How can Net Zero be successfully incorporated into the UK PPP market?

Working with the public sector to deliver a sustainable future

We have had the climate change crisis. The climate change emergency. And now, as of August 2021, the UN’s Intergovernmental Panel on Climate Change (IPCC) declaring climate change as a ‘code red’ for humanity.

The IPCC’s report warned us to expect increasingly extreme heatwaves, droughts and flooding, and a key temperature limit being broken in just over a decade unless we all act now.

Initially, this article was going to consider the question ‘can Net Zero be successfully incorporated’ but the answer is obvious: it has to be. So the next question is: ‘how’?

Meeting the Net Zero targets

The UK government amended the Climate Change Act in 2019 to commit the UK to being Net Zero by 2050. The government has followed that up (in April 2021) by announcing that it would set, in law, "the world’s most ambitious climate change target” to reduce emissions by 78% by 2035 , compared to 1990 levels.

At a local government level, numerous local authorities have set out that they intend to meet the Net Zero target at least five years before the national 2050 target, showing that the message on the need to act has reached council chambers and offices.

Some sectors have already announced their own strategies, such as the Environmental Services Association’s recent publication, in June, of its Net Zero greenhouse gas emissions strategy for the UK recycling and waste sector.

But, clearly, Net Zero isn’t restricted to one sector, one organisation or one group of people. It is something every area of the economy and wider infrastructure market across the UK (and beyond) has to tackle.

With the UK’s presidency of the forthcoming COP26 UN Climate Change Conference in Glasgow in October and November, the focus will again be on how we are responding to the challenges and the roadmap the conference and political leaders will lay out.

New challenges inevitably require new thinking, new approaches and new attitudes, and it is here that big obstacles - but also the biggest opportunities – lie for the UK PPP market.

Sharing the risk, sharing the rewards

If it is true that meeting the Net Zero challenge means everyone working together globally, then it’s equally true, if not more so, in the PPP market.

Whilst the potential shortcomings and issues (whether perceived or actual) in respect of the PPP model have, over the years, been well versed, the positives of the PPP model must be recognised. What will be essential in relation to achieving Net Zero within PPP projects is a reassessment of the risk profile between public and private sector partners, if low cost finance is to be secured and Net Zero projects delivered at scale.

Following the government’s UK Hydrogen strategy launch in August, this is currently a topical area with hydrogen viewed as a low carbon fuel of the future. Widely tipped by experts to be a major future green power source, at the moment it remains largely unproven and the technology needed to create a hydrogen-powered future is either very new or in development.

That is the sort of challenge the PPP market currently faces, including through a Hydrogen Hub PPP project having been tendered by Aberdeen Council. Without doubt, hydrogen could be a major contributor to our Net Zero future.

However, hydrogen investment is not without significant commercial risk and, if the PPP sector continues to operate as it does now, the expectation will be that private sector organisations should shoulder the commercial burden in new sectors such as this.

Some would argue that such caution is appropriate, but with risk can come real reward for both public and private sector partners. First mover advantage in some of these areas and successful delivery of projects using new technologies and methods, which are reliably installed and consistently perform over the contract term, could see major returns for partners in the future.

However, the fact remains that, in order to incorporate Net Zero within the UK PPP market, far greater collaboration will be needed between the public and private sectors - including government entities, procuring authorities, developers, investors, funders and the supply chain.

The way forward

If the “right” risk/reward balance is developed, new PPP procurements are well placed to address Net Zero from the start. Bristol City Council is procuring a strategic partner for its City Leap project who will work with the council to deliver more than £1bn of investment towards Bristol becoming a zero-carbon, smart energy city by 2030. We have been supporting a bidder on this market leading project.

The Greater Manchester Combined Authority anticipates running a procurement for a number of partners as part of its Go Neutral Smart Energy Framework later this year. This will involve a framework model with a number of lots for smart technologies, including battery storage, solar PV and EV charging hubs.

Elsewhere, Belfast recently issued a contract notice for a private sector partner to redevelop the city’s Weavers Cross transport hub which, while not explicitly linked to recognised green tech, will play its part in contributing to Net Zero by focussing on a transport hub.

So, if you excuse the pun, the green shoots are there in the PPP market but are still sporadic. Much greater scale and spread will be needed across the UK if it is to achieve our long-term carbon goals.

Of course, underlying procurement requirements for new PPP projects are also coming through, including PPN 06/21 and individual procurement requirements under specific contracts being tendered. Published in June 2021, PPN 06/21 introduces mandatory Net Zero related selection criterion on which bidders will be assessed on certain contracts of more than £5m - essentially, requiring a commitment from bidders in respect of Net Zero if they want to win future government contracts.

It is yet another example of how the government is increasing the focus on carbon reduction and Net Zero for new procurements. We have assisted numerous clients on the impact of meaningful PPP evaluation criteria in respect of Net Zero, carbon reduction and environmental performance, including assisting bidders on ways to maximise their scores in this area.

However, a big question mark still hovers ominously over existing infrastructure – how can Net Zero be addressed in existing PPP infrastructure projects, including the more than 700 UK PFI projects?

On first inspection, possibilities include retrofitting and energy related performance variations to leverage energy efficiencies and carbon reduction.

However, the challenge will be getting all project parties (both public and private, as well their advisers) to agree a proactive, pragmatic, flexible solution - particularly in relation to the approach in respect of existing contractual requirements and existing procurement aspects (which can be addressed) in order for all parties to work together to assist in achieving Net Zero. Obviously, where extensions to existing facilities or new facilities are being considered within an existing PPP project, the adoption of carbon neutral practices, contractual requirements and procurement aspects will be key considerations for all parties.

Expiry opportunity

 Perhaps the biggest opportunities exist in the lead-up to the expiry of existing PPP and PFI projects, when the parties might explore various commercial option such as:

• reassessing maintenance and/or lifecycle programmes; or
• relaxing existing handback requirements

in return for Net Zero carbon initiatives and, potentially, future projects. Either possibility has the potential to enable the private sector to help the public sector meet its Net Zero commitments and, importantly, the UK more widely.

Collaborate to create a better future

Whether it is new or existing PPP projects, Net Zero is here to stay and needs to be addressed. Therefore collaboration, flexibility, innovation and a proactive approach between the public and private sectors (including investors and the supply chain) will be the key.

A ‘code red for humanity’ is a call to action for us all. Now is not the time for traditional thinking or a wait and see approach. Now is the time to act.

 

Originally published by Partnerships Bulletin in “The Net Zero Partnerships Report 2021” (September 2021)