MD3203 Project Development Funding for OPDC and MPS Heat Networks

1.1.    The Mayor has set an ambition for London to be a net-zero city by 2030. The retrofit of buildings and the supply of decarbonised heat to those buildings are key to reducing London’s carbon emissions. Delivering net zero also brings wider benefits, including reducing air pollution; making buildings operate more efficiently; and supporting the growth of London’s green economy. 
1.2.    The GLA Group has an important role to play in reducing emissions from its own buildings and fleets. Developing a strong pipeline of investment-ready projects is a key challenge to achieving net zero. Across the GLA Group, there are several assets that will require significant project-development support before they can be funded by other private or public grant or investments. 
1.3.    In March 2022, the Mayor announced that the GLA would be participating in the C40 Climate Leadership Group’s climate budget pilot; and that the 2023-24 GLA Group financial budget would include, for the first time, a climate budget. This integrates, within the annual budget process, a report on the funding for climate-related measures proposed in the forthcoming budget cycle; and the associated emissions reductions. As part of the process, each functional body has set out its planned spending on emissions reduction over the next three financial years, and the estimated carbon savings. The implementation of climate budgeting has enabled and encouraged GLA Group member organisations to examine their assets and operational carbon emissions to identify key projects to ensure net zero is achieved. These include Table A projects (those that are funded) and Table B projects (unfunded climate actions) required to reach net-zero emissions. Both the Empress State Building (ESB) and the Old Oak and Park Royal Development Corporation (OPDC) heat network are Table B projects that could have a significant impact on CO2 emissions and the feasibility of achieving net zero. Due to their size and complexity, further project development support is required to enable the realisation of both projects.
1.4.    The project-development support required by the ESB and the OPDC heat network cannot be funded through the current project support programmes offered by the GLA. The Net Zero Enabler and Low Carbon Accelerators programmes are not suitable, as they cannot provide the necessary scale. The Local Energy Accelerator offers grants to design and commercialise complex projects, but its £2.2m budget for 2023-24 is expected to be fully spent. The Retrofit Accelerator (Workplaces) programme only has a £100k budget in 2023-24 to support small grants. The complex technical support these two projects need exceeds the scope of the current Programme Delivery Unit. 
1.5.    In addition, while the GLA has earmarked approximately £2m for grant funding from the successor Zero Carbon Enabler Hub in 2024-25 to support project development, this is intended to support multiple smaller projects (typical contract value: £100k) across London. The OPDC and Metropolitan Police Service (MPS) proposals would fully use this budget and prevent the development of other projects across London to investment-ready status. 
1.6.    Of the £90m allocated by the Mayor to the Green Finance Programme in 2022 (held in reserves), around £15m has been earmarked for project-development support, including £12.6m supporting the current Low Carbon Accelerators and their integrated successor (see MD3133: Enabling Accelerating Net Zero). The remaining £75m was earmarked to support the relatively low interest rates across loans agreed with borrowers under the Green Finance Fund. Current forecasts of such interest rate requirements suggest only £50m-£55m would be required for this purpose, leaving approximately £20m-£25m available to support other activity to enable the acceleration of projects. 
MPS Empress State Building (ESB)
1.7.    The ESB is a strategic site for the MPS located in Earls Court, next to a large 40-acre redevelopment that is led by the Earls Court Development Company (ECDC). The development, underpinned by a zero-carbon energy network, will provide 4,000 new homes (targeting 35 per cent affordable housing across all tenures); and create 2.5m square feet of new workspace, green space and cultural venues for London. 
1.8.    The ESB is one of the MPS’s top five carbon emitting assets, accounting for 8-9 per cent of the MPS estate’s operational emissions. The existing boilers are around 20 years old, and so the MPS is developing a life cycle replacement strategy for the site. The replacement options are to: 
•    replace with a similar gas-fired system (this is the MPS’s baseline in the budget, but is incompatible with achieving net zero 2030) 
•    replace with a zero-carbon system for the building alone (considered unaffordable) 
•    develop a heat network in partnership with the neighbouring ECDC.
1.9.    The MPS is prepared to do maintenance work to extend the boilers’ lifespan for a short period, but is ultimately seeking to replace them with a heat network. This would not only significantly decrease CO2 emissions from the MPS estate, but would also increase the site’s energy security and improve the health outcomes for the adjacent site.
1.10.    There is an opportunity to work with the ECDC to develop a holistic zero-carbon heat network that will support 4,000 new homes, offices and shops, and the existing ESB. The ECDC is also working on the masterplan for the adjoining site. Its aspiration is to deliver a decarbonised, zero-emission development, and its plans include a unique collaborative partnership that may use the link with TfL to draw heat from the London Underground network below the ECDC site. 
1.11.    The MPS and the ECDC are working together to ensure high-level coordination between the site feasibility frameworks. The MPS commissioned E.ON Energy to ensure that any further developments are aligned and enable easy integration between the heat networks. 
1.12.    Consultants and contractors (who are security-cleared and have been involved with the development of the building to date) are in place, and ready to develop proposals to renovate the building and deliver zero-carbon heating.
OPDC Heat Network
1.13.    Over the last 18-24 months, OPDC has developed proposals for a heat network that will recover waste heat from local data centres; and supply low-carbon heat through a heat network to new and existing residential and non-residential local buildings. OPDC submitted an application for grant funding (including the outline business case for the project) to the Green Heat Network Fund. It successfully secured £1m of revenue grant funding to part-fund the undertaking of a detailed business case (also called ‘the commercialisation phase’) to get the project investment-ready. The OPDC secured £35m of capital grant funding to deliver the low-carbon heat network. The GLA issued a letter of support to the OPDC during the application process, in which the GLA committed to provide funding to ensure the OPDC heat network would complete the commercialisation phase.  
1.14.    The project is fundamental to OPDC’s ability to achieve the Mayor’s net-zero target for new and existing buildings in the area. It will also help protect the local electricity grid (already close to capacity) from additional load associated with decarbonising heat supply through individual heat-pump solutions. 
1.15.    If the funding was not provided the project would have to be put on hold. This would result in a delay in the development and funding partner procurement programme which is currently underway and is on the critical path for delivery. If the GLA funding was no longer available there would be the loss of the £35m grant from the DESNZ Green Heat Network Fund as OPDC would not be able to draw down the grant in the timescales defined under the terms of funding. There would need to be a review of the heat network strategy for the scheme and there may be consequential impacts on the Old Oak West infrastructure delivery strategy and programme.
 

2.1.    The Mayor of London’s London Climate Finance Facility has the following aims:
•    to unlock billions of long-term, flexible, private finance to support the decarbonisation of London’s buildings, energy and transport systems, thereby tackling the triple dangers of toxic air pollution, climate change and congestion
•    to significantly accelerate the development and delivery of climate and environmental projects, working with strategic partners
•    to build on London’s existing financing capabilities to secure investment for London and strengthen its competitiveness.
2.2.    Both projects will make an important contribution to the aims above. The funding will accelerate the delivery of these important schemes; and have the potential to unlock further finance to support their decarbonisation.
MPS Empress State Building
2.3.    The ESB accounts for approximately 8 per cent of MPS estate’s operational emissions. The building’s boilers, at around 20 years old, need replacing urgently. Following an initial evaluation of options, the most cost-effective and net-zero-compatible approach is to work in partnership with the ECDC to incorporate the building within a wider heat network.
2.4.    The estimated project capital costs are £15m-£20m, although this will be tested more thoroughly through the development work. One of the key outputs of the project-development work will be a more accurate estimate of the total project cost. The initial estimated carbon saving from the project is 29,470 tCO2, equating to a cost of £550/tCO2. This is well below the current threshold for access to the Mayor’s Green Finance Fund (£3,500 per tonne of CO2).
2.5.    The funding would allow the technical solution to be designed and costed in detail, looking at alternative options – from a standalone network to a collaborative one – that will identify the optimum carbon solution and demonstrate value for money (a statutory pre-requisite for MOPAC under the Police and Social Responsibility Act 2011). This will provide sufficient information to allow MPS to then prepare a self-funding, grant-funding or green finance application for the ESB site; and to progress a commercial solution with the ECDC. If the ECDC decides not to develop a heat network, the ESB site will still be feasible and preferable to the other boiler options. Some of the additionalities of a heat exchange – and subsequent revenue generation for the MPS – would be lost, but the ESB would still be commercially viable.
2.6.    The proposals cover the project development costs through RIBA Plan of Work Stages 2 to 4, with an outline of the work as follows: 
•    RIBA Stage 2 – concept design: development of the three options at paragraph 1.8, above to a sufficient level of detail to understand approximate costs, risks and dependencies; and inform the selection of an option for progression. Initial development of a commercial proposal for partnership with the ECDC. 
•    RIBA Stage 3 – spatial coordination: development of the selected option to provide a sufficient level of detail to make a town planning application for the works; and refine the costs and design. Further development of the commercial deal with the ECDC. 
•    RIBA Stage 4 – technical design: development of the final detailed design information ready to construct the project. Preparation of the final pre-tender cost plan in sufficient detail to inform a full business case, and any subsequent grant or green finance application. 

OPDC heat network
2.7.    The OPDC has already secured £1m in revenue support from the Department for Energy Security and Net Zero (DESNZ) to help complete the detailed business case that will enable them to go out to market, and secure funding and finance to deliver the heat network project. Work is well under way to develop the business case in line with the conditions of the DESNZ grant. DESNZ has also committed to providing £35m capital, in the form of grant funding, to support the construction of the heat network. DESNZ’s grant-funding agreement means no more than 50 per cent of the commercialisation can be funded through them; so the OPDC requires a further £1.3m in 2024-25 to finalise the business case and ensure the project’s commercial viability. The potential carbon savings of the project are estimated at £1,124/tCO2. As part of the OPDC’s application for funds from DESNZ, the GLA confirmed that it would contribute to the project-development costs required to unlock the project development and capital funding. 
2.8.    This MD formally requests that this funding is transferred to the OPDC, as a grant from the £90m of reserves set aside to support the Mayor’s London Climate Finance Facility.
2.9.    The funding of up to £1.3m will support the completion of the detailed business case for the development of the heat network. Over the product life cycle, the heat network will save 101,200 tonnes of carbon compared to the business-as-usual alternative of installing gas boilers.
2.10.    The next stage of work will develop a procurement/private-sector partnering strategy; and address key technical and commercial risks. During this detailed business case (commercialisation) phase, the OPDC will continue to market-test the heat network, which will inform the commercial and funding structure. The OPDC’s capital investment capability is limited to planning obligations income that it can reinvest in carbon-saving projects (forecast: £10m over the life of the project).
2.11.    The £35m awarded by DESNZ is only a part of the finance package (estimated at £100m) that is required to fund the overall project. As such, there is a significant gap in the financing required to deliver the project. That will need to be sourced from public and/or private-sector sources over the next 12-18 months. There is a very good opportunity and rationale for the Mayor’s Green Finance Fund to be part of the final finance package. The cost of finance from the Green Finance Fund (even at rates similar to those of the Public Works Loan Board) will be significantly lower than the alternative private-sector finance options. These costs, ultimately, can be realised in ways that allow the heat network to grow faster; and/or ensure a lower cost of heat to customers. 
 

3.1.    Under section 149 of the Equality Act 2010, as a public authority, the GLA is subject to the public sector equality duty and must have due regard to the need to: 
•    eliminate unlawful discrimination, harassment and victimisation 
•    advance equality of opportunity between people who share a relevant protected characteristic and those who do not 
•    foster good relations between people who share a relevant protected characteristic and those who do not.
3.2.    Protected characteristics under section 4 of the Equality Act are age, disability, gender reassignment, pregnancy and maternity, race, religion or belief, sex, sex orientation, and marriage or civil partnership status (all except the last being “relevant” protected characteristics).
3.3.    The Green Finance Programme supports the London Environment Strategy. A full Equality Impact Assessment was carried out for the strategy, and can be found here.
3.4.    Introducing a heat network in the ESB, rather than replacing the boilers, has positive health impacts for local residents. The ESB boiler system is housed in a below-ground compound, away from the main tower building, on land owned by the ECDC (but leased back to MOPAC). Boiler emissions are removed via a flue stack rising from the plant room on the boundary of the new development. The earliest part of the ECDC scheme to be delivered will include five tower blocks close to the boundary with the ESB. Computational modelling indicates that, once the tower blocks reach a certain height, emissions from the ESB flue stack will be diverted by the tower blocks across an adjacent council estate. 
3.5.    This scenario is unlikely to be acceptable to local residents and planning authorities and accelerates the need for the ECDC to enact a boiler-replacement solution at the ESB to align with its development timetable. 
3.6.    By offering heat via secondary sources (such as data centres), rather than gas boilers at the point of use, the OPDC scheme will offer air pollution benefits by reducing emissions from gas heating.
3.7.    In both cases, the proposals will support delivery of the Mayor’s vision for delivering cleaner air for London and tackling health inequality resulting from harmful pollution emanating from gas boilers. The most deprived communities in London are still most likely to live in the most polluted areas of the city, with the average NO2 concentration in the most deprived areas being 4.4 µg/m3 higher than in the least deprived areas in 2019. The Mayor’s policies have already helped reduce the difference in NO2 exposure between the most and least deprived areas by up to 43 per cent between 2013 and 2019, showing that the inequalities have reduced.

3.8.    The full benefits for both the ESB and the OPDC scheme will be set out through the project-development work being commissioned. 
 

4.1.    The risks, and mitigating actions, are outlined below. Likelihood and Impact are assessed using the GLA Corporate risk scale (1-5).

4.2.    The governance of both projects has been designed to ensure that risk to the GLA is minimised. 
4.3.    For the ESB project, governance will be put in place and agreed to ensure that the GLA’s investment is overseen and subject to appropriate go/no-go points. MPS’s framework and life cycle process allows pause or termination of design work at each stage, should the preferred option be unviable. Following RIBA stage 2, MOPAC and/or MPS will share the report with the GLA; and a joint decision will be made to determine if RIBA stages 3 and 4 will go ahead. The funds will therefore be drawn down through two separate tranches. Additional oversight will be provided to the GLA through regular meetings and access to project-team reporting. This ensures that the commercial risk is low. 
4.4.    The GLA will also be closely involved throughout the project life cycle in the OPDC project. OPDC has agreed to share strategic high-level project documentation with the GLA to ensure continuous oversight. In addition, a representative from the GLA sits on the working group, assessing the technical developments of the project on an ongoing basis.
Link to Mayoral strategies
4.5.    The work outlined in this MD will contribute towards the following:
•    London Environment Strategy Objective 6.1: reduce emissions of London’s homes and workplaces while protecting the most disadvantaged by tackling fuel poverty
•    London Environment Strategy Policy 6.1.1: improve the energy-efficiency of London’s homes and support the transition to low-carbon heating and power through energy for Londoners; and make sure that new developments are zero carbon from 2019, with clean supplies of energy and high energy-efficiency designed in from the start
•    London Environment Strategy Proposal 6.1.1.b: pilot innovative methods to implement the stronger energy-efficiency retrofitting needed
•    London Environment Strategy Policy 6.1.3: improve the energy-efficiency of London’s workplaces and support the transition to low-carbon heating and power
•    London Environment Strategy Proposal 6.1.3.a: provide direct technical support and assistance to help reduce CO2 emissions and energy within the public sector, including leading by example in the GLA Group estate
•    London Environment Strategy Policy 6.1.4: ensure that new developments are zero carbon
•    London Environment Strategy Objective 6.2: develop clean, smart and integrated energy systems utilising local and renewable energy resources
•    London Environment Strategy Policy 6.2.1: delivering more decentralised energy in London
•    London Environment Strategy Proposal 6.2.1.a: help implement large-scale decentralised and low-carbon energy projects, including stimulating demand from the GLA Group.
4.6.    Relevant recovery missions are: A Green New Deal; and Good Work for Londoners. 
4.7.    The project does not involve any transfer of sensitive data or the storing of GLA data on external servers. There is no need to produce a Data Protection Impact Assessment. 
4.8.    There are no conflicts of interest to note for any of the officers involved in the drafting or clearance of this decision form.
 

5.1.    Approval is requested for expenditure of up to £2.3m allocated as follows:
•    £1.3m to OPDC as match funding to develop a detailed business case for its proposed heat network and to enable the unlocking of £35m of DESNZ ‘Green Heat Networks’ grant funding 
•    £1m to MOPAC in relation to the MPS’s development of a detailed project proposal for the decarbonisation of the ESB, including concept design, spatial co-ordination and technical design for the detailed business plan. 
5.2.    This expenditure will be transferred to OPDC and MOPAC under section 121 of the Greater London Authority Act 1999 (GLA Act) (with MOPAC then funding the MPS ESB project accordingly). The expenditure will be funded from the £90m Green Finance Programme initially set up as part of the Mayor’s 2022-23 budget. 
5.3.    Of the £90m allocated by the Mayor to the Green Finance Programme in 2022 (held in reserves), around £15 million has been earmarked for project development support, including £12.6m supporting the current Low Carbon Accelerators and their integrated successor (MD3133 Enabling Accelerating Net Zero). The remaining £75m was earmarked to support the cost of borrowing for and from the Mayor’s Green Finance Fund. Current forecasts indicate that not all of this amount will be used and there is approximately £20-25m available within the £75m, to support other activity to enable the acceleration of projects including the expenditure in this decision.
5.4.    The planned profile of expenditure is shown below:

5.5.    This expenditure has not been included as part of the Environment and Energy Unit’s budget and therefore all relevant budget adjustments will be made.

6.1.    The foregoing sections of this report indicate that:
•    the decisions sought concern the exercise of the GLA’s general powers, falling within the GLA’s statutory powers to do such things considered to further or that are facilitative of, or conducive or incidental to, the promotion of the improvement of the environment in Greater London
•    in formulating the proposals in respect of which a decision is sought, officers have complied with the GLA’s related statutory duties to:
o    pay due regard for the principle that there should be equality of opportunity for all people
o    consider how the proposals will promote the improvement of health of persons, health inequalities between persons and to contribute towards the achievement of sustainable development in the United Kingdom 
o    consult with appropriate bodies. 
6.2.    In taking any decisions sought, the Mayor must have due regard to the Public Sector Equality Duty – namely the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by the Equality Act 2010; and to advance equality of opportunity and foster good relations between persons who share a relevant protected characteristic (race, disability, sex, gender reassignment, age, sexual orientation, religion) and persons who do not (section 149 of the Equality Act 2010). To this end, the Mayor should have particular regard to section three (above) of this report. 
6.3.    If the Mayor makes the decisions sought, officers must ensure that:
•    the proposed award of grant funding (in this case, under s121 of the GLA Act 1999) is made fairly, transparently, in accordance with the GLA’s equalities and with the requirements of GLA’s Contracts and Funding Code and funding agreements; and are put in place between, and executed by, the GLA and recipients before any commitment to fund is made. 
6.4.    In addition, to the extent that the proposals in respect of which decisions are sought involve the making of commitments that extend beyond the current Mayoral term, officers must ensure that the terms of all agreements entered into in respect of the expenditure do not have the effect of fettering the discretion of any successor administration, considering in particular the London elections taking place in May 2024. Accordingly, officers must ensure that all agreements that involve making such commitments include a GLA right to terminate, at any point for convenience (at no cost to the GLA); that all such agreements are managed in such a manner; and that any deliverables, milestones and/or output requirements are structured so as to mitigate risks of the GLA incurring abortive expenditure (which might be reasonably be taken to fetter, practically, the exercise of such discretion).
 

MPS Empress State Building
7.1.    The ESB feasibility study already has contractors in place who are security-cleared to work on the site, allowing the project to commence immediately without the need for a six-month security clearance of all staff. The work schedule is set up to undertake RIBA stage 2 first, with a natural break to evaluate progress and the financial viability of the project; coordinate any requirements with the ECDC; and ultimately, act as a go/no-go decision point. Following the evaluation of RIBA stage 2, the second part of funding will be drawn down to develop RIBA stages 3 and 4 alongside each other to ensure, that the project is delivered at speed and offers high value. 
7.2.    The project will be delivered according to the timetable below. 

OPDC Heat Network
7.3.    OPDC has already commenced the feasibility study for which it has received grant funding but requires the additional funding from the GLA to complete this work. The £1.3m is required to jointly fund the current commercialisation phase of the heat network project (alongside DESNZ grant) to March 2025. This phase also includes the procurement of a development and funding partner who will deliver and operate the heat network. This funding contributes to OPDC’s internal costs, consultant team fees (Aecom, Hermetica Black, Asteros) as well as our external legal advisors. 
7.4.    Alongside the development of the feasibility study, the build of the heat network is going out to tender in early 2024, with the aim of OPDC having a joint-venture partner in place by the end of 2024. The build partner will be appointed by OPDC by October 2025, and the build is due to commence January 2026, with the first customers connected to the network by the end of 2027. 
7.5.    Given the high maturity of the project, and requirements for project spend from DESNZ, the risks of changing timelines are low. There is a high degree of confidence that the heat network will be developed according to the timetable below.