MD1531 Mayor’s RE:FIT programme 2016-2019

Type of decision: 
Mayoral decision
Code: 
MD1531
Date signed: 
24 July 2015
Decision by: 
Boris Johnson MP (past staff), Mayor of London

Executive summary

This paper sets out proposals and funding requirements for the next phase of RE:FIT, the Mayor’s non-domestic retrofit programme, which will run from 2016 to 2019. Like the highly successful current phase, it will comprise a framework of suppliers and a GLA-commissioned and managed Programme Delivery Unit (PDU) to support public sector organisations to identify and implement retrofit projects. 
This will ensure that the retrofit of public buildings in the capital continues at scale and that it results in the largest possible carbon savings, in order to help achieve the Mayor’s target to reduce CO2 emissions by 60% by 2025. It is anticipated that by 2019 this new phase of RE:FIT will save around 23,500 tonnes of CO2 and 68m kWh annually, generating cost savings to the public sector of over £4m and creating an estimated 2,000 jobs. 
It is proposed that the three and a half year £4.2m programme is funded on a 50:50 basis by the GLA and the European Regional Development Fund (ERDF). 
It is anticipated that as well as attracting £1 of match funding from the ERDF, every £1 invested in this programme by the GLA will lever in around £40 of capital funding for retrofit projects.   
While the proposed programme goes beyond the current Mayoral term, any funding commitments, contracts and agreements will be designed to ensure that the discretion of a future administration is not fettered.
 

Decision

That the Mayor approves:
•    RE:FIT programme expenditure of £4.2m for the period February 2016 to July 2019 funded by a contribution of £2.1m by the GLA, including £0.35m from the GLA’s returns arising from its original contribution to the London Green Fund (LGF), matched by £2.1m from ERDF funding
•    procurement of a new RE:FIT Programme Delivery Unit 
•    entry into an agreement with the ERDF, subject to the GLA’s bid for match funding being successful and appropriate break clauses being put in place. 
 

Part 1: Non-confidential facts and advice

Introduction and background

Background
1.1    Public buildings account for 10% of London’s carbon footprint and 30% of emissions in the services sector, and given that 80% are still likely to be in use in 2050, retrofitting these buildings is vital to meeting regional carbon targets. 
1.2    The GLA has assessed the public sector retrofit challenge, and identified the barriers that prevent it from happening at the rate and scale necessary:
•    a lack of capacity/expertise within public sector organisations to identify and implement projects, and access finance 
•    protracted and complex procurement processes 
•    risks associated with investing money with long-term paybacks and no savings guarantee.
1.3    To overcome these barriers, in 2009 the Mayor launched the RE:FIT programme. This comprises a framework of suppliers to deliver retrofit works, plus an expert PDU that supports and enables public sector organisations in London to retrofit their buildings and make best use of the framework. The framework is based on an energy performance contracting model whereby the suppliers guarantee the level of energy savings, thus offering a secure financial saving over the period of the agreement. 
1.4    The current phase of RE:FIT is funded by ELENA  (85%) and the GLA (15%) –  a total of £2.781m over four years. ELENA funding was conditional on the programme levering in a minimum of £60m (25 times the ELENA investment). The programme has so far supported the delivery of retrofit projects worth over £68.5m in three and a half years - 28.5 times the ELENA investment. 
1.5    As well as making a major contribution to the overall Mayoral target to reduce CO2 emissions by 60% by 2025, RE:FIT has specific targets, all of which it is on track to meet:
•    to retrofit up to 600 buildings by the end of 2015 (447 buildings so far achieved)
•    to generate savings of 45,000 tonnes of CO2 by the end of 2015 (96,400 tonnes so far achieved)
•    to retrofit 1.6m m² of public sector floor space by the end of 2015, 6.3m m² by 2020 and 11m m² by 2025 (1.45m m2 so far achieved)
•    to retrofit 100 GLA Group buildings by the end of 2015 (86 so far achieved – generating annual savings of over 9,000 t CO2 and £1.4m in the Group’s energy bills)
•    to retrofit up to 200 schools by the end of 2016 (57 schools so far achieved – with a pipeline of a further 251).
A new phase of RE:FIT
1.6    The current phase of RE:FIT comes to an end early next year and it is proposed that a new phase commences immediately following this. A new framework is currently being procured, to commence in early 2016. The intention is also to procure a new PDU, in accordance with the GLA’s Contracts and Funding Code. This will be in place when the current one ends, also in early 2016, and will run for three and a half years – the maximum period for which ERDF funding is available.
1.7    An appraisal of options for achieving CO2 reductions in London workplaces at scale into the future has determined that RE:FIT continues to be the best way of achieving large scale CO2 savings because:
Carbon saving targets will not be met if we do not retrofit existing buildings. Public buildings account for 10% of London’s carbon footprint and 30% of emissions in the services sector, and given that 80% are still likely to be in use in 2050, retrofitting these buildings is vital to meeting regional carbon targets. 
There are still many public buildings in London requiring retrofit. As at the end of May 2015 the programme: 
•    had resulted in 447 buildings comprising 1.6m m² of floor space being retrofitted or in the retrofit process  
•    had worked with around 200 organisations 
•    was saving around 30,000 tonnes of CO2 and 74m kWh each year 
•    had saved around £5m in public sector organisations’ energy costs
•    had enabled around £80m of investment in projects.
However, with around 4,000 public sector organisations and around 27.5m m2 of public building floor space in the capital, there is clearly enormous scope to do more. It is anticipated that by 2019, if the application for ERDF funding is successful, this new phase of the programme will enable a further £80m investment in energy saving works, saving around 68m kWh and 23,500 tCO2 annually in around 435 buildings (covering 1.2m m2 of floor space), generating cost savings to the public sector of over £4m, improving London’s infrastructure and contributing an estimated 2,000 jobs to London’s economy.  
The RE:FIT model is tried, tested and successful. RE:FIT has proven to be very successful and a catalyst for delivering projects at scale (see above achievements).
Public sector organisations continue to need support to retrofit their buildings. The current PDU’s pipeline from new organisations and from existing organisations with additional projects is continuing to grow. This demonstrates that a lack of in-house skills/capacity remains as much of an issue now as it was in 2009, and that without the GLA’s support many projects simply would not happen or would not be as extensive and successful. Indeed, in a recent survey of PDU clients, the overwhelming view was that their projects proceeded solely because of the support they received from the PDU (see section 2.1 below).
GLA funding
1.8    The full funding proposal for this work is set out in the Finance comments section.
1.9    The GLA’s published 2015-17 Business Plan earmarks a gross budget of £1m a year (half from the GLA and half from anticipated income) for RE:FIT for 2015-16 and an indicative budget of the same for 2016-17, which is subject to the 2016-17 budget setting process. This demonstrates ongoing Mayoral commitment to the programme and to its continuation following the end of the current programme, in recognition of the Mayor’s RE:FIT targets for 2020.
1.10    It is proposed that a further £1.1m of GLA budget is invested in REFIT post 2016-17, to enable the project to continue for a three and a half year period and to be resourced at a slightly higher level than at present (with an anticipated seven FTEs in the PDU team rather than the current five FTEs). This additional resourcing is necessary for the reasons outlined in Section 2.2 below. 
1.11    It is proposed that £0.35m of this further £1.1m of GLA funding will come from returns to the GLA arising from its contribution to the 2007-11 London Green Fund for energy efficiency retrofit projects. This funding will specifically ensure that the new PDU has sufficient resources both to attract new harder-to-engage organisations to the programme and, in line with the publicly stated aim of the Mayor for this new phase of RE:FIT, to accelerate the use of solar PV in public buildings, particularly schools. 
1.12    The GLA’s match funding was £26m for the London Energy Efficiency Fund (LEEF), managed by Amber, and £6m for the social housing retrofitting fund, managed by The Housing Finance Corporation. Both of these funds have fully committed the GLA funds to loan investments with repayment schedules that vary by project. In the case of LEEF, the capital originally invested is scheduled to be repaid in full by 2023. Amber’s contract allows them to reinvest the capital on these returns, in line with the current investment policy, until 2018. After then all returns will be repaid. Amber pay annual interest to the European Investment Bank (EIB), who hold the sum paid on the GLA’s behalf. The GLA’s investment managed by the THFC has a much longer payback period – 29 years.  Both the capital and interest for the THFC element will return to the GLA. 
1.13    By the end of 2019, the GLA will have accrued returns from LEEF (interest) and THFC (interest and capital) of just over £3.5m, of which £0.5m will need to be paid to the EIB for costs. This is an estimate, as it is possible that loan repayments may be rescheduled. However, the figure is highly likely to be in this region. 
1.14    Given that it will enable an additional £0.35m of ERDF funding to be secured, which will in turn lever in an additional £14m of capital funding for retrofit projects, this use of the returned funds is demonstrably good value for money. It is being proposed in a separate MD that a further £1.75m of the remaining c£3m is used for Energy for London, also for ERDF match funding.
    European funding
1.15    RE:FIT fulfils the objectives for the 2014-20 ERDF set out by the European Commission, the government and the London Enterprise Panel (LEP). The European Commission has ‘supporting the shift to a low carbon economy across all sectors’ as one of its thematic objectives for the ERDF in 2014-20.
1.16    Following the submission of an outline application to ERDF for half of the funding for the next phase of RE:FIT (the maximum amount permitted), the GLA has been invited to proceed to the full application stage. The full application will be submitted by 25 September, with the outcome likely to be known early in 2016. The full application will require confirmation of the GLA’s funding for the project.
1.17    In the unlikely event of the GLA’s application to the ERDF being unsuccessful, it is proposed that the procurement a new RE:FIT PDU would still go ahead, albeit at a reduced scale, while other match funding options to allow for expansion are explored.   
RE:FIT and a future Mayor
1.18    With Mayoral elections in May 2016, careful consideration has given to ensuring that the discretion of the next Mayor is not fettered by the proposed arrangements, which go beyond the current Mayoral term. That is, a contract with the PDU and a funding agreement with ERDF that both run from early 2016 to the summer of 2019.
1.19    The following alternatives to the proposed arrangements have been considered: 
•    extending the contract with the current PDU for a further year
•    reprocuring a new PDU for an early 2016 start, but on a one year renewable contract 
•    delaying procurement of a new PDU until the new Mayor is in place and has given approval, with a gap between the end of the current and the commencement of the new PDU
•    delaying the application for ERDF funding until the new Mayor is in place.
1.20    All of these alternatives have been rejected, for the following reasons:
•    extending the current contract with the current incumbents would open the GLA up to a high risk of challenge from other suppliers. It would also mean that the GLA would not benefit from the innovation and new approaches from the wider market that a procurement through a framework would bring. 
•    reprocuring a one year renewable contract through a framework would be costly and inefficient. The amount of officer time involved a major procurement for such a short timeframe would be high, as would the cost of the service itself, as mobilisation costs would not be able to be spread over a reasonable period of time. Furthermore, if a provider other than the current incumbent wins the contract, the mobilisation period could take up a quarter or even half of the entire period of the contract. This would undoubtedly negatively impact on the achievement of the programme’s KPIs.
•    delaying procurement so that there is a gap between the current and future PDUs would threaten the achievement of the Mayor’s carbon reduction targets. One of the first tasks for a new PDU will be to translate a healthy pipeline that will be left at the end of the current phase of RE:FIT into projects. They will also need to keep up and build the momentum of the programme by rapidly develop a new pipeline. In the short term, a gap between the end of the current and the beginning of the new phase of RE:FIT would present a very serious threat to the achievement of the Mayor’s target to retrofit 200 schools by the end of 2016.
•    applying for ERDF funding now – at the point when the funding is launched – gives a much greater chance of success and a far higher level of certainty. This is because the timescales for possible future funding rounds have yet to be announced, and the amount of funding available will reduce as time goes on.
1.21    However, the risk of the proposed arrangements fettering the discretion of a successor administration is considered to be low, because:
•    the PDU contract will contain an annual break clause as well as the flexibility to increase or decrease the service, so enabling a new Mayor to change or terminate the programme
•    the ERDF funding agreement is highly likely to have scope for a new Mayor to change or terminate the programme with no financial penalty. The DCLG/ERDF Example Revenue Funding Agreement allows for programmes to be changed, subject to approval by the GLA’s European Programmes Management Unit (EPMU). Potential changes include those relating to the nature of the project, the amount and profile of expenditure, milestone dates and targets. In the event of the Mayor wishing to terminate the funding agreement, the EPMU have a number of options at their disposal, including the discretion to require repayment of some or all of any grant already paid. However, the risk of clawback of grant funding is considered to be low, particularly if the programme has met its targets and milestones to that point.

 

Objectives and expected outcomes

2.1    The proposed next phase of RE:FIT will generate and accelerate substantial retrofit activity, achieving significant reductions in energy demand and carbon emissions of London’s public sector buildings. It is anticipated that by 2019 this new phase of the programme will save around 68m kWh and 23,500 tCO2 annually in around 435 buildings, generating cost savings to the public sector of over £4m and improving London’s infrastructure. It will also benefit London’s economy through the creation of an estimated 2,000 jobs arising from retrofit works. 
2.2    It will build on the activities of, and be informed by the key learnings from, the current programme. In line with the contractual requirements of ELENA, the programme has been and continues to be evaluated on a regular basis, with findings – and any changes to the programme arising as a result of these - reported to the EIB on a six monthly basis. These six-monthly evaluations (the most recent of which was in March 2015) include depth interviews with at least ten PDU client organisations, all 12 suppliers on the RE:FIT framework and the PDU. Improvements to the programme are also informed by feedback from RE:FIT clients received by the PDU on an ongoing basis. The design of the next phase has also been informed by an appraisal of external factors, such as the Mayor’s strong commitment to solar PV. 
2.3    Having considered the above, it is clear that in order to maximise outputs the new PDU needs to be an enhanced version of the current one. It is therefore proposed that the size of the team is increased by around two FTEs, to seven rather than five. The key reasons are as follows:
•    to boost marketing and engagement, in order to attract new organisations to RE:FIT
•    to promote solar PV  
•    to generate greater retrofit activity in schools
•    to innovate in order to overcome barriers to delivery.
2.4    The new PDU will: 
•    deliver a more efficient programme, prioritising projects and groups of projects to deliver optimal outputs
•    develop new approaches to overcome sector specific barriers to improving the energy efficiency of non-domestic buildings (specifically around accelerating the use of solar PV and the retrofitting of schools)
•    expand the RE:FIT client base and generate new projects for existing RE:FIT clients 
•    support clients throughout the RE:FIT process by providing specialised advice, for example, marketing, benchmarking, technical, finance, procurement
•    identify and help to secure finance for retrofit programmes, including through low cost public borrowing schemes for example, Public Works Loan Board, Salix and LEEF
•    advise on and produce documentation to assist with using the RE:FIT procurement framework including all aspects of energy performance contracting contracting
•    provide ongoing support on RE:FIT contract management and technical quality assurance
•    monitor and verify project outputs. 
 

Equality comments

 

3.1    The GLA has taken and will take appropriate steps to ensure that there are no potential negative impacts expected on those with protected characteristics. Those with protected characteristics will gain from the positive benefits of these projects in equal measure should their properties be selected, and there will be equality of access to participate in the delivery and benefit from the programme, without discrimination. 

3.2    In line with the Equality Act 2010, the GLA pays due regard to the need to promote equality and prevent discrimination in everything it does, including its decision-making. The GLA also has an equality framework – the Mayor’s Equal Life Chances for All – that goes above and beyond what is required by the Equality Act 2010. This promotes outcomes for a diverse range of communities, and seeks to bring real changes to the quality of life for all Londoners. All aspects of the development and delivery of RE:FIT will conform fully to legislative requirements and deliver the aims and objectives set out in Equal Life Chances for All. This includes ensuring non-discrimination in procurement, stakeholder engagement, marketing, publicity and the delivery of retrofit projects supported by RE:FIT.  
 

Other considerations

Key risks and issues

Risk

Mitigation

Rating

The discretion of a new Mayor, who may want to change or stop the RE:FIT programme, is fettered by contractual commitments that go beyond May 2016

All political parties share a commitment to reduce carbon emissions, so there is little risk, at a strategic level, that this would not be a priority for a new Mayor. However, in the unlikely event of a new Mayor wanting to change or stop funding services, there would be scope in the PDU’s contract (that is, break clauses) and in the agreement with ERDF to allow for this.

More detail on this is given in Sections 1.6 and 1.7 of this paper.

Low risk

The GLA does not commit the full amount of funding, negatively impacting on the achievement of the Mayor’s RE:FIT and wider  CO2 targets

The LGF returns are not invested in RE:FIT, enabling little or no scope to innovate or to boost delivery in new areas, such as solar PV

The GLA has already earmarked £1m a year for 2015/16 and 2016/17 in its published Business Plan and is fully supporting the ERDF application. Furthermore, the returns to the GLA arising from its contribution to the LGF provide an additional source of funding which has been directly identified to meet ERDF requirements and to support the ERDF application. Effective programme management of the PDU by the GLA will continue to ensure that the PDU is focused on achieving these targets and meeting these requirements.

There is sufficient resource within the returns to the GLA arising from its LGF contribution to cover the £350,000 for 3.5 years required for RE:FIT. Furthermore, the Mayor has publicly indicated that he wishes to use his RE:FIT programme and PDU to maximise the installation of solar PV – and this funding is needed in order for it to do so.

High risk

The GLA receives no or reduced ERDF funding, resulting in a smaller PDU team, reduced outputs and  a negative impact on the Mayor’s RE:FIT and wider  CO2 targets

The GLA will use the GLA funding of £2.1m to procure a reduced team but is confident that its application to ERDF will be successful, as it is so closely aligned with ERDF and other key objectives. However, in the unlikely situation of receiving no or reduced ERDF funding, the GLA will explore other match funding options in order to boost resources.

Medium risk

There is a delay in receiving ERDF funding, impacting of the activities of the PDU

It is the GLA’s intention to schedule the procurement of a new PDU so that we enter into contract in February 2016 (following the current expected date for the decision on the outcome of the full ERDF application). A short delay would mean the GLA further extending the contract of the current PDU.

Medium risk

The new phase of RE:FIT fails to achieve its targets, negatively impacting on the achievement of the Mayor’s RE:FIT and wider  CO2 targets and meaning that the ERDF may claw back funding

Future targets have been based on the track record of the current phase of RE:FIT. The new phase will start with a healthy pipeline of projects from the current phase.

Given that only a small proportion of public sector buildings have so far been retrofitted through RE:FIT, there is enormous scope for future projects to be implemented.

Effective programme management of the PDU by the GLA, and contractual incentives linked to the achievement of KPIs, will ensure that the PDU is focused on achieving targets.

Medium risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Links to Mayoral strategies and priorities
4.1    The RE:FIT programme contributes to London becoming a world leader in improving the environment: identifying and investing in projects that reduce greenhouse gas emissions, reducing resource consumption and developing new green skills and services.

4.2    The programme will also contribute towards the achievement of the following aims and objectives of the Climate Change Mitigation and Energy Strategy:
•    the overall target of cutting carbon emissions by 60% by 2025
•    Policy 8 - Retrofitting London’s existing workplaces with energy efficiency measures and low and zero carbon microgeneration technologies - The Mayor, working with partners, will use public funds to develop commercial models that catalyse markets to retrofit workplaces with energy efficiency measures and low and zero carbon microgeneration technologies 
•    ‘Objective 3’ of the Mayor’s Economic Development Strategy to ‘make London one of the world’s leading low carbon capitals by 2025 and a global leader in carbon finance’
•    the specific RE:FIT targets set out in paragraph 1.5.

Impact assessments and consultation
4.3    The programme has been, and continues to be evaluated on a regular basis, with findings – and any changes to the programme arising as a result of these - reported to the EIB on a six monthly basis. These six-monthly evaluations (the most recent of which was in March 2015) include depth interviews with at least ten PDU client organisations, all 12 suppliers on the RE:FIT framework and the PDU. Improvements to the programme are also informed by feedback from RE:FIT clients received by the PDU on an ongoing basis.

4.4    On 30 July 2014, the Mayor launched the consultation for the first long-term London Infrastructure Plan (LIP). The consultation proposed a number of energy measures and stated that ‘the GLA will … (continue) to retrofit existing property to improve energy efficiency and reduce demand ...’ Following consultation, the LIP update report confirms support for both RE:FIT and RE:NEW (the Mayor’s domestic retrofit programme), stating that ‘These programmes will continue to run over coming years, further reducing (energy) demand.’.
 

Financial comments

5.1    As the 2016-17 budget will be the last to be set by the current Mayor, this contract will contain an appropriate break clause as well as the flexibility to increase or decrease services.
5.2    In the unlikely event that the GLA’s bid to ERDF is unsuccessful, the total project cost will reduce from £4.2m to £2.1m, and the option of alternative match funding would be explored.
5.3    Returns associated with the GLA’s investment of £32m into the fund are GLA funds and its use and allocation subject to the decision making process. 
5.4    There are sufficient funds available to resource the GLA match funding of £2.1m required for this programme. The receipts of £0.35m required to part-fund the GLA element from the LGF are due back to the GLA at minimal risk of default and are being held by the holding fund manager on behalf of the GLA.
5.5    The GLA’s 2015-17 business plan includes a gross budget of £1m for RE:FIT in 2015-16 (half from the GLA and half from anticipated income) and an indicative budget of the same for 2016-17, which is subject to the 2016-17 budget setting process. A further £1.1m of GLA budget will be required post 2016-17 to continue the programme.
5.6    The proposal is to fund a maintained RE:FIT framework and a PDU that facilitates retrofit projects. The new PDU is likely to be a seven FTE team flexible to the requirements of the projects it is supporting so will incorporate work from higher numbers of part time staff. The cost per FTE is £154,285 per annum on the basis that 90% of this funding goes to the PDU. 
5.7    The Programme, Policy and Services team within Housing and Land is sufficiently resourced to manage this project and there would be no additional staffing requirement to continue this work.  
 

Investment and Performance Board

7.1    The funding and procurement of the new phase of RE:FIT was considered and approved by HIG on 3 March 2015. On 16 July 2015 IPB approved in principle the Stage 1 (Strategic Case) and Stage 2 (Investment Decision) reports for a new phase of RE:FIT (as set out in Appendix 2). 

 

Planned delivery approach and next steps

The next steps following consideration/in-principle approval by IPB are summarised below:

Activity

Timeline

Approval of MD

31 July 2015

Commence procurement process for the PDU

July 2015

Submit ERDF full application*

August 2015

Submit full application to ERDF

25 September 2015

Obtain ERDF funding approval*

January 2016

Sign ERDF grant agreement*

February 2016

Appoint new PDU*

February 2016

Delivery end date*

31 July 2019

*provisional