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Cash/direct Investment

The council can use its own funds through cash or direct investment to finance a project.

The use of council funds for Net Zero projects needs to be balanced against the needs of other mandated responsibilities, such as adult social care. The same issue was also reflected in our research with regard to the need to divert funds to properly resource climate and sustainability teams. Local authorities across the UK are also in very different financial positions and have widely different levels of commercial capability and internal resource, which are also major factors in successful project implementation through this financing route.

• Finance source: Local authority own funds
• Funded phases: Plan, design, build, operate
• Typical project size: Up to £10 million but is dependent on local authority’s risk appetite and available funds
• Match funding: N/A
• Security: Local authority’s revenues and assets
• Speed of accessing finance: Timescales are limited by the local authority’s ability to release investment

Relying on council funds for focused, long-term funding may be unfeasible for scalable local energy project development. Any project could use internal funding as long as it meets internal hurdle rates. There may be material risks which the LA would assume by direct development of the project; these need to be reflected appropriately in assessment of the required rate of return (hurdle rate) and relevant return metrics, such as Internal rate of return, return on investment or payback period.

A local authority’s reserves are the most commonly cited form of equity for local authorities.

Subsidies or incentives

Subsidies can be used either to encourage private sector participation in local authority projects or as a funding source directly for a local authority’s own projects. They come in various forms including direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates).

• Finance source: Depending on scheme

• Funded project phase: Plan, design, build, operate

• Typical project size: Varies according to scheme terms

• Match funding: Subject to scheme terms

• Security: Not typical

• Speed of accessing finance: Varies according to scheme terms

The most common subsidies used by local governments are:

Producer-oriented subsidy

Local government can provide a subsidy to the investor or solution provider, such as providing a special tariff for using renewable energy;

Consumer-oriented subsidy

The subsidy can be designed to subsidize a behaviour of consumers, for example subsidizing purchasing of electric cars

This instrument is not sufficient for financing large-scale infrastructure projects. Subsidies can unnecessarily distort markets, preventing efficient outcomes and diverting resources from more productive uses to less productive ones in some cases. They can be useful to kickstart a market or sector.

New development deals

The Secretary of State may designate a geographical area which would not be subject to future levies and resets, thereby creating an area (and a stream of revenue) which is outside the Business Rate Retention Scheme. The Non-Domestic Rating (Designated Areas) Regulations 2013 (SI 2013/107) lists several dozen areas, many of which are Enterprise Zones, in which the local authority will retain 100% of business rates growth for the next 25 years (House of Commons Library, 2021).

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