Last month, we learned that Nottingham City Council’s wholly owned energy company EnviroEnergy is to be taken in-house. This decision comes not long after the collapse of Robin Hood Energy, which was set up by the council in 2015 to compete with the “big six” but which closed in September 2020 due to financial issues.
Amid concerns over the viability of smaller energy companies against the backdrop of rising wholesale gas prices, councils with wholly owned energy companies are likely to be looking at the future viability of these companies and what they can do if things do go wrong. Taking an entity in-house is one option open to councils in this position, but this option needs to be carefully considered before any action is taken.
What do we mean by “take in-house”?
The legal entity of the company will cease to exist and the activities previously carried out by it will be directly managed and facilitated by an internal team within the council. The activities become functions of the council like any other local authority function.
What do councils need to consider when deciding whether to take an entity in-house?
Financial and governance considerations
Perhaps most importantly, councils need to consider the financial risks associated with such a decision. By taking the entity in-house, the council will be absorbing the debts and liabilities of the company (which could be extensive), and it will need to ensure that it has adequate financial resources available to not only meet these liabilities but also to continue to provide the function. Often the motivation for out-sourcing the function will have been the ability to make a profit, but without a commercial entity the services may need to be delivered at cost. The council should also be mindful of any employment issues that may arise, particularly in relation to TUPE and the risk of additional liabilities in the form of pension contributions.
Given the financial consequences of bringing the entity in-house, the council will need a clear business case to evidence that it is acting prudently, and complying with its best value duty under the Local Government 1999. It should obtain external advice and reports on the viability of bringing the entity back in-house, and be clear on the financial impact on the council before any decisions are made.
Reputational and political considerations
Given the drive for clean energy and carbon-neutral schemes, saving a green energy company by taking it in house may have political and reputational benefits for the council, however the council must satisfy itself that there is sufficient capacity and capability in its internal team to successfully deliver the service. There could be cost associated with additional expertise or qualified staff, and the council will need to be prepared to deal with any reputational or political fall out as a result of poor service or issues arising from the transition in-house.
The council will need to be aware of the procurement risks associated with bringing the services in-house, particularly in relation to existing contracts between the company and its sub-contractors that are then novated to the council. The council must ensure that it can comply with both internal and statutory procurement regulations.
Energy provision is a heavily regulated area, and the council needs to be aware of the legal and regulatory requirements associated with providing energy services. External advice should be sought so that the council is familiar with its obligations before deciding whether to take the service in-house.
What other options are available to councils in this position?
Councils may decide to financially ‘prop-up’ wholly owned energy companies before deciding whether to bring an energy company in-house, but councils need to be aware of the potential subsidy control risks associated with this, and should seek external advice on subsidy control compliance before granting any loans or funding to the company.
Councils may also decide to invoke their powers as shareholders of the company to appoint industry and other experts to the board of directors to help manage the company, with the aim of resolving any financial issues and ensuring the company can continue to trade without council intervention.
Angela Watson is legal director in the public sector team of law firm Ashfords