Is energy supply a legitimate area of interest for local authorities, or an expensive vanity project that is unlikely to either make money or help the local community?

In a sector dominated by talk of smart systems and digital disruption, it is sometimes easy to forget that the UK’s energy industry was once run by town halls.

The era of municipal energy appeared to come to natural end with the 1947 Electricity Act, which nationalised more than 500 separate generation and supply organisations into 14 area boards.

However, in the finest traditions of a show­ business comeback, the concept of councils selling electricity came back into vogue around six years ago.

Spurred on by the chance to open up a valuable source of income, tackle fuel poverty and tap into the green agenda for renewables, there followed a flurry of announcements and press launches and it seemed every council in the land would soon have their own white label or fully fledged energy services company.

As with many a comeback, however, problems emerge, and over the past 18 months the torrent has turned into a trickle, with local authorities appearing to lose their appetite for energy.

In August, Portsmouth City Council very publicly abandoned plans to create its own energy company after the new administration decided that what lay ahead was not profit but loss. Speaking at the time, the leader of the council, Gerald Vernon-Jackson, said they had taken the decision “to limit the council’s losses and make sure no further money goes the same way”.

Given the enormous financial pressures many councils find themselves under, a reluctance to commit millions of pounds of taxpayers’ money to a risky venture like an energy company is understandable, but has the second coming of municipal energy stalled before it ever got a chance to properly get going? Or is this just a temporary blip? To paraphrase a well-known football anthem, could energy still be “coming home” after all?

The largest operator in the local authority energy market is Robin Hood Energy, which was launched by Nottingham City Council in 2015.

The supplier has more than 120,000 customers, totalling over 200,000 meter points, and nine white label partnerships across the country, including The Leccy, Your Energy Sussex and White Rose Energy.

In 2017, after only three years of trading, the company returned a profit of around £200,000, which was reinvested into a Warm Home Discount scheme to help some of its most vulnerable customers during the winter months.

“We believe Robin Hood Energy is the missing piece of the energy industry puzzle, helping to redress the balance in the energy industry in favour of the consumer and championing the public’s right to access fairly priced energy,” said the supplier’s chief executive, Gail Scholes.

In addition, Ovo Energy has a number of white label deals with various local authorities, including Southend Energy and Peterborough.

The latest entry into the market is Engie, which recently signed a contract with Cheshire West and Chester Council to launch a new platform called Qwest Energy.

Speaking to Utility Week, Engie’s divisional chief executive for homes and enterprise, Kevin Dibble, says the new energy company is the result of a “long-standing partnership with Chester and Cheshire West Council”.

Qwest Energy has been developed through Qwest Services, a joint venture company between Cheshire West and Chester Council and Engie set up in 2015. Qwest Services provides expertise in facilities management, customer services, workplace solutions and digital transformation for local authorities.

“We are already working with more than 400 communities in the UK, providing technical and facilities management services to local authorities and in regeneration and the refurbishment of homes,” says Mr Dibble.

“There is already the 100 per cent ­council-owned approach in the market,” he adds. “There’s the white label approach with backing from a private supplier, and then there are council-to-council deals. This is another form of that arrangement, which fits well for Engie, but that’s not to say we would rule out the more straightforward white label with other councils and we are still interested in developing that activity where we can.

“It comes down to the council and how much risk they want to take and what their appetite is to dive into the energy market, and commit public money. Obviously, there are examples where councils who have taken that plunge with a full energy services company. For others, that is not necessarily the logical way to do it,” adds Dibble.

Qwest Energy will offer a range of tariffs, with customers being automatically rolled on to the company’s cheapest comparable deal at the end of their fixed-term contract thanks to a rate rollover promise.

“We see this as a community model and an opportunity to help support the council in its fuel poverty activities,” says Dibble.

“There will be a social tariff, targeted in specific postcodes in the region, which will support those who most need it and will help fund energy efficiency advice, home visits and drop-in sessions.

“We’ve also been working with the council’s affordable warmth steering group, which brings together the various charities and stakeholders to work with them and use those funds.

“The important element is to provide a local vehicle to engage people in the energy market. We have people on the ground who understand the partnership we have in place already, and that will allow us to reach disengaged customers and show them how they can save money.”

But while some local authorities appear interested in pursuing white label deals with existing suppliers, not everyone is convinced they offer the best deal for councils, particularly in the long term.

Consultant Stephen Cirell, who has worked on a variety of local authority energy projects around the country, says councils will not make “any money at all from a traditional white label deal”.

“All you get is a cheaper tariff in your area with your name on it,” he says. “You can’t sell the brand at the end of the contract and depending on what’s in the agreement, you could have very few rights at the end.

“The customers under a white label are a customer of the licence holder, not the brand. At the end, they go back to the licensee. That’s why I’m very unhappy with traditional white label deals – you get no money, you don’t develop anything with value and you don’t control the tariff.”

Cirell says a fully fledged local authority energy service company remains the “Holy Grail”.

“It is harder to get going. There is a commercial risk. But once it is up and running and the investment has been paid off, it will generate a six-figure sum per annum for the local authority.

“The brand and the company both have a value,” he adds. “When you start to look at the success companies like Robin Hood Energy have had, you realise there is a modus operandi and a demand for civic energy companies.”

Looking forward, Cirell says he can see between six and twelve regional local authority companies covering the entire UK.

“Within the next five years, you can expect at least six more energy service companies to launch,” he says. “You’ll end up with regional coverage, similar to local authority purchasing organisations.

“There will be one in Scotland, whether involving the Scottish government, local authorities or both,” he predicts. “There’s bound to be one in Wales. There will be another in the South West. A group of authorities are talking about the potential of creating one in the North East and a group of councils across the English and Scottish border are also looking at doing a licensed company as well.”

Ryan Thomson a partner in Baringa’s energy practice tells Utility Week he believes there is “definitely still appetite” in the market, despite Portsmouth City Council volte-face.

“A year or two ago, it felt like any council who did not have a supply company would be an oddity, now people are weighing it up much more carefully,” says Thomson. “It is not a sure thing. Robin Hood Energy and Bristol Energy could still be a couple of years away from turning a profit and no longer be a drag on council finances.”

Regarding the debate about white labels versus full-blown energy service companies, he says: “White labels sit closer to other affiliation deals that councils may have done previously. In terms of getting it through a council chamber, a white label deal will definitely be easier and does not feel as risky.

“If you are going down the white label route, you need to think about how you are protecting the brand. If you start having significant issues with your partner, then how do you back out? If the complaints go through the roof, you could be dealing with the headlines.

“There’s also a question around how you attract customers who would not otherwise switch. There’s more than enough competition in the switching market already, but it’s the 60 per cent who have not switched that local authority companies could target. Customers could feel more attracted to a local authority brand.”

In terms of what drives a local authority to think about entering the energy business in the first place, Grant Thornton’s head of energy and environment, Mike Read, says it can be down to a number of issues, including wanting to tackle fuel poverty, generate income or a desire to increase the amount of renewable energy used in their area.

“There are various angles and one of the challenges is that most of them are mutually exclusive,” explains Read.

“If you want to tackle fuel poverty, then the chances are you will not be generating massive dividends for the local authority. It would be incredibly challenging to offer low-cost solutions and get a return.

“The energy supply market is incredibly competitive and unless there is a clear rationale, you need to recognise that you might not be able to do it.”

Read points to the example of the Scottish government, which has cited a desire to tackle fuel poverty as one of the main reasons why it is considering creating a public energy company north of the border.

“The Scottish government has identified a real reticence in Scotland to switch suppliers,” he adds. “They think that in setting up a trusted brand, they will encourage a debate about switching, and you can also develop that brand into other energy efficiency activities as well.”

Fiscal flexibility

While councils remain under enormous financial pressure, one recent development may offer significant opportunities for energy companies looking to expand into the local authority market.

Theresa May’s recent announcement that the government plans to scrap the cap on what councils can borrow against their housing revenue to build new homes might not seem significant, but it could mean many more local authorities start building homes.

A large number of councils have already set up their own housing companies and if they do still build homes, then they may also look for ways to help residents insulate or power these new properties.

Read says this could help the burgeoning heat network market and also drive demand for local energy companies at the same time.

“It will be the local authorities who see the bigger picture who will take this forward,” says Read. “It will be the councils who have bought into their greater role as an enabler, who are setting up heat networks or housing companies.”

Make no mistake, the need for councils to make massive budget cuts and the highly competitive nature of energy markets do not make for easy bedfellows. It would be a brave council leader who signed off a multi-million-pound investment for a fully fledged energy service company in the hope of making a fast buck. But if that council leader was serious about helping thousands of residents out of fuel poverty and making a long-term commitment to the local community, then it could make a lot of sense.

Ironically, the key to future energy companies could well be in the hands of the local authority housing market, which is also hoping to make a comeback. Don’t write either of them off quite yet.

The main players

Robin Hood Energy and Bristol Energy are currently the only two fully licensed energy suppliers run by local authorities.

Robin Hood Energy

Robin Hood Energy was the first local authority-owned energy company to be launched in the UK, in 2015, and is based in Nottingham. The company says its ambition is to reduce fuel poverty across the country.

Robin Hood Energy came 15th out of 31 energy firms rated by 8,761 members of the general public in the annual Which? satisfaction survey.

In October, it announced a 14.8 per cent price increase for customers on its standard variable tariff.

Robin Hood Energy has white-labelling arrangements with eight other energy suppliers – most of them council-owned – whereby Robin Hood’s tariffs are repackaged by its partners under their own branding. They include: White Rose Energy in Leeds, Ram Energy in Derby, Angelic Energy in London, Great North Energy in Doncaster, Citizen Energy in Southampton, and Leccy in Liverpool.

Bristol Energy

Bristol Energy is a municipally owned energy company founded in 2015 by Bristol City Council and began trading in 2016. It describes itself as a “force for social good” and aims to deliver non-profit energy using renewables at lower prices than large profit-making energy corporations.

Bristol Energy offers six simple tariffs at competitive prices, including a green option that provides 100 per cent renewable electricity from local sources.

Bristol Energy was ranked 11th out of 31 energy firms rated by 8,761 members of the public in the annual Which? satisfaction survey.

Defeat for Victory Energy

Local authority energy is not always profitable, as was found out by Victory Energy in August. The Portsmouth Council-owned company was scrapped before it even became operational. Having already cost £2.5 million, the council, headed by Liberal Democrat councillor Gerald Vernon-Jackson, said at the time it could require many millions more to get up and running.

The scheme, which was approved by the previous Conservative administration, had already received significant investment, and the current cabinet felt it “more responsible to cut the council’s losses” rather than risk spending further money with no guarantee of it being returned.

PwC was asked to compile a report into the profitability of the company and reportedly said the scheme could be profitable. In another report to the cabinet written in July last year it was suggested Victory Energy would require a total of £3.8 million investment from the council, but PwC’s current estimate is that it would take at least £15.2 million with no guarantee that changes in the market would not increase this amount further.
The same report forecast that 25,000 customers per year would be needed to make the company viable, a figure that has now risen to 50,000 according to the company’s business case.