You've got the power

Patience is a virtue tested to its limits when dealing with utility providers. Many in the industry have been frustrated at the lack of response from the utility market, which can seriously delay projects or even result in their cancellation because of uncertainty over the cost or timing of works.

One reason for the seemingly slow response from the statutory water and power providers is the lack of available network capacity, a direct consequence of years of under-investment in an ageing infrastructure, particularly in London.

Power - or lack of it - is the main issue and when large developments take place, there is a need to reinforce major substations or build a major primary substation on site. The latter is expensive and takes up valuable space.

Deregulation of the utility market – first gas, then electricity and water – has encouraged developers to use alternative methods of sourcing utility infrastructure to and within their developments

What can be done?

If utility providers took a more strategic view of future network capacity, thinking, say, five years ahead, that would benefit developers greatly. We have tried to debate this issue with providers but have had little response to date.

For simple one-off buildings, there should not be a problem. There is a clear timeframe and industry regulators Ofgem and Ofwat can provide back-up if necessary. Large regeneration projects are a different matter, however. These require a more holistic response, with sustainability issues potentially coming into play, and there are likely to be at least three delivery routes under consideration. Patience can pay dividends in reducing risk and saving millions of pounds in upfront costs. The following review gives an insight into the utility market.

Deregulation

Continued deregulation of the utility market has prompted developers to use alternative methods of sourcing utility infrastructure to and within their developments. Initially, market unbundling freed up competition for gas connections. This unbundling has now been extended to electricity and water.

The options

For large regeneration projects in planning or construction, utilities infrastructure has become a major issue both in terms of cost and delivery. Developers are funding the construction of utility infrastructure associated with their schemes. In other words the utilities are, designed, constructed and owned by the incumbent host utility companies but paid for by the developer.

Thanks to the efforts of Ofgem and Ofwat, competition in the utility connections market has advanced greatly. As regulations have changed, so have methods of procurement. Now the emphasis is on delivering commercial benefits such as cost competitiveness and programme certainty, the latter giving developers the reassurance of fixed installation dates. Developers now have a choice as to who designs, installs, owns and operates connections and networks for their developments. The old monopolistic approach of the utility has been replaced by an open market competitive approach that directly benefits developers.

In this marketplace, developers of major regeneration projects should consider the following options:

• going down the traditional procurement route
• broadening the procurement route by considering a supplier from outside the geographical area
• using a multi-utility company
• using sustainable energy, such as combined heat and power.

Contestable works are all new utilities works away from the point of connection, but excluding the point of connection to the existing network, such as a new network or a combined heat and power installation. Contestable works can be carried out by a suitably accredited third party.

Work that is upstream from the point of connection, which could potentially be a distance away from the development site, is classed as non-contestable. This must be carried out by the incumbent utility company.

Developers can invite competitive bids from accredited third-party contractors for contestable works and subsequently offer these assets back for adoption by the incumbent utility company. The benefits of this approach include potential to reduce capital outlay through competitive bidding and greater certainty of delivery. There can be further benefits in "bundling" up the contestable works for all of the utilities and procuring a multi-utility solution: it places the co-ordination risk with the contractor, offers potential efficiencies in trenching and civil engineering works, can reduce disturbance and disruption to the local area and can improve delivery.

The incumbent utility company will adopt correctly installed assets from the contractor and charge the developer either an adoption fee or an inspection fee. However, these assets have a value to a licensed network operator and, in certain instances, the developer can receive a capital contribution from an independent operator in return for the title to the assets, giving the operator the ability to earn a revenue though their use. Ongoing maintenance and operation of these assets then becomes the responsibility of the independent operator.

The old monopolistic approach of the utility has been replaced by open market competition

Developers now have a choice as to who designs, installs, owns and operates connections and networks for their developments

Another option: the Esco

An alternative is to form an energy supply company, or Esco. An Esco sells heat, power and other energy-related services at a site or local level. Various parties can form an Esco; a developer could form one in partnership with utilities providers - a well-known Esco is Thameswey Energy, the joint venture formed by Woking council and a Danish environmental foundation to produce sustainable energy.

An Esco can offer capital contributions based on the capitalisation of future revenue from selling energy over a long-term agreement to a development. It is usual for these supply agreements to be with commercial organisations rather than individual residential consumers, but early agreement along with a guarantee of load take-up can result in financial contributions from the Esco at the front end of a development. This alleviates some of the pain of upfront costs to the developer.

The chart shown above sets out in greater detail some of the options for a major regeneration site. The options range from the traditional procurement route (A) through increasingly innovative options (to G). Generally, the more innovative the procurement route, the greater the potential commercial rewards.

What we can't do

Although infrastructure off site may need to be upgraded to supply a development, such works up stream from the point of connection are considered as non-contestable and can only be carried out by the incumbent utility company.

In the past a developer needing 10 megawatts of power for a scheme may have found itself paying the whole cost of a 20 megawatt substation, but new apportionment rules mean the developer now only pays for its share of the substation. These rules protect the developer from funding utilities provision over and above the level required by its development.

All utility undertakers have obligations under their licences to plan for the future, and indeed they benefit from funding allowances to plan and implement the upgrading of networks to accommodate future normal load/demand growth. Whereas developers have always understood this, utility companies have not always been transparent, leaving developers feeling that they are in fact funding residue benefit on behalf of the utility companies.

To alleviate this, Ofgem has requested that the electricity and gas companies prepare and make available seven-year development statements indicating the level, type and location of planned network investment in that period. Obviously this kind of public commitment will give developers greater transparency.

Electricity and gas companies now have to prepare seven-year development statements indicating how they plan to invest in the network

Sustainability

Sustainability is at the forefront of client considerations. The government and local planning authorities are demanding more stringent reviews of sustainability and inclusion of sustainable energy. Wind turbines are one efficient way of meeting such demands on large schemes, although planning may challenge the visual/noise issues of such installations.

There is debate over how sustainable combined heat and power is, primarily because of the fuel source. CHP can run on a lot of fuels and woodchip is often recommended as a sustainable option. But how sustainable is woodchip if it is produced in Sweden and transported to the UK? Nonetheless, CHP is an efficient way to locally produce electricity, as long as it is possible to use the heat generation and, where possible, cooling capacity.

As with all the options, CHP relies on a steady load profile, essentially constant use, in order to maximise its efficiency and viability. It is not viable for an office building where electricity consumption peaks in the day but falls back at night, but can be used for mixed-use projects where nine-to-five office demand and out-of-office hours residential demand can produce a 24-hour reliable load profile.

Viability will depend on the programme of uptake of the utility, as whoever is providing the installation will provide it on the basis of "revenue". The basic questions are: what is our revenue? What is our cost? What is the payback? And, does it work?

Some CHP providers make significant contributions to the capital cost of schemes, depending on the revenue stream.

And remember …

With all the options, a study should be carried out to establish the most appropriate solution. This may mean running several solutions in unison to evaluate the best for the development. For larger developments, the traditional procurement route should not be the sole route followed for utility services.