Manchester City Council Report for Resolution. Strategic Director, Strategic Development

Transcription

1 Manchester City Council Report for Resolution Report to: Executive 1 July 2015 Subject: Report of: Civic Quarter Heat Network Proposal Strategic Director, Strategic Development Summary This report outlines the range of Heat Networks that the City Council is seeking to deliver and with partners across the city in the short to medium term. The report then sets out proposals to progress the delivery of the Civic Quarter Heat Network (CQHN) project and to request revenue funding of 500,000 from the Climate Innovation Fund to support the costs of procuring this initiative. Recommendations Members are requested to recommend that the City Council: 1) Approve the release of 500,000 from the Climate Innovation Fund Reserve to fund the revenue costs of the Civic Quarter Heat Network project development to financial close. The Executive is recommended to: 1) Note that the City Council is enabling the development of a series of Heat Networks within the City Centre that will, if delivered, make a contribution to the city target of a 41% reduction in carbon emissions by 2020; 2) Note the steps now being taken to progress the delivery of the Civic Quarter Heat Network (CQHN), which will be the subject of further reports to the Executive in due course; and 3) Authorise the City Solicitor to complete the necessary documentation in relation to the use of the Carbon and Energy Fund (CEF) Procurement Framework. Wards Affected: City Centre, Ardwick, Hulme, Ancoats & Clayton S30

2 Community Strategy Spine Summary of the contribution to the strategy Performance of the economy of the region and sub region Reaching full potential in education and employment Individual and collective self esteem mutual respect Neighbourhoods of Choice Investment into a series of Heat Networks within the City Centre will help to reduce costs to businesses and improve their resilience to climate change. The delivery of a series of Heat Networks within the City Centre should facilitate the creation of employment opportunities at a range of skill levels. None The delivery of Heat Networks within the City Centre will help improve the environmental quality and attractiveness of the city, reduce energy and resource costs for residents, and help create attractive places that residents and businesses will choose to locate to. Environmental and Climate Change Impacts Consider, and describe if applicable, how the recommendations in the report will impact on the environment, on carbon reductions goals for the city, and on the Council s climate change strategies. The Civic Quarter Heat Network will reduce the City s CO2 emissions by over 3500 tonnes per year and will operate for at least 30 years. It will improve air quality in the city centre by reducing the emissions of oxides of nitrogen currently generated by unabated combustion plant (boilers). Full details are in the body of the report, along with any implications for: Equal Opportunities Policy Risk Management Legal Considerations Financial Consequences Revenue The cost of developing the scheme up to the point at which a contract can be signed is 500,000. This cost will be funded through the Climate Innovation Fund Reserve. Financial Consequences Capital There are no capital consequences. Contact Officers: S31

3 Name: Eddie Smith Position: Strategic Director: Strategic Development Telephone: Name: Position: Julian Packer Low Carbon Investment Director, Core Investment Team, Greater Manchester Combined Authority Telephone: Name: Charlie Tomlinson Position: Strategic Lead Commercial Legal Telephone: Name: Andrew McIntosh Position: Strategic Lead Commercial Finance Telephone: Name: Ian Brown Position: Head of Corporate Procurement Telephone: Background documents (available for public inspection): The following documents disclose important facts on which the report is based and have been relied upon in preparing the report. Copies of the background documents are available up to 4 years after the date of the meeting. If you would like a copy please contact one of the contact officers above. MCC Climate Change Action Plan 2015/ /18, Executive, 18 th March 2015 S32

4 1.0 Introduction 1.1 Manchester A Certain Future (MACF) is the city s Climate Change Action Plan, setting out what all organisations and individuals in the city will need to contribute to collective, citywide action to enable Manchester to realise its aim to be a leading low carbon city by It has the following aims: To reduce the city's carbon emissions by 41% by 2020; To engage all individuals, neighbourhoods and organisations in a process of cultural change that embeds low carbon thinking into the lifestyles and operations of the city; To prepare for and actively adapt to a rapidly changing climate; and To make a rapid transition to a low carbon economy. 1.2 The City Council has committed to contribute to the delivery of the city s MACF plan, setting out its commitments in the City Council s Climate Change Action Plan, the most recent of which was approved by the Executive in March Within that Action Plan it identifies that the energy consumed within the Council s operational buildings estate contributes 66% (from 2009/10 baseline) of the City Council s direct CO2 emissions. As such this is a key area for the Council to secure reduction. 1.3 The City Council s Climate Change Action Plan highlighted the intention to develop and deliver a heat network in the Civic Quarter. This report sets out proposals to progress the deliver of the Civic Quarter Heat Network (CQHN) project and also sets out the range of other Heat Networks that the City Council are seeking to help deliver across the city in the short to medium term. 2.0 Delivering Heat Networks in Manchester 2.1 In order to help reduce the city's carbon emissions one of the key carbon reduction opportunities is the introduction of modern, high efficiency, low carbon heat (energy) networks. The delivery and long term operation of these networks will also stimulate economic growth through in particular the creation of jobs during the construction phase, and also the revenue generated for the City Council by the scheme and the contribution to an improvement in local air quality (i.e. a reduction in the emissions of nitrous oxides (NOx)) 2.2 Heat Networks / District Energy Schemes are typically based around the establishment of an energy centre housing modern, high efficiency, low carbon/renewable generation plant which distributes the heat produced via insulated underground pipes to local buildings. Frequently, and to improve both the economic case and increase carbon reduction, the scheme will include power generation and distribution. Where both heat and power are distributed the scheme is referred to as District Energy (DE). 2.3 The new generation plant will be designed to be ultra low or even zero NOx S33

5 emissions and as it will be displacing older NOx producing combustion plant located in the buildings served by the network an improvement in local air quality ensues. Networks typically have an operating life of 30 years or more with generation plant due for replacement typically after 15 years. 2.4 In addition to the Civic Quarter Heat Network (CQHN) project described in subsequent sections of this report other potential District Energy projects around the City Centre are being developed utilising funding secured from DECC : Within the Corridor Manchester area a Feasibility Study is in progress that will report in September. A detailed technical feasibility report will be produced together with a costed business case and recommendation with regard to commercial structure. There is the potential for the Corridor Network to be integrated with the CQHN; In the NOMA area of the city a parallel Feasibility Study is also in progress that will report in September. A detailed technical feasibility report will be produced together with a costed business case and recommendation with regard to commercial structure; and In the medium term proposals for a Heat Network are being explored with Network Rail and other partners for Piccadilly Station and the surrounding area 2.5 In addition to these area specific Heat Network projects in the city other work is being undertaken (again funded by DECC) to investigate and report on the potential to commercially and technically connect the District Energy clusters in Manchester, Salford and Trafford. Across the rest of Greater Manchester other District Energy opportunities are under active consideration including potential projects in Bury, Tameside and Bolton 3.0 The Civic Quarter Heat Network (CQHN) A technical feasibility study has been undertaken by AECOM and confirmed by SKM Jacobs to underpin the viability of the business case for the CQHN. The study investigated the energy demands of the key heat customers (the so called anchor loads ) and looked at various options of how to satisfy these with a heat network (together with direct electricity supply to certain of the buildings).the study also considered other customers who could be supplied as developments in the area are delivered (providing an element of future proofing). The CQHN will: Provide reliable supplies of low carbon heat and power over a period of at least 30 years; Reduce the cost of energy to the City Council; Improve low air quality through a reduction in the emissions of oxides of nitrogen (NOx) over a period of at least 30 years; S34

6 Generate a revenue surplus; Avoid the cost of replacing ageing plant in individual buildings; and Be the first modern heat network in Manchester and act as the pathfinder/catalyst for others. The study examined options for the generation of the energy (both heat and power). The proposed new generation plant comprises natural gas fuelled, high efficiency and low emission Combined Heat and Power units [(CHP) similar to those installed in the Town Hall Extension] and so power will also be generated and distributed to selected buildings via a Private Wire System (PWS). The PWS will be installed at the same time as the pipework. 3.2 The CHP plant will be the lead energy provider with new high efficiency boilers as top up/back up heat providers. The grid supply acts as back up for electricity supply. The new plant will be located in Manchester Central which will itself receive heat and power and from which the network will supply low carbon heat and power to eight other properties (the anchor loads ), a number of which are in the ownership of the City Council and include the following City Council owned assets: MCC Building Heat Power Bridgewater Hall Yes Yes Town Hall Ext and Library Yes Yes Town Hall Yes No Manchester Art Gallery Yes No Heron House Yes No Manchester Central Yes Yes A number of potential customers who own assets within the compass of the CQHN are already in discussion with the City Council and their participation in the scheme will be considered during the next stage of project development. 3.3 There will be some ability to expand the initial network with spare capacity built into the initial design. This will be limited to c20% with any new capacity needing to be provided via additional generation plant. This will be assessed as loads come forward. There will also be the opportunity to interface the scheme with other proposed networks (e.g. the Corridor Manchester scheme) 3.4 The CQHN is a pathfinder project for modern high efficiency DH/DE networks not just in Manchester but also for Greater Manchester. Using the procurement exercise set out below will provide valuable experience and information which, it is intended, will enable Manchester to establish its own expertise and processes to undertake future projects. As such the development of the CQHN project is being supported by the GM Low Carbon Project Delivery Unit which is part of the Greater Manchester Combined Authority Core Investment Team. S35

7 3.5 The GM Low Carbon Project Delivery Unit provides specialist support acting as the informed client. At present the Unit is being funded through the Greater Manchester Combined Authority. This investment is being increased as a result of successfully securing funding from the European Investment Bank (EIB). The EIB has offered funding of 2.7m over 3 years to support the establishment of the GM Low Carbon Project Delivery Unit. This will fund 90% of eligible technical /legal /financial services costs (the balance to come from AGMA) associated with the eligible workstreams. The eligible work streams are: Heat networks; The establishment of an Energy Facilities procurement framework; and Conversion of street lighting to LED. 3.6 In addition it has been recognised by the Department of Energy & Climate Change (DECC) that there is a need for a Local Authority owned District Energy Procurement Agency (DEPA). The Greater Manchester Low Carbon Project Delivery Unit have been in discussion with DECC and specialist consultants with regard to DECC part funding (67%) an options appraisal and business case for the establishment of such an agency, with a view to basing the DEPA in Manchester. This would enable an Energy Facilities Procurement Framework to be hosted with the District Energy Procurement Agency (DEPA) and provide a new route to market for local authorities across the UK. This proposal has already received endorsements from over 30 local authorities in England along with an endorsement from the Scottish Government. If DECC support the establishment of a DEPA based in Manchester it will create a centre of excellence that can support further the development of Manchester based heat networks as set out elsewhere in this report. CQHN Procurement 3.7 After due consideration it was decided to use Carbon and Energy Fund (CEF) procurement framework to assist the City Council to procure and deliver the CQHN. CEF is an OJEU compliant procurement framework that offers a set of documentation and processes to allow mini-tender for the procurement of the Civic Quarter Heat Network project and its subsequent long term operation. The CEF can provide (if required) project, procurement, management and legal support. The CEF also provides access to a wide range of experienced delivery partners. CEF invite an organisation to join a Fund (a form of joint venture embodied in the Membership Agreement) with the aim of selecting and engaging a pre-qualified supplier to deliver and operate the project. 3.8 CEF is the only viable option for delivering the project in the near term given the lack of any existing viable frameworks that could be utilised combined with the absence of the necessary technical experience within the City Council to deliver such a project. The procurement encompasses both the construction S36

8 and long term operation of the network. CEF has successfully delivered in excess of 150m of low carbon projects into the health sector many of which are similar in nature to the CQHN project. 3.9 The CEF panel of suppliers/delivery partners have considerable experience in all aspects of procurement and delivery and covers legal/ technical/ financial/ project management expertise as well as substantial delivery (main contractor) organisations (e.g. Cofely, Veolia, EON, Vital) all of which have extensive experience in delivering DH/DE projects. The framework contains a significant breadth of potential partners that the City Council would expect to be presence of such a Framework. Utilising the CEF framework it is assumed that construction commences in the summer of 2016 following a procurement exercise The anticipated cost of procuring the CQHN via the CEF procurement framework has been estimated at 500,000. This is a combination of external costs (CEF, external legal as required by the City Council and a specialist project manager working for LCPDU) and internal costs. A proportion of these costs will be eligible for support from the EIB resources secured by the GM Low Carbon Project Delivery Unit as the Civic Quarter Heat Network is acting as a trailblazer for other schemes across Greater Manchester. At this juncture it is not possible to determine what proportion of the 500,000 will be eligible for support from the EIB therefore the City Council will be required to underwrite the 500,000 of revenue costs for the Civic Quarter Heat Network project to develop this initiative to financial close. 4.0 Conclusions and Recommendations 4.1 The Civic Quarter Heat Network (CQHN) project has been identified as providing the optimal carbon reduction solution technically, to be a Greater Manchester pathfinder project for procurement, delivery and operation of these types of asset, to offer the most cost and time effective method of procurement and to be aligned with the low carbon energy policy for Manchester. 4.2 The Business Case that has been developed for this project to date has demonstrated that the capital costs of the CHQN project would be repaid through the energy savings generated for the City Council and income from selling outputs to other customers. As such the project will contribute to the strategic objectives of the City Council including revenue savings, carbon impact reduction and offset heating plant replacement costs. 4.3 Having undertaken the procurement exercise for the CQHN, via the CEF Procurement Framework, further reports will be submitted to the Executive setting out the detailed outcomes of the business case, capital costs, contract structure along with seeking the necessary approvals from Council to progress the scheme. 4.4 Detailed recommendations appear at the front of this Report. S37

9 5.0 Contributing to the Community Strategy (a) Performance of the economy of the region and sub region 5.1 Investment into a series of Heat Networks within the City Centre will help to reduce costs to businesses and improve their resilience to climate change. (b) Reaching full potential in education and employment 5.2 The delivery of a series of Heat Networks within the City Centre should facilitate the creation of employment opportunities at a range of skill levels. 5.3 None (c) Individual and collective self esteem mutual respect (d) Neighbourhoods of Choice 5.4 The delivery of Heat Networks within the City Centre will help improve the environmental quality and attractiveness of the city, reduce energy and resource costs for residents, and help create attractive places that residents and businesses will choose to locate to. 6.0 Key Polices and Considerations (a) Equal Opportunities 6.1 An outcome will be to capture significant employment opportunities and ensure that local residents have the opportunity to compete for such job opportunities. (b) Risk Management 6.2 The key risks arising from the development of Heat Network proposals are as follows: Design risk associated with the impact on a project of deficiencies in design (e.g. of heat mains, energy centres, control systems, internals); Construction risk associated with the building of physical assets to a specified design and costs; Operational risk associated with operating and maintaining assets to meet specified requirements and costs; Demand / market risk - associated with variances from anticipated demand e.g. heat loads fail to materialise, or connection of loads to the network is significantly delayed, or loads choose to disconnect from the network; S38

10 Performance risk associated with being able to supply customers to an agreed performance / service standard e.g. due to demand being greater than forecast, or heat output being less than anticipated for the heat generation source(s); Financial risk various financial risks that generate a potential financial loss, including, for example: credit risks; and interest rate movements; and Regulatory risk associated with changes to the legal / regulatory framework adversely impacting a project (e.g. planning control, metering, billing, consumer protection, technical standards). The Governance structures for the Civic Quarter Heat Network will monitor these key risks as part of the delivery of this project. (c) Legal Considerations 6.3 The CEF procurement framework requires that the City Council enter into a Membership Agreement which sets out the parties obligations in relation to the procurement of the design, construction, operation and maintenance of a heat network. On the basis that the City Council wishes to utilize the knowledge it has acquired in carrying out the CQHN project under the CEF Framework, we have sought to limit the scope of the restriction on the use of IPR in so far as possible. The contract documents created for this scheme will be useable by the City Council for any future projects without risk. 6.4 The City Council is reliant on the CEF Framework having been correctly procured and operated. On the basis of the documentation available, there is no evidence to suggest that there is any material risk save that the Framework has been procured for services contracts as oppose to works contracts on the basis that under a standard CEF contract, the services element would be circa 70%. Whilst there is a risk that a party (including the commission on audit) could take issue with this, the risk is very low. To the extent that the Framework is subject to challenge, the City Council s remedy for any loss would be against CEF under the Membership Agreement. The strength of CEF financial covenant should be further investigated. 6.5 The CEF Framework, whilst not designed specifically for this type of project, can be used to procure the design, construction, commissioning and maintenance under a form of contract with an acceptable allocation of risk. S39