulates) and supports a wide range of initiatives such as establishing low emissions zones, retrofitting fleets with low emission technologies and traffic measures. It has also funded electric vehicle chargepoint infrastructure.

Active travel and cycles lanes 

In July 2021 a £338 million package to boost cycling and walking across the country was announced. The package includes funding to build hundreds of miles of high-quality cycle lanes and is part of the government’s commitment to build back greener from the pandemic.

Local transport authorities outside of London were given funding through the Capability Fund.

Additional sources of green funding, which flow from the Government’s 2018 Clean Air Strategy, are as follows:

  • The Bus Services Act 2017, which includes a range of measures to improve bus services through franchising and better partnership working. Councils and bus operators are encouraged to agree a package of improvements to introduce bus priority measures to reduce idling and journey times, or to introduce Ultra Low Emission Vehicles along key routes.
  • In March 2021 up to £120m was made available through the Zero Emissions Buses Regional Area scheme to help local transport authorities, outside of London, introduce zero-emission buses. Applications are no longer being accepted, but a further £150m was made available in the October 2021 spending review, to support the scheme, taking the total funding to £270m in the financial year 2021 to 2022.
  • The National bus strategy, “Bus back better” was published in March 2021, guidance to councils and bus operators can be found here.
  • The Cycling and Walking Investment Strategy published in 2017 identifies £1.2bn of funding to be invested in cycling and walking from 2016 to 2021. This has already included £101m made available through the Cycle City Ambition programme to improve cycling infrastructure in eight cities, and £80m to support local projects to improve safety and encourage cycling.

Shared Prosperity Fund

The Government has announced a UK Shared Prosperity Fund (UKSPF) in the 2021 Spending Review the fund is worth £2.6 billion over the period to 2024-25. Further details can be found on the UKSPF website.

The national planning system and greenspace mapping are examples of further programmes which benefit cycling and walking infrastructure and will directly result in increases to cycling and walking activity. The Healthy New Towns programme, supported by NHS England and Public Health England, was launched on 1 July 2015.

The Community Infrastructure Levy and s106 contributions allow councils in England and Wales to raise funds from developers undertaking new building protects in their area in order to help provide vital infrastructure, based on local priorities. These funds can be used to for a wide range of infrastructure, including transport, parks and green spaces, cultural and sports facilities, provided the scheme has sufficient resources and the local authority has compliant policy in place to enable funds to be collected for the purpose.

The Cycle to Work Scheme is a tax-efficient, salary-sacrifice employee benefit, introduced in the 1999 Finance Act, which provides a way of encouraging more adults to take up cycling. Employers are able to loan cycles and safety equipment to employees up to the value of £1,000. At the end of the loan, an employer can offer the cycle for sale to the employee, but at the full market value. Electric vehicle salary sacrifice schemes also exist which enable an employee pay for an electric car each month using their gross salary. It’s the same as other salary sacrifice schemes, such as childcare, cycle to work schemes or pension contributions.

Flood defence

Lead local flood authorities (unitary authorities or county councils) have the lead operational role in managing the risk of flooding from surface water and groundwater. In areas with no district council, they also have the lead role in managing flood risk from ‘ordinary watercourses’, for example any watercourse that isn’t a main river.

A flood risk management authority can apply for grant-in-aid (GiA) to fund Flood and Coastal Erosion Risk Management (FCERM) projects. A highway authority or water authority can only apply for a GiA for projects to reduce flood risk which are outside its normal area of responsibility. More information can be found tn the FCERM guidance. Further details on funding arrangements can be found on the LGA’s flooding funding arrangements webpage.

Peat/habitats improvements

The UK Peatland Strategy identifies a target for two million hectares of peatland to be in good condition, under restoration, or sustainably managed by 2040. In the March 2020 budget, the Government announced a £640m Nature for Climate Fund to plant more than 40 million trees and restore 35,000 hectares of peatland in England.

The fund is to be used to dramatically increase the rates of tree-planting in England along with funding more research into the most appropriate species to plant across the country, a scaling up of the nursery sector to grow saplings, establishing new partnerships with landowners, and increased planting rates on sites. As part of the budget the Government also announced a Nature Recovery Network Fund of £25m to support habitats and species action in nature recovery areas.

4.4 Other significant government funding sources

Whilst not specifically ‘green funding’ it is anticipated that successful bids to national schemes such as the Shared Prosperity Fund  and the Levelling Up Fund will need to demonstrate their green credentials.

Debt

​​​​​​5.1 Forms of debt

Debt funding comes in many forms and from a wide range of providers. However, it can be split into forms which are secured against a particular asset and forms which are secured against the activities of the local authority.

Securing funding (usually either PWLB, a municipal bond or a CMB) against the local authority reduces the level of overall lending risk and therefore provides access to lower rates of interest.

There are further market interventions which can be used to reduce risk and therefore reduce interest rates and increase the availability of debt. These generally take the form of providing surety for a debt or guaranteeing the availability and value of income streams.

Councils are able to access debt in a variety of different forms. The selection of one form of debt over another will be specific to both the local authority and the project.

5.2 PWLB

The PWLB is one of the main lenders to councils and accounts for around two thirds of local authority debt. Since the introduction of prudential borrowing, the PWLB has normally offered the lowest rate of interest available to councils and is provided on a more flexible basis than most private sector funding. Lending is structured around the statutory provision of the local authority as opposed to specific projects. PWLB borrowing is automatically secured on the revenues of the local authority rather than by reference to specific project revenues, assets or collateral. This enables lower interest rates and entails significantly less external due diligence on individual projects than other forms of borrowing.

The Government published new lending terms for PWLB on 26 November 2020, primarily aimed at introducing proportionate and equitable ways to stop councils investing in commercial assets primarily for yield.

The new lending terms introduce specific requirements:

  • Submission of a high-level description of capital spending and financing plans for the following three years, including their expected use of PWLB.
  • The s151 officer to confirm that there is no intention to buy investment assets primarily for yield during the next three years as part of that submission and when applying for a new loan.
  • Lending to be for the purposes of service delivery, housing, regeneration or preventative action. The Government has issued guidance rather than developing strict definitions in recognition of the complexity of the sector .

PWLB was used by Warrington Borough Council in the acquisition of two solar farms in Yorkshire as set out in case study below.

Case Study 1: Warrington Borough Council – PWLB

Carbon accounting practice does not allow councils to buy a green tariff electricity and claim the carbon benefits, instead the grid supplied intensity rate applies. If a council generates its own renewable electricity from a directly owned or identified source then it is possible to account for the carbon savings, provided additionality (i.e. new provision) can be demonstrated. Most councils are large users of electricity and in 2018 councils collectively spent over £863m with the big six energy companies. As energy is one of the largest controllable overheads in council buildings, many councils have looked at offsetting the retail cost of electricity and to generate income through energy generation. One such example is that of Warrington Borough Council which acquired two solar farms to sleeve the power back to themselves, and in doing so benefit from price certainly on their wholesale electricity costs.

The first, a hybrid solar farm consists of a 34.7MWp solar farm plus a 27MW battery storage facility. The project is located near York and completed construction in December 2019 by the Council’s contractor Gridserve. The second, a 25.7MWp solar farm in Hull was completed in spring 2020 (also by Gridserve). Both projects were developed subsidy free with electricity from the York solar farm being sold on the open market whilst the Hull site supplies all the Council’s own energy needs. The Council has put a contract in place with Gridserve to operate and maintain both projects over their lifetimes.

The Council funded this through a PWLB loan, with loan payments being supported by a Power Purchase Agreement (PPA) where the Council signed a long-term agreement to buy the electricity generated by the Hull solar park to power its own operations. This secured a revenue stream for the project to get financed, without the need for a Government subsidy, and guarantees zero carbon electricity is being used by the Council.

5.3 UKMBA

The UKMBA is publicly owned with its shareholders being the LGA and 56 councils. Councils have the power to issue bonds, an IOU that can be traded on the financial markets, but it is not currently a common activity due to the cost, time and fees involved relative to the cost and flexibility offered by the PWLB. The UKMBA provides councils with a clear and effective route to market, either for a single or a pooled bond. Bonds can provide cheaper finance than PWLB and interest rates are outside the direct control of Government.

Bonds are raised against the covenant strength of the local authority and for single bonds (i.e. one local authority) a credit rating will be required. For pooled bonds the UKMBA will undertake financial due diligence on the councils which will not result in a published credit rating. The UKMBA is able to issue certified Environmental, Social and Governance (ESG) bonds for compliant projects and has a published certified framework for these. ESG bonds attract a lower interest rate than standard bonds and provide finance which is potentially cheaper than PWLB.

The reporting requirements are relatively light touch and seek to rely on criteria the local authority have already developed to support their project reporting.

Bonds require a minimum size of £ 250m borrowing which can be either from a single local authority or a pool of councils. The UKMBA will broker any pooled arrangements. Projects can be refinanced through this route and a local authority is able to include both projects which have been completed within the last three years and projects which are being delivered over the next two years.

Bonds have the advantage of being able to forward fix an interest rate for up to two years, without the need to draw the funds immediately. This can provide significantly more funding cost certainty than PWLB.

Lending terms can be flexible between 10 and 45 years and whilst the UKMBA does not provide financial advice it will help councils decide which is the best option for their requirements.

5.4 UKIB

Background and mandate

The UKIB is a new Government-owned policy bank, focused on increasing infrastructure investment across the UK. It will partner with the private sector and local government to finance investments that deliver the net zero agenda and drive local economic growth. The UKIB will finance strategic and high value projects across the range of local authority bodies and will invest alongside the private sector, crowding-in private sector capital.

The UKIB is wholly owned and backed by HM Treasury, but will operate independently and has two core objectives:

  • help tackle climate change, particularly meeting our net zero emissions target by 2050
  • support regional and local economic growth through better connectivity, opportunities for new jobs and higher levels of productivity.

Investment criteria

The UKIB can lend to both private sector investors and local and mayoral authorities, where those high value investments align with its core purpose. Like any other bank it will review individual projects on their own merits and investment is not guaranteed just because a project aligns with core objectives.

The focus is on high value and complex projects which align with the following principles:

  • the investment drives regional and local economic growth or supports tackling climate change
  • the investment is infrastructure based and will prioritise projects in the sectors of clean energy, transport, digital, water and waste.
  • the investment is intended to deliver a positive financial return, in line with the UKIB’s financial framework
  • on the private lending side, the investment is also expected to crowd in significant private capital over time.

Green eligibility

Included in the UKIB’s mandate is that investments do no significant harm and as such, the UKIB will not invest in projects which involve fossil fuels, with limited exceptions around carbon capture and storage or carbon capture, usage and storage, or decommissioning of existing fossil fuel assets.

UKIB financing assessment will likely align with the criteria set out for public procurement under PPN6/21.

Lending capacity and support

When the UKIB was launched in June 2021 an initial £22bn of financial capacity was allocated by HM Treasury, consisting of:

  • £4bn for local authority lending
  • £8bn for private sector equity and debt
  • £10bn of private sector loan guarantees.
     

An associated advisory service is available for those councils who would like to discuss potential types of project in more detail. The advisory service is still in its development phase, but it will be aimed at providing councils with practical support and guidance on structuring complex infrastructure projects.

Pricing and other criteria for lending to councils

Qualifying projects will need a ticket size (i.e. loan value) of at least £5m and there is currently no defined maximum size for projects or programmes. Lending will be priced at Gilt + 60bps, which is more competitive than PWLB. This should reflect an incentive to councils to push forward their de-carbonisation and growth agenda.

Loans will have attached sustainability monitoring criteria attached to ensure that the advertised benefits are realised over and above the requirements for PWLB lending. The resource requirements for this will need to be understood as part of the development of the financial case for the Outline Business Case for projects.

The financing can be used in conjunction with other Government grant funding.

Future developments

UKIB is in its early development phase. It is formalising its first Strategic Plan and is scaling up in its capabilities and capacity. By March 2022, the UKIB had provided financial support to four projects.

The UKIB’s first Strategic Plan is expected in June 2022.

5.5 Community Municipal Bonds (CMB)

Crowdfunding is a process by which people provide money to projects, companies or organisations via a website or platform. Depending on the nature of the financial arrangement, people receive a return that is either financial (investment-based) or non-financial (donation-based).

A CMB structure is a new model of public sector crowdfunding, which offers the potential of providing low-cost capital for councils while also delivering socially and environmentally positive outcomes. This structuring provides councils with the ability to raise money more locally for green projects and provides a direct connection between their communities and new green infrastructure. Increasingly the rates and terms for community lending are close to those offered by PWLB.

West Berkshire Council was the first local authority in England to launch a Community Municipal Investment (CMI) bond (see case study below). More recently, in August 2020, Warrington Borough Council launched a CMI bond (via ethical investment platform Abundance Investment) to raise £1m to help finance the construction of a solar farm near Cirencester and its co-located battery storage facility (a 24MW hybrid project). The CMB has a five-year term and will pay investors 1.2 per cent per year, on a twice-yearly basis. The minimum investment was just £5. Warrington Borough Council is one of only a few UK councils to have a credit rating from Moody’s international rating agency. The CMB fund raise closed after reaching its £1m target, attracting over 500 investors from across the UK, with an average investment of almost £2,000 each.

Both the West Berkshire Council and Warrington Borough Council CMIs were issued by the council corporate body and administered by Abundance Investment, with resident and general public investors purchasing the bonds. Section 6 also includes a case study highlighting other Warrington Borough Council renewable energy investments.

Abundance Investment is particularly active in this sector and has indicated through research that CMIs have the potential to unlock a multi-billion market of retail investment money that could be directed into local authority funding via the Community Municipal Bond approach. Furthermore, the research outlined that investment-based crowdfunding had the potential to provide capital on terms which are similar to or better than the PWLB and through a process that emulates the ease of use of PWLB, while also offering the potential to deliver significant wider benefits to local communities. You can learn more by reading the Financing for Society report.

Case Study 2: West Berkshire Council – Community Municipal Bond

UK's first local authority green bond

West Berkshire Council has looked to tackle the climate emergency by investing in its first Community Municipal Investment (CMIs). The Council unanimously declared a climate emergency in July 2019 and approved an environment strategy to take action. The Council offered residents and community groups an opportunity to invest directly with them to help build a greener future for the district.

The Council was seeking to raise £1 million to fund new rooftop solar power on Council-owned buildings around West Berkshire and to help deliver its ambitious target of making the district carbon neutral by 2030. The sites included:

  • a storage building at Greenham Common, an important open space for local people
  • the Council’s headquarters at Market Street in Newbury
  • the Phoenix Resource Centre in Newbury, which provides services for adults with learning disabilities, physical disabilities, frailty and dementia
  • schools in Aldermaston and Burghfield Common
  • the Willink Leisure Centre at Burghfield Common.

About the CMI

Individuals both in and outside of West Berkshire were able to invest from as little as £5 to support specific projects that align with the Council's declaration of a climate emergency. The investment is a CMI which is a UK first. A CMI is a bond or loan mechanism issued by a council directly to the public. The bond was issued in partnership with the online crowdfunding platform Abundance Investment, which is regulated by the Financial Conduct Authority. CMIs can be used to supplement, diversify or replace sources of borrowing to fund specific infrastructure projects, or to refinance existing debt.

The investment offered returns of 1.2 per cent per year over a 5-year term, with capital returned in instalments across the investment term. Interest and capital repayments can be withdrawn or reinvested into new investments. Investors can look to sell their investment if an exit is required before the full-term length. The CMI successfully closed reaching its £1m target five days ahead of the proposed deadline. The CMI attracted 640 investors who each invested an average of around £1,500. Just over a fifth of investors were West Berkshire residents.

About Abundance Investment

Abundance Investment works with businesses, Government and financial services to facilitate investment in green and social infrastructure and connect private investors with innovative projects and companies. Abundance Investment is a founding member of the UK Crowdfunding Association and has pioneered the development of public sector investment crowdfunding within the UK.

5.6 UK Sovereign Green Bond update

Green bonds are one of the fastest-growing areas in the ESG investing industry. Green bonds provide a tangible and measurable way to address climate change by leveraging the power of private sector investment. They are used by countries and companies to finance environmental projects such as renewable energy or better public transport.

Poland became the first sovereign nation to issue a green bond in December 2016. In the past year, an increasing number of states have started issuing sovereign green bonds. The Netherlands (see case study below), Sweden and Germany are amongst the most recent nations to do so.

Germany issued its first green bond on 2 September 2020. The 10-year bond (€6.5 billion) was more than five times oversubscribed by investors, who placed over €33 billion in orders. The proceeds have been earmarked to go towards sectors including transport, energy and agriculture. The green bonds are twin bonds, issued alongside conventional federal bonds with a similar maturity and rate of return. They include a unique feature where investors will be able to swap the green bonds for an otherwise identical conventional bond, to help mitigate any liquidity concerns. The EU has plans to create up to €225 billion of green debt, with Germany planning a second green bond issue before the end of the 2020 calendar year.

The 2018 report to Government by the Green Finance Taskforce (Accelerating Green Finance) recommended (Recommendation 23) that the Government issue a Sovereign Green Bond. Subsequently, it has issued two Green Gilts, both were multiple times over-subscribed indicating the level of demand for such products and will provide finance at a slightly lower cost than conventional gilts for financing investment in flood defences, renewable energy, and carbon capture and storage projects.

5.7 Green Lenders

Green Investment Group (GIG)

In 2012 the UK Green Investment Bank plc (GIB) was launched by the Government. It was the first institution of its type in the world – a publicly funded bank designed to mobilise private finance into the green energy sector. Between 2012 and 2017, the GIB helped to finance more than £12bn of UK green infrastructure projects. In 2017, Macquarie acquired GIB from the UK Government and combined with Macquarie Capital’s renewables team to create one of the world’s largest teams of specialist green infrastructure developers and investors, the GIG.

GIG’s mission is to accelerate the green transition and primarily supports energy efficiency, waste and bioenergy, offshore wind and onshore wind projects. GIG uses innovative financial products to deploy new renewable technologies that have led to new and innovative ways of financing green projects and technologies. Another example of GIG activity is the Green Loan programme, designed for councils to increase the installation of LED technology in the UK streetlighting market as well as help councils reduce their streetlight energy bills. The loan finances capital expenditure for LEDs and central management systems for smart LED systems. It offers councils a low fixed-rate financial arrangement over a period of up to 20 years with a sculpted loan repayment option. The 2020 Progress Report highlights that GIG has provided climate financial advisory services to local government organisations including Hertfordshire County Council.

Other debt providers

There are a range of other debt providers specialising in green finance from whom councils could borrow money if considered prudent and value for money to do so. The Capital Financing Requirement (CFR) of a local authority is the amount of capital expenditure that needs to be financed through either external borrowing or internal cash balances.  Typically, councils take a corporate portfolio approach to borrowing with reference to the overall CFR rather than a project level approach. As such, any new borrowings are entered into having taken account of interest rate projections and the maturity profile of the existing portfolio. However, circumstances may warrant project level borrowing, particularly within an incorporated joint venture partnership or where wider social objectives are being sought.

5.8 Government supported debt financing and lending support mechanisms 

Salix reduce carbon emissions and lower energy bills. Salix is a non-departmental public body, owned wholly by the Government. Salix is funded by BEIS, the Department for Education, the Welsh Government and the Scottish Government. Salix is able to fund energy efficiency projects across local authority estates, with over 100 energy efficiency technologies supported, including boilers, combined heat and power plant, insulation, LED and lighting upgrades. The funding is provided via an interest-free loan which is paid back through the predicted savings on energy usage.

Eligible parts of estates include:

  • car parks
  • communal areas of social housing
  • council offices and operational buildings, such as depots and warehouses
  • external building lighting, floodlighting and spot lighting
  • libraries, leisure and sports centres
  • museums, galleries and theatres
  • parks and playgrounds
  • public transport shelter and footpath lighting
  • street lighting, traffic lighting, bollards and street furniture.

To be eligible for funding in England, projects must comply with the following criteria:

  • The loan is usually repaid from energy savings within a 5-year period (projects exceeding this will repay more per annum than the energy savings or can be part funded by the authority using other funding sources).
  • The cost of CO2e must be less than £191 per tonne over the lifetime of the project. Salix can part fund projects which do not fully meet these criteria.

Salix offers two types of funding in England: Recycling Funds and the Salix Energy Efficiency Loan Scheme which are summarised below.

Salix Energy Efficiency Loans

  • One-off, interest-free loans to support project costs.
  • Project compliance calculated based on estimated savings (projects can be part funded by other local authority funding if they exceed criteria).
  • Loan paid back through estimated savings on energy bills.

Recycling Funds

  • Match funded by Salix and the Public Sector Body (PSB).
  • Ring-fenced, self-sustaining fund held by the PSB.
  • Accumulated savings reinvested in future projects.

As of 31 March 2020, Salix had funded 18,780 projects with an investment of £971m, delivering annual financial savings of £203m. There are also more than 80 case study examples showcasing how different energy efficient technologies have been funded by Salix, which can be found on the Salix website. Case study 3, provides a typical example of how Salix can work in conjunction with energy performance contracting to deliver energy efficiency measures.

Application guidance notes, which also includes information on assurance can be found on the Salix website. PSBs are requested to update Salix regularly on achievement of key milestones during the delivery of the project. Once projects reach completion, the PSB will be asked to submit to Salix a signed and authorised Completion Certificate for the final costs of the works. This should be supported with documentation evidencing costs to a reasonable level of the full amount. 

Case Study 3 – Calderdale Council’s Re:fit Programme with Salix finance

Calderdale Council delivers its services from over 300 buildings and, like all councils, is under increasing pressure to reduce its costs. In 2017 the Council took steps to cut carbon emissions from its buildings through implementing a Re:fit programme, delivered across two phases.

The Council, supported by Local Partnerships, ran a mini-competition with SSE Contracting Ltd appointed as the contracting partner to deliver the energy efficiency measures. The Council initially focused on improving the energy efficiency of fourteen of its long term holding buildings including Halifax Town Hall, several leisure centres, a stadium, a theatre, a crematorium, a residential facility, day centres and general accommodation, which all offered viable opportunities to proceed with energy efficiency investments.

Phase 1 delivered in 2017 included upgrading LED lighting, replacing inefficient boilers, improving control of heating systems and installing electricity-generating solar panels on roofs.  This first phase was fully funded by Salix, blended with PWLB borrowing to keep the Salix repayment to 5 years. The first phase of works allowed the Council to make energy savings of £156,000 a year and an 843-tonne annual reduction in carbon dioxide emissions.

The second phase delivered in 2018/19 achieved further reductions of £113,000 and 328 tonnes of CO2 annually. This involve investment in energy-saving measures at another 14 Council buildings including Bankfield Museum, Shibden Hall, Hebden Bridge Library, Mixenden Outdoor Centre and Todmorden Market.

Renewable electricity generation support mechanisms

In order to encourage further deployment of renewable electricity generation the Government has provided two mechanisms to assist with the funding of renewable energy generation projects. These are both instruments which address potential market failure, as opposed to sources of finance. These instruments are of interest as they support investor confidence and therefore access to debt finance.

Contracts for Difference (CfD)

The CfD scheme is the Government’s main mechanism for supporting new, large scale, low carbon electricity generation projects in the UK. On 7 April 2022 under it’s British Energy Security Strategy the Government announced that there will be a pot 1 allocation for subsequent rounds of CfD support (which includes solar PV and wind generation). Under the CfD generators agree a fixed price for each unit of electricity generated through an auction process. Where the market price exceeds the price agreed in the auction (strike price) the generator pays money back to the Government, if the wholesale price is lower than the strike price then the Government makes up the difference. The purpose of CfD is to provide price certainty without significant subsidy in order to support investor confidence.

Obtaining a CfD is based on a competitive bidding process and there are no guarantees that any particular scheme will be successful. Pricing is generally at or below the current wholesale electricity price. Eligible technologies include onshore wind (>5MW), solar (PV) (>5MW), energy  from waste with combined heat and power, hydro (>5MW and <50MW), landfill gas, sewage gas. The scheme sets a cap on for the auction process with bids being accepted from the lowest first until the cap is reached. All schemes are then set at the price paid for the last scheme to be accepted before the cap is reached (i.e. all schemes regardless of their bid level receive the highest accepted price).

Even where CfDs are available it is likely there will be pre-qualification requirements which will include land ownership, a valid grid connection and planning consent. The application process and calculating the value to bid in the auction are complex and therefore specialist advice should be sought before CfD income is considered in any business case.

Smart Export Guarantee (SEG) Scheme

On 1 January 2020, the Government introduced the SEG scheme, which will enable anaerobic digestion, hydro, micro-combined heat and power (with an electrical capacity of 50kW or less), onshore wind, and solar photovoltaic exporters with up to 5MW capacity to receive payment for exported electricity. The SEG scheme replaces the Feed in Tariff scheme that closed in Q1 2019. The purpose of the scheme is to guarantee a market for small scale renewable energy generation projects which export power directly to the grid.

Under the SEG scheme, all licenced energy suppliers with 150,000 or more customers must provide at least one SEG tariff. The Government has set out that in order to provide space for the small-scale export market to develop, there will not be any specified minimum tariff rate, other than that a supplier must provide payment greater than zero at all times of export. The SEG licensees therefore decide how they want their SEG export tariff to work in terms of its rate, type and length. Storage is also eligible to receive export payments, although suppliers will be able to exclude brown electricity from those payments and require the generator to put metering in place that isolates ‘green’ exports.

Under the scheme, exported power must be metered, with a meter capable of reporting exports on a half-hourly basis, and meters must also be registered for settlement – though the SEG design is flexible and does not necessarily require half-hourly readings.

For PV, wind and micro-CHP installations up to 50kW, generators will be asked to demonstrate that their installation and installer are suitably certified. OFGEM have indicated that an installation certificate such as a Microgeneration Certification Scheme (MCS) certificate (or equivalent) is sufficient to demonstrate this. For all other installations, generators will be asked to demonstrate that the installation is suitably certified. The Government does not plan to require a central register of SEG installations. You can read the OFGEM SEG guidance to learn more.

5.9 Contractually guaranteed returns

In addition to Government backed schemes which guarantee returns or provide additional support to investor confidence there are also market schemes which guarantee returns and transfer contractual risk to a third party. These mechanisms do not directly provide debt finance but can support easy access to finance as the third party is in effect providing a surety to the debt provider. Examples of this would be EPCs or the Re:fit framework.

Energy Performance Contracting (EPC)

A priority for a local authority looking to fulfil its environmental pledges is to tackle energy demand and carbon emissions across the estate. If not already doing so, councils could consider using an EPC framework, which offers a tangible first step towards a green recovery.

Energy performance contracting has become a common approach for organisations to retrofit existing buildings with energy-saving and energy-generation measures that improve the energy performance of buildings, thereby reducing carbon emissions and achieving substantial annual cost savings. These savings are guaranteed by the contractor who designs and implements Energy Conservation Measures and guarantees the level of energy savings, thus offering a secured financial saving over the period of the agreement.

This savings stream is used to support borrowing as the basis to fund the cost of improvements and services from the provider. Once the costs have been repaid, the public sector buyer (contracting authority) would be able to keep the full savings generated from the improvements and may also be able to gain financial benefits from the start.

Re:fit

The Re:fit framework is a procurement initiative, jointly owned by the Greater London Authority and Local Partnerships. It enables public bodies to implement and accelerate energy efficiency measures and local energy generation of their assets, buildings and land. It helps improve the energy performance of local authority assets and, as a result, guarantees substantial annual cost savings and the reduction of carbon emissions (see case study 3).

Programmes supported by the Re:fit framework, such as upgrading LED lighting and replacing boilers, represent quick wins for councils embarking on the pathway to net-zero. For organisations that have already made progress, there is an opportunity to implement deeper retrofit measures such as fabric improvements and the decarbonisation of heat.

The fourth Re:fit framework, Re:fit 4, was launched at the end of April 2020. The Framework has been developed for use with heat networks and other larger-scale renewable energy projects in mind, to specifically help authorities develop and deliver key climate response activities. Crucially, the use of an EPC framework such as Re:fit provides councils with a means to grapple with longer-term solutions to more difficult challenges such as the decarbonisation of transport and adaption.

5.10 Advantages/disadvantages of the forms of debt

Table 2 summarises the key advantages/disadvantages of the forms of debt considered in this chapter that are available to councils.

Table 2: Characteristics of debt and other instruments
 

Form of debt

Cost of borrowing

Borrowing amount

Security

Proposed due diligence

Comments

PWLB

Depends on lending term. 25 Year Annuity Rate (as at April 2022 is around 3%)

100%

Lending against revenues of the local authority

Extensive board and council member approval process for project.

 

The PWLB application process is currently deliberately permissive. If the finance director of the applicant authority can confirm that they are acting in line with statute and can afford to repay the loan from their revenues, the PWLB will issue the loan within two working days.

Borrowing cannot be primarily for yield and must support local authority objectives in service delivery, housing, regeneration or preventative action, and will require submission of a three-year capital plan, together with s151 officer confirmation that lending primarily for yield is not included.

UKIB

Cheapest form of borrowing available to councils at gilt + 60bps (around 2.6% at April 2022)

£ 5m upwards

Lending against the local authority covenant

Due diligence will be relatively ‘light touch’ compared with most commercial lending and will seek to use criteria developed by the projects for their own use

There will be a support offer provided alongside the lending offer which will focus on a number of key specialisms.

UKMBA

Highest costs are similar to PWLB, with lowest being around 50bps above gilts (currently 2.5% to 3%)

£ 250m+. The UKMBA will aggregate the requirements of several councils and the sum can relate to delivered projects and future requirements

Against the covenant strength of the local authority. Single authority bonds will require a credit rating score. Pooled bonds require a credit assessment (not published as a rating)

Due diligence focus around the financial standing of the local authority.

Bonds can be expensive and time consuming to put in place, but potentially provide access to long term cheap debt.

Green lenders

Most expensive form of lending at rates equivalent to private sector projects

Typically, up to around 80% of a steady state project

Lending against the project assets

Extensive technical, financial and legal due diligence undertaken by green lender.

As for PWLB, borrowing cannot be primarily for yield and must support local authority objectives in service delivery, housing, regeneration or preventative action.

Use of green lenders likely to be specific to both the local authority and the project.

Crowdfunding/ CMB

Potential to provide capital on terms which are equal to or better than PWLB – (around 3% at April 2022)

Potential for 100%, although local authority CMIs above £1m not yet tested

Securing funding against the local authority credit rating

Extensive board and council member approval process for projects.

Process that emulates the ease of use of PWLB

As for PWLB, borrowing cannot be primarily for yield and must support local authority objectives in service delivery, housing, regeneration or preventative action.

West Berkshire Council and Warrington Borough Council have both issued CMIs at £1m - investment offers returns of 1.2% per year.

Swindon Borough Council raised £4.2m through the UKs first local authority solar bonds which provides confidence that higher value bonds can be achieved.

Sovereign green bonds issued in 2020 all oversubscribed.

Salix

Interest free loan

100% no-maximum loan value but amount dependent upon payback period

Lending against the local authority

Compliance tool and business case to assist in application. Responsibility and competence requirements placed on local authority.

As for PWLB, borrowing cannot be primarily for yield and must support local authority objectives in service delivery, housing, regeneration or preventative action.

Assurance/audit process post project delivery

Renewable electricity generation support mechanisms

Addresses potential market failure, as opposed to sources of finance. Support investor confidence and therefore access to and price of debt finance.

Addresses potential market failure, as opposed to sources of finance. Support investor confidence and therefore access to and price of debt finance.

Addresses potential market failure, as opposed to sources of finance. Support investor confidence and therefore access to and price of debt finance.

Addresses potential market failure, as opposed to sources of finance. Support investor confidence and therefore access to and price of debt finance.

Addresses potential market failure, as opposed to sources of finance. Support investor confidence and therefore access to and price of debt finance.

Energy Performance Contracting

Depends on payback period.

Salix – interest free loan, PWLB loan rate if part funded.   

100%

Lending against the local authority

High Level Appraisal and Investment Grade Proposal.

Framework owner benchmarking and assurance throughout procurement process.  

Performance Guarantee in place with delivery contractor.

Shortfall payments to the local authority in the event of any contractor underperformance.  

Financing Green Projects

6.1 What is a green project?

Green projects deliver environmental benefits and address the causes and impacts of climate change. In order to tackle climate change, we need to do the following:

  • use less resources
  • stop burning fossil fuels at the point of use and use electricity (or potentially hydrogen) instead
  • generate all electricity from renewable sources, balancing services and smart grids
  • sequester any remaining greenhouse gas emissions from the atmosphere
  • make adaptations necessary to deal with the inevitable consequences of climate change.

Any projects which contribute towards these aims is potentially green. Some of these projects will have recognised verification schemes, whereas for others measurement and verification may be more difficult.

This section explores a range of green projects, together with their potential funding routes available to a local authority. The examples are not exhaustive but designed to provide an understanding of the types of green funding likely to be available.

6.2 Who is the funding for?

Of the English councils who have declared climate emergencies, a number have done so on an area wide basis. The project examples below include some area wide initiatives where it may not be appropriate for the local authority to act as the financially accountable body, but where they may want to stimulate action by others.

There may also be occasions where the local authority specifically wants to co-fund with others or encourage community investment. Community investment is not necessarily green and should not be confused with green finance, although many community investment projects historically have green credentials.

6.3 Projects to use less resources

Using less resources involves many traditional projects – such as building energy efficiency but could also include projects which reduce the need to travel or which contribute to reduced waste either through recycling or through more efficient use of materials initially.

Building energy efficiency (owned estate)

Table 3 below sets out key parameters for building energy efficiency projects.

Table 3: Building energy efficiency projects key parameters

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Local authority buildings energy efficiency

Yes

Yes

Yes – through energy bills

£1bn Government grants available.

 

SALIX finance for projects with payback <5 years

PWLB for remainder

Suitable for Energy Performance Contracting

 

Building energy efficiency (area wide) 

Table 4 below sets out key parameters for building energy efficiency projects on building stock which is not owned by the local authority.

Table 4: Building energy efficiency projects (area wide emissions) key parameters

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Area wide building energy efficiency on private sector buildings

Yes

Yes

Yes – through energy bills, energy performance certificates or display energy certificates

£2bn Government grants available for private residential buildings.

Private sector equity and debt for the remainder

Potential for UKIB funding if scale is sufficient

 

Suitable for Energy Performance Contracting.

Potential to provide a revolving door loan fund using s106 contributions.

 

Waste management projects

Table 5 sets out key parameters for waste management projects. These are projects where the local authority is likely to have some direct involvement.

Table 5: Waste projects key parameters

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Increase in recycling – investments in low capex (<£20m) infrastructure

Yes

Yes – dependent on targeted material

Monitoring of waste through DEFRA system

PWLB, UKIB, private sector equity.

Potential grant funding from DEFRA (TBD) post 2023

Will be required as part of Recycling and Waste Solution policies by 2035

Separation of food wastes for anaerobic digestion

Yes

Location specific

Monitoring of waste through DEFRA system

PWLB, UKIB, private sector equity.

Potential grant funding from DEFRA (TBD) post 2023

Due to become mandatory requirement under the Environment Bill

 

Digital infrastructure

Digital infrastructure relates to 5G and fibre broadband projects. These may qualify as green investments as they support the digital economy. The digital economy reduces the need for travel through measures such as increased homeworking and remote GP appointments. Table 6 below sets out the key parameters for digital infrastructure projects.

Table 6: Digital infrastructure projects key parameters

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Projects to support the roll out of 5G and fibre broadband

Yes

No

Delivery of infrastructure, numbers connected and speeds of connectivity

Largely private sector equity and debt or UKIB if scale is sufficient

Department of Culture, Media and Sport grant support may be available for areas which are not financially viable and 5G Create which has offered £30m to develop new 5G capabilities.

Generally, the local authority is not the direct provider

 

6.4 Electrification and hydrogen projects

Projects which support a migration from the direct burning of fossil fuels at the point of use are key to achieving net zero. Projects to tackle heating and transport of paramount importance and Table 7 sets out the key parameters for these types of projects. Note that where it is intended to replace gas or oil boilers in buildings with heat pumps or electric boilers the parameters would be the same as the building energy efficiency measures set out in Tables 3 and 4.

Table 7: Electrification and hydrogen projects

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Electric vehicle charging infrastructure

Yes

Yes

Yes – through number of charge points installed

OZEV  workplace charging grant for staff and depots. should also promote too local business.

ORCS funding, LEVI funding

Require new developments to have chargepoints via SPD.

 

Think of chargepoints as providing a service to residents, visitors, taxis and business not a source of income. Focus should be on cost neutral service provision via well managed concession agreement.

OZEV grants can be accessed by local businesses

 

Small and medium vehicle replacements with electric vehicles

Yes

Yes

Yes - through mileage emissions calculations

Green vehicle finance (lease or hire purchase) or PWLB/public sector equity finance

Plug in car and van grant available.

 

Understanding duty cycle and overnight charging is critical to success. Significant cost savings for cars and vans over lifetime. Ensure all purchase decisions made are on the total cost of ownership and with the zero emission default option.

For further information visit Cenex

Large vehicle replacements with low emissions vehicles

No

Not at this stage, other than electric refuse collection vehicles (RCV)with <3mpg

Yes – through mileages emissions calculations

Few vehicle finance options available, so PWLB most likely option.

As the market matures it is likely that lease and hire purchase options will become available.

Review fleet and assess benefits of biomethane in short term and identify procurement timetable for replacing heavy vehicles other than RCVs(gritters etc) as new technologies mature.

Physical measures to improve cycling and walking e.g. new cycleways, widening pavements, junction improvements, cycle storage etc

Yes

No

Yes – through vehicle surveys.

Verification quality through the Active Travel England scheme and through Sustrans National Cycle Network

£ 2bn grants through Active Travel England.

PWLB and highways budgets.

Further funds could be raised through s106 contributions.

 

Hydrogen and hydrogen infrastructure projects

No

No

Project specific

Grant funding for pilot schemes and potentially for initial infrastructure roll out.

Hydrogen projects are likely to become viable and fundable in the mid-term once the concepts have been proven and the cost of technology falls.

Schemes to encourage staff to cycle or invest in EVs

Yes

No

Through business and commuting mileage by vehicle type

Octopus finance (private sector debt) are the main provider in the EV space

Salary sacrifice schemes providing tax efficient options for staff.

 

6.5 Renewable electricity generation, balancing services and smart grids

Renewable electricity generation, balancing services and smart grids are relatively mature technologies, however the income streams are largely merchant and as a consequence funders consider the project risks as high without some form of price certainty.

Table 8 sets out the key parameters for renewable electricity generation, balancing services and smart grids.

Table 8: Renewable electricity generation, balancing services and smart grids

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Renewable energy generation (freestanding). Note building integrated systems as per tables 2 and 3.

Yes

Yes

Yes – REGO certificates

Most public sector schemes to date are PWLB as project returns unlikely to meet SALIX requirements.

Private sector debt, UKIB and community funding are also possible.

Some schemes may be suitable for Energy Performance Contracting.

CfD and PPA agreements may be used to provide price certainty and investor confidence. SEG provides route to market for smaller schemes.

 

6.6 Carbon sequestration projects

Carbon sequestration projects range from various forms of mechanical carbon capture and storage to the restoration of peat bogs and kelp beds to growing trees. All forms of green and blue infrastructure development and enhancement are likely to qualify as green projects.

Table 9 below sets out a sample forestry project.

Table 9: Sample carbon sequestration through tree planting project

Project type

Tried and tested

Financial return

Verification

Likely finance source

Comments

Planting of new woodland

Yes

Sometimes - dependent upon the type of woodland planted (i.e. whether commercial forestry is included).

Woodland Carbon Units

Grant funding is available for tree planting and early years’ maintenance.

Residual funding will depend on whether commercial forestry is included.

Commercial forestry produces financial returns. Broadleaf forestry is less likely to, although biodiversity enhancement opportunities are greater.

 

6.7 Preparing for the effects of climate change

Adaptation projects are part of the suite of green projects; however, they rarely have a direct financial return for the local authority. Returns are generally seen by cost avoidance in the local community and the insurance sector.

Government provides financial support to councils to deliver climate adaptation projects, with bids being submitted on a competitive basis. These change on a regular basis and up to date guidance can be found on the flood funding arrangements section of the LGA website.

Adaptation projects do not show verification criteria in the same way as some mitigation projects – but there will be a clear need to articulate the benefits of any scheme in order to qualify for grant funding.

Conclusions and recommendations

7.1 Conclusions

There is much talk of green finance, but ultimately it is about the supply and funding of sustainable projects, regardless of the source of the finance. It is important that whatever the source of finance, that local authority ‘green’ projects provide transparent and reliable verification of the non-financial benefits.

Councils are well placed to access debt finance at extremely competitive rates, through various channels including conventional sources such as the PWLB and emerging sources such as the UKIB and the CMB market. The cost distinction at project level between conventional debt sources and CMBs is likely to be minimal going forward. CMBs provide the opportunity to connect local people to projects in their area but are unlikely to raise all the funding necessary for larger projects. CMBs and council debt sourced from the likes of the PWLB and UKIB can be blended to support projects where both local connection and larger funding packages are required.

Other than where partnership working with the private sector is envisaged there is rarely a need for councils to engage with the more complex and expensive private sector green finance, although this may change as ambition around scale and pace are increased. Involving private sector partners who bring finance and expertise can be beneficial provided financial offer is comparable with that a local authority can raise in its own right.

7.2 Recommendations

Councils looking to invest in green projects should consider the following:

  • Can the project demonstrate it primarily supports the function of the local authority?
  • How will the project’s sustainable benefits be measured and verified?
  • Is there a source of grant funding available for the project? It should be noted that these change from time to time, so it is important to keep up to date.
  • Recent grant funding for energy efficiency projects may be repeated in subsequent years.  In order to access funds it may be necessary to move quickly, so preparing schemes in advance is an advantage when looking to secure grants, if grants are not available this will also assist in seeking alternative means of funding. Councils should also consider using existing energy performance framework agreements to ensure speed of delivery, certainty of benefits and compliance with procurement law.
  • Access to alternative routes for funding have an administrative burden (for example enhanced levels of project specific due diligence) which need to be considered as part of the funding decision.
  • Councils have access to both grant funding and cheap finance, providing a competitive advantage over the private sector where there is competition for assets (such as in the purchase of renewable energy generation capacity).
  • Where councils are offering finance into joint venture projects or to utilise their land assets to leverage projects the implications of state aid and more complex procurement need to be fully factored in alongside the potential benefits of new sources of capital and expertise.

Glossary of terms

Any engagement in green finance will involve a degree of technical language and common terms. It is not necessary to have a detailed technical vocabulary, however an understanding of some of the basic terms and concepts will aid understanding in the subsequent sections of this document.

BEIS

Department for Business, Energy and Industrial Strategy

CfD

Contract for Difference – current large-scale subsidy regime

CFR

Capital Financing Requirement

CMB

Community Municipal Bond

CMI

Community Municipal Investments

DECC

Department of Energy and Climate Change (fore runner to BEIS for as the ministry for energy)

DEFRA

Department for Environment Food and Rural Affairs

DLUHC

Department for Levelling Up, Housing and Communities

ECO

Energy Company Obligation

EPC

Energy Performance Contract

ESG

Environmental, Social and Governance (bonds)

EU

European Union

EV

Electric Vehicle

EWCG

England Woodland Creation Offer

GFS

Green Finance Strategy

GIG

Green Investment Group

Green Lending

Lending money, by providing loans or purchasing bonds, in line with environmental principals

Green bonds

A bond is a type of loan where investors buy debt from a bond issuer. Green bonds use the money raised for green activities, such as renewable energy projects.

GHNF

Green Heat Network Fund

HNDU

Heat Network Delivery Unit

HNIP

Heat Network Investment Project

LDA

Local Authority Delivery

LED

Light Emitting Diode

LEVI

Local Electric Vehicle Infrastructure Fund

LGA

Local Government Association

MCS

Microgeneration Certification Scheme

OFGEM

Office of Gas and Electricity Markets

OPE

One Public Estate

ORCS

On-Street Residential Chargepoint Scheme

OZEV

Office for Zero Emission Vehicles

PWLB

Public Works Loan Board

PPA

Power Purchase Agreement – contract for the buying and selling of electricity

PPN6/21

Public Procurement Note 6/21

PSB

Public Sector Body

PSDS

Public Sector Decarbonisation Scheme

PV

Photovoltaic i.e. turning light energy into electricity

Re:fit

National Energy Performance Contract framework – owned by Local Partnerships and the Greater London Authority

REGO

Renewable Energy Guarantees of Origin – scheme administered by OFGEM to provide transparency to customer about the source of their electricity

SEG

Smart Export Guarantee Scheme

UKIB

The UK Infrastructure Bank

UKMBA

UK Municipal Bond Agency

WCC

Woodland Carbon Code

WCF

Woodland Carbon Funding

WCG

Woodland Carbon Guarantee

WCPG

Woodland Creation Planning Grant

WCU

Woodland Carbon Unites

Contact

Jo Wall, Strategic Director – Climate Response, Local Partnerships