The race for grid positions

Councils may move into the energy business by selling surplus supplies, writes Paul Gosling

British Gas and the regional electricity supply companies may face tough competition from local authorities as the energy market becomes increasingly deregulated. Many councils are keen to earn profits to subsidise other activities or reduce rents, while cutting energy prices for low- income tenants.

The Combined Heat and Power Association (CHPA) is encouraging public bodies to heat their buildings from their own generating plants, selling surplus electricity either to the national grid or directly to other local users. St Pancras Housing Association has installed a CHP plant for two residential sites at a cost of pounds 267,000, attracting a grant of pounds 45,000. The scheme should repay its initial investment in seven years, and has cut tenants' heating bills by 20 per cent.

CHP provides cheaper electricity than the national grid because it is more efficient. Most large power stations owned by the electricity generating companies do not use waste heat, which is emitted into the air, contributing to global warming. But small-scale CHP plants use the hot air for space and water heating, while supplying electricity for local use.

David Green, director of the CHPA, says that local authorities stand to make money by supplying electricity. "It is open to local authorities to make a substantial attack on the margins," he says. "Electricity generators and distributors are very profitable companies." At present, Green says, the retail electricity price is 7 to 8 pence an hour, compared with a wholesale price of 2.4 pence.

Stockport Council has spent pounds 390,000 on a CHP scheme which is expected to cover its costs in under five years. The electricity is used for a variety of municipal buildings, and the surplus is sold to the regional supply company. Leicester Council has gone a stage further, and is using a gas-powered CHP generator to heat a swimming pool, selling surplus electricity direct to local council tenants. Any electricity still unused is sold to the grid and additional demand bought from it. The council has supplied its own meters and is responsible for billing tenants.

Although the council has been granted pounds 100,000 from the Energy Savings Trust towards the pounds 400,000 cost of the project, its viability still depends on a ruling from the electricity regulator, Offer, on the charge by the electricity supply company for the use of cabling. Offer's ruling in the Leicester dispute will affect the viability of CHP schemes across the country.

It is unclear, however, whether authorities have the legal powers to sell energy. Both the Department of the Environment and the Audit Commission believe councils are probably empowered by the Local Government (Goods and Services) Act to sell electricity and gas to tenants, but selling energy to owner occupiers or to businesses may be beyond their powers.

Most authorities interested in energy supply have therefore set up arms- length companies which are able to operate without the same restrictions. Profits from a joint venture will go into a council's general fund, whereas surpluses from direct sales to tenants would go into the ring-fenced housing revenue account.

London's borough of Waltham Forest had its own energy supply division until it was sold to a management buy-out last November. Waltham Forest Energy Services, working in partnership with the council, is now able to sell energy to any customer, across much of the London region, and can compete with the inducements offered by the big private energy suppliers. Nottingham Council has set up an arms-length company in association with the French water company, CGE, to sell the heat and electricity generated by a waste incinerator. Because the plant attracts a non-fossil fuel subsidy it earns more by selling to the grid than if it sold direct to users. But this will change when the energy industry is fully deregulated in 1998, when the company will supply to local domestic customers.

John Reynolds, energy analyst at HSBC-James Capel, believes that joint ventures are in any case more likely to be efficient than local authority in-house operations. "It might be better to get a professional energy company to do it for them," he suggests. "The obvious thing is to do a joint venture and get a management fee." The operating company may be required to invest heavily not only in new CHP plant, but also in new billing systems and supply cables.

Deregulation of the gas industry - with an open market already operating in the South West, to be followed by the South East next year, and the rest of the country in 1998 - is allowing councils to sell gas, by negotiating discounted bulk-buy deals on behalf of tenants.

BP Gas is supplying several councils with gas, for use in municipal buildings and for sale to tenants, at prices below those of British Gas. Local authorities wishing to sell gas at a profit need to be licensed by the gas regulator, Ofgas.

But councils are not the only organisations moving into the energy market, with the oil multinationals and leading retailers, such as Sainsbury's and the Co-operative Wholesale Society, doing the same. They will be tough opposition.