Content

RESOLVED:
 
1. 
To agree the procurement strategy for a Design, Build,
Operate and Maintain (DBOM) contract and to procure a DBOM
Contractor using the Negotiated Procedure with prior call for
Competition under Regulation 47 of the Utilities Contracts
Regulations 2016.
2. 
To agree the procurement strategy for a Metering and
Billing (M&B) contract and to procure an M&B Contractor
using the Competitive Flexible Procurement under the Procurement
Act 2023.
3. 
To agree the extension of the PSDS3c contract by
£630k to include the extension of the existing Britannia Heat
Network to connect Bridport House.
 
 
Reasons For
Decision
1. 
The Colville and Britannia developments are important strategic
projects for the Council, with the aim of providing more new
housing with a significantly lower carbon footprint than any
housing they replace together with low carbon Schools and Leisure
Centre. The Colville heat network project is a major project and
investment for the Council and apart from the carbon benefits that
it would deliver for the borough, the Council sees this project as
integral to its ambition to deliver on its Climate Action Plan
commitments, to improve air quality, improve the environmental
sustainability of its neighbourhood and deliver other wider social
economic benefits to residents of the borough
 
2. 
As detailed in this report, the primary reasons for the development
of the Colville Heat Network (CHN) are planning related.
Notwithstanding the planning requirement for the development of the
heat network it was equally important that the Council takes
forward a project proposal that is financially viable and
sustainable and one that does not place any additional burden on
the already stretched Council finances. To this end, the OBC for
the CHN project was developed to deliver at least the minimum IRR
which Council will normally use for its investments, and also
secure funding from various sources to meet the capital and
commercialisation cost for the project. In specific terms, the
project will be funded using the GHNF grant of £2.938m,
domestic connection charges of £5,750 per dwelling which will
be paid to the project by the Colville and Britannia developments
for those properties which are as yet unbuilt and are factored into
the costs for these projects. This equates to 958 dwellings or 73%
of the total domestic connections and has a value of £5,509k.
A connection charge of £211k will also be levied on the
Shoreditch Park Primary School representing the estimated cost of
connection to the district heat network. Council borrowing has been
assumed for the balance of the capital expenditure not covered by
the GHNF grant or connection charges.
 
3. 
The Colville Heat Network is being developed to alleviate fuel
poverty and reduce carbon emissions in the Borough. It is
recognised that the cost of supplying heat to dwellings that would
be connected to this heat network needs to take account of what
people are paying and/or would pay if connected to other heat
sources such as individual boilers. The financial modelling to
establish viability has therefore been completed within an overall
restriction that no householder would pay more for heat through the
heat network than they would if the same property was heated
through an individual boiler system.
 
4. 
The work carried out to develop the project’s Outline
Business Case, which was approved at Cabinet in June 2024, also
included an extensive soft market testing which considered various
options for the delivery and commercial structures for the project.
The outcome of this exercise has informed the recommendation to
contract with a specialist contractor responsible for Design,
Build, Operation and Maintenance (DBOM) of the heat network and to
also appoint a contractor to deliver the Metering and Billing
(M&B) services for the heat network.
 
5. 
Using the funding secured through the GHNF grant, a contract has
been placed with Buro Happold, and Bevan Brittan to support
Commercialisation work for the CHN. The first part of this work has
been ongoing since June 2024 to define the Procurement Strategy and
work up the procurement and legal documents. The key considerations
have been the best way to achieve the benefits from the balance
available between Capital and Whole Life Maintenance Cost together
with market leading reliability and availability targets.
 
6. 
The delay in the Colville Heat Network has meant that the Council
is unable to spend the awarded grant from Green Heat Network Fund
(GHNF, £2.9m) in the timescale (by the end of
2024/25).  It also became clear that the
Bridport House refurbishment would require heat before the Colville
Energy Centre was available. The Council therefore proposed to
accelerate heat availability to Bridport House by extending the
existing Britannia Heat Network pipework to deliver heat and
thereby meeting the request from GHNF for some acceleration and
retention of the Grant. The Council therefore proposes to extend
the PSDS3c contract to also connect Bridport House to the
network.
 
7. 
This report seeks agreement from CPIC to commence the procurement
of both the main DBOM and M&B contractors using the procurement
routes detailed in other parts of this report and to extend the
PSDS3c contract by £630k to include the extension of the
Britannia Heat Network to provide heat to Bridport House.
 
Alternatives
considered and rejected
 
Other commercial structures and procurement
approaches considered for the development of the Colville heat
network are discussed in this section. Clearly, the procurement
route has to follow the Utilities Contracting regime given the
nature of the requirement and the complexity of the
employer’s requirement means that some forms of dialogues and
negotiations will be included in the procurement process regardless
of whether this procurement is carried out under the current
procurement regime or the Procurement Act 2023. The complexity and
extensive nature of the heat network also dictate that the
procurement is carried out by approaching the wider market instead
of using an existing framework to allow the Council to secure
greater competition from the market and consequently better value
for money for these requirements  .
Option 2 - Delivery structure with single DBOM
contractor holds heat supply agreements with customers
This option would deploy the Council or its
energy services company (ESCo) as the
operating entity for the CHN project with the DBOM contractor being
asked to take responsibility for the purchase of fuels required to
generate the  heat and also for the
supply of heat to customers. Although the Council would receive a
proportion of the net benefit from these costs and revenue to
support the debt funding used to finance the project, this option
is discounted because it can not be
used for supply of heat and power to Council’s buildings
without going through more formal and complex procurement which
will not yield additional benefits to the Authority. Also there is
the risk that the whole operation largely sits under the DBOM
contractor particularly with regards to pricing, metering and
billing with the Council not able to exert the level of control
that could protect people within fuel poverty.
Option 3 - Delivery structure with single DBOM
contractor, but the Council energy company holds heat supply
agreement with customers
Option 3 which sets out a scenario whereby the
sourcing of the input fuels is placed under the responsibility of
the energy company was also considered but discounted. The revenue
from heat sales would also go to the energy company. This option is
primarily discounted because the contracting arrangement that sits
below the energy company places all the risk for delivery and
operation of the network under the one single contractor even
though the Council’s energy company would have responsibility
for purchasing the input fuels
Option 4 - Delivery structure with multiple
contractors, and the Council energy company holds heat supply
agreement with customers
Under this option, the scenario in option 3
above is replicated but instead of having one single DBOM
contractor responsible for the whole operation, the contracting
arrangement is split into three, allowing three different
contractors to provide, design and build, operation and
maintenance, and metering and billing separately. The
Council’s energy company will still be responsible for the
procurement of the input fuel for operating the network. This
option is also discounted because of the complexity of contracting
with three different contractors and because separating the long
term maintenance from the initial design and build risks a conflict
of priorities which is intended to be managed by a DBOM contractor
responsible for both. Analysis of other schemes shows that having
the same contractor reduces disputes and ensures compatible
decision making across the separate disciplines.