Decision Maker:

Outcome: For Determination

Is Key Decision?: Yes

Is Callable In?: No

Date of Decision: February 3, 2025

Purpose:

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.