Viability

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What determines viability?

An energy or emissions target for a site will typically be met through a combination of energy efficiency and renewable or low carbon energy technologies. These give rise to additional, upfront development costs and potentially to additional, ongoing operating and maintenance costs. This investment may be returned, at least in part, by upfront income or ongoing revenues. Fiscal incentives may also influence viability, including market mechanisms (eg trading of Renewables Obligation Certificates), taxes and any future carbon pricing.

Viability at the planning stage is usually considered from the perspective of a developer. In this case the question is:

• Can the developer pay, or pass on to others, the additional upfront costs related to meeting the carbon target (alongside all other development costs) and still meet their investment criteria, usually return on investment?

The perspectives of future building owners and occupiers are also important to viability. In their case the question is:

• Will those with a longer term interest in the development be able to afford ongoing operating and maintenance costs?

Applicants are most likely to put forward proposals that fall short of applicable targets citing grounds of ‘viability’ where they determine the answer to either or both of these questions is ‘no’.

Although simple payback is often used as an indication of viability, including for energy measures implemented to comply with Part L of the Building Regulations, it does not fully reflect the issue of viability for developers or owners and occupiers.

Testing ‘viability’ as a constraint on planning proposals

Suppose an applicant proposes an energy strategy that does not meet renewable or low carbon energy targets on the grounds of ‘viability’, even though it may be technically feasible to generate sufficient energy and emissions reductions on-site. The applicant could be expected to provide quantified justification, which could be reviewed in terms of the following considerations:

Non-viability on the grounds of cost to the developer

The main issue to be raised will often be the options the developer has considered for meeting the upfront costs of renewable and low carbon technologies. This is likely to involve third parties financing the initial investment in return for future income. It is reasonable to expect applicants for major developments to have considered an Energy Services Company (ESCO), particularly where shared technologies are an option, especially site-wide heat networks. However, ESCOs typically focus on system operation and sometimes procurement, and have rarely contributed the bulk of the financing necessary. Finance would therefore need to be secured from another third party or a special purpose vehicle set up by the developer.

• www.london.gov.uk/mayor/environment/energy/partnership-steering-group/docs/making-escos-work.pdf

A significant sum is likely to be required from the developer, even where third party finance is available. The costs borne by third parties will also influence the ongoing costs and prices charged to building owners and occupiers.

The developer may propose an energy strategy that does not meet the targets because:

• No ESCOs or other third parties were interested (responses to a call for expressions of interest could be requested as evidence)
• ESCOs and/or other third parties were interested in financing on-site technologies, but:
  • The residual cost to the developer is considered unaffordable (this must then be considered on its own merits in the context of the development or by benchmarking with similar developments)
  • A transfer of costs that makes the residual cost affordable to the developer results in charges and energy prices that are considered unaffordable by building owners and occupiers

Non-viability on the grounds of costs to owners & occupiers

Where an ESCO and/or other third party are financing the energy strategy, their investment will effectively be paid back over time through the heat and/or electricity prices paid by the consumers and, typically, a standing charge to building owners/occupiers to cover operating, maintenance and financing costs. Where dedicated renewable or low carbon technologies are installed in individual dwellings or non-residential units, the owners and occupiers will have to directly cover any costs of operating and maintaining them.

Developers may propose not to meet the target where they conclude that the costs will make the buildings unattractive in the market or affect affordability for owners and occupiers. This argument must then be judged on its merits.

Difficulties of assessing viability

Faced with a non-compliant proposal, planners should first satisfy themselves that a reasonable set of feasible scenarios and costs have been identified, and that options for transferring costs have been adequately explored. After that, decisions relating to viability often come down to a judgement on whether the developer and building owners and occupiers can afford the costs of achieving the target. If they cannot, the challenge is to agree a sufficient contribution from renewable or low carbon sources corresponding to a level of cost that can be borne. There is currently no catch-all test or assessment process to answer these questions and the situation is similar to that for other issues negotiated during the planning process (e.g. for section106 agreements).The following table summarises factors that should typically be considered in an assessment of viability and indicates data sources.

Upfront costs	Data source
Capital cost of equipment & supporting infrastructure	Quotes from manufacturers and suppliers
Design and installation costs	Quotes from consultants, suppliers, contractors or Quantity Surveyor estimate
Cost of land take, plant space & ancillary structures, and any other design aspects/changes	Quantity Surveyor estimates and quotes from suppliers/contractors where relevant
Financing costs	Developer, ESCO, financing entity

Operating costs/charges	Data source
Amount of energy supplied	Energy strategy/feasibility study. Compare with ESCO assumptions where relevant
Operating and maintenance costs – systems installed in individual buildings	Information from manufacturers and suppliers.
Operating and maintenance costs – shared systems	Prospective ESCO or assumptions in energy strategy/feasibility study
Energy prices for heat and electricity (extent of occupier dependence)	Prospective ESCO
Standing charges to building owners	Prospective ESCO

Upfront income & cost transfer	Data source
Grant funding	Applicant
Third party financing & loans	Applicant
ESCO financing	Applicant; also see Making Energy Service Companies Work: Guidance and Advice on Setting Up and Delivering an ESCO
Any property sale value uplift realisable	Surveyors or estate agents

Ongoing income & charges	Data source
Value of energy exported	Prospective ESCO
Current fiscal incentives, e.g. ROCs	Prospective ESCO; various Government departments and agencies involve in administering them: www.ofgem.gov.uk, www.hmrc.gov.uk, www.decc.gov.uk, www.berr.gov.uk
ESCO financing	Applicant; also see Making Energy Service Companies Work: Guidance and Advice on Setting Up and Delivering an ESCO
Prospective incentives e.g. renewable heat, feed in tariffs, tax breaks