Portsmouth City Council has dropped plans to create its own energy company at a potential cost of up to £2.5m.
The decision was taken by the council’s cabinet last week, following a review of the business case for the proposed Victory Energy company.
A report from advisors PwC said that an initial 2017 estimate that the company would require £3.8m investment from the council was more likely to be £15.2m.
The PwC review was commissioned after leadership of the council—in which no party has overall control—changed from the Conservatives and UKIP to the Liberal Democrats following local elections in May.
Gerald Vernon-Jackson, Lib Dem leader of the council, said: “The money the council will lose from this will not put extra pressure on future council budgets.
“The previous administration spent money setting the company up, that money has been spent and is gone. We have taken this decision to limit the council’s losses and make sure no further money goes the same way.”
He said that the business model equated to “an open chequebook”, where the council would be required to put in as much cash as necessary to make the company successful.
Vernon-Jackson added: “It is not the role of a council to be effectively acting as a hedge fund and playing roulette with public money.”
Advice from PwC said that the energy company was an “untried and untested business model trying to attract a very inaccessible audience”, he added.
The PwC report said that the company’s projected net margins looked relatively high, particularly given regulatory constraints on future tariff levels.
“Typically, only the Big Six suppliers have experienced positive net margin growth in line with VESL’s projections over the past five years, and we consider that this was driven by the profitability of their ‘sticky’ standard variable tariff customers, soon to be subject to a price cap,” the report said.
Victory Energy is not the first local authority energy company to run into problems. In May, Bristol City Council announced that it had switched its energy contract away from its own standalone energy company to British Gas.
The council said it was forced to award the contract to the Big Six supplier due to procurement rules.
The move came as it was revealed that the authority has ploughed an extra £6.7m into the company, Bristol Energy, since November last year.
Meanwhile, the UK’s sweltering summer has helped Forest Heath District Council beat its estimated returns from a solar farm investment.
In 2016, the council paid £14.5m to acquire the 12.4MW solar farm at Toggam Farm in Lakenheath.
For the second year running, the solar farm has performed marginally better than expected, with generation rising significantly during the recent sunny spell.
After operating costs and recouping some of the capital used to buy the solar farm, the council said it has generated £372,300 towards the funding of services compared to a predicted £330,000.
However, the wisdom of the purchase was questioned by Victor Lukaniuk, an independent councillor on Suffolk County Council, who told the East Anglian Daily Times: “The solar farm produced a profit of £372,300 during the financial year 2017–2018 on an investment of £14.5m. That is a return of about 2.5% after hefty costs.
“By anybody’s standards that is a pretty miserable return.”
However, Stephen Edwards, cabinet member for resources and performance at the authority, said the solar farm will produce £700,000 to support public services by year 10 of operation, reflecting an annual return of around 5%.
In Suffolk’s annual report for 2017–18, the council reported income from investments was £118,328, less than the £181,000 predicted.
“The under achievement of interest earned was primarily due to reduced funds available for investment following the purchase the solar farm at Toggam Farm,” the report said.
