Outline Business Case
Pilot Energy Efficiency Project, using the Carbon Energy Fund Scotland model, across three NHS Grampian Sites
November 2014
Contents
Page
Executive Summary / 41. / Introduction / 8
2. / Strategic Case / 9
2.1 / Introduction / 9
2.2 / Strategic Context / 9
2.2.1 / National Strategy / 9
2.2.2 / Local Strategy / 10
2.3 / Drivers of Change / 10
2.3.1 / Legislation and Policy / 10
2.3.2 / Financial / 11
2.3.3 / Social / 11
2.4 / Business Needs / 12
2.5 / Investment Objectives / 13
2.6 / Existing Arrangements / 14
2.7 / Programme Objectives and Delivery Criteria / 15
2.8 / Benefits / 16
2.9 / Strategic Risk Assessment / 16
2.10 / Constraints and Dependencies / 18
2.10;1 / Constraints / 18
2.10.2 / Dependencies / 19
3 / Economic Case / 20
3.1 / Introduction / 20
3.2 / Critical Success Factors / 20
3.3 / Approach / 21
3.4 / Qualitative Benefits Appraisal / 22
3.5 / Quantifiable Benefits Appraisal / 24
3.5.1 / Economic Appraisal / 25
3.6 / Sensitivity Analysis / 26
3.6.1 / Preferred Option / 28
4 / Commercial Case / 29
4.1 / Required Services / 29
4.2 / Potential for Risk Transfer / 30
4.3 / Proposed Charging Mechanisms / 31
4.4 / Proposed Contract Length / 32
4.5 / Proposed Key Contractual Clauses / 32
4.5.1 / Objectives of the contract / 32
4.5.2 / Access / 32
4.5.3 / Energy Baseline / 32
4.5.4 / Savings Guarantee/Payment Mechanism / 33
4.5.5 / Supervening Events, Changes, Defaults and Termination / 34
4.6 / Residual interests / 34
4.7 / Personnel Implications (including TUPE) / 34
4.8 / Implementation Timescales / 35
4.9 / Accounting Treatment / 36
5.0 / The Financial Case / 38
5.1 / Introduction / 38
5.2 / Affordability Implications of the Energy Efficiency Investment Delivered by the Preferred option / 38
5.3 / Sensitivity Analysis / 39
5.4 / Impact on a NHS Board’s Income and Expenditure Account and Balance Sheet / 41
6.0 / The Management Case / 42
6.1 / Introduction / 42
6.2 / Procurement Strategy / 42
6.3 / Outline Arrangement for Programme Management / 42
6.4 / Benefits Realisation / 43
6.5 / Risk Management / 43
6.6 / Post Project Evaluation / 44
Appendix 1 – Project Risk Matrix / 45
Executive Summary
Introduction
The purpose of this Outline Business Case (OBC) is to seek approval for investment in energy efficient infrastructure, using the CEF Scotland model, at three large, strategically important sites within the NHS Grampian estate: Royal Cornhill Hospital, Dr Gray’s Hospital and the Foresterhill Campus (which includes Aberdeen Royal infirmary, Royal Aberdeen Childrens Hospital, Aberdeen Maternity Hospital and Aberdeen Dental School).
Strategic Context
The planned project fits clearly with NHS Grampians strategic theme of delivering high quality care in the right place through providing safer, effective and sustainable services. In addition the project fits national strategy in relation to the Scottish Government’s commitments under the Climate Change (Scotland) Act 2009 to deliver a 42% reduction in greenhouse gas (GHG) emissions by 2020 from a 1990 baseline. Specifically the initiatives to be delivered under the project will improve NHS Grampians performance against the NHSScotland energy and GHC targets (these require NHS Boards to deliver a basic target of a 6.8% reduction in energy consumption and GHG emissions by 2020 against a 2014/15 baseline, and a stretch target of a 14.9% reduction.
Case for Change
The following key points illustrate the case for change:-
· NHS Grampian is required to further improve its performance in terms of energy consumption and GHG emissions. In the last year of reporting against HEAT target performance (FY 2014/15), NHS Grampian is missing its energy consumption reduction target by c 1.3% and its GHG emissions reduction target by c 0.8%.This relates primarily to the age profile and development across multiple NHS Grampian sites, coupled to limited investment in low energy technologies and opportunities. The most recent and significant investment in the replacement energy centre at the Foresterhill Campus has substantially assisted our drive towards GHG targets, but further ‘downstream’ investments are also required.
· NHS Grampian has the third highest energy-consuming hospital in Scotland (Aberdeen Royal Infirmary) and has a number of hospital sites with energy consumption well in excess of the Scottish national average (including Aberdeen Maternity Hospital and Dr Gray’s Hospital).
· Energy prices have risen dramatically in recent years and this trend is set to continue. Between 2009/10 and 2013/14, NHS Grampian’s energy bill increased by over 57%, reaching £12.9 million in 2013/14 despite energy consumption over the same period rising by only 2.6%. In a Business as Usual (BAU) scenario (i.e. no further energy consumption reductions being made), the NHS Grampian energy bill could be as high as £19 million by 2020 (based on a mid-line DECC pricing scenario). If the NHSScotland energy reduction targets are met, savings of c. £1million per annum would be achieved by 2020.
· An analysis of energy costs shows that the bulk of the increase is due to changes in taxes and levies, rather than wholesale energy prices. Since 2009/10, NHSScotland Boards have seen the introduction of the Carbon Reduction Commitment Energy Efficiency Scheme (CRC EES) which in 2013/14 cost NHS Grampian c. £0.5 million. If costs rise in line with EU projections of carbon floor price, and under a BAU scenario, this cost would rise to c. £0.9million in 2020. This cost is in addition to the energy costs cited above.
The Project
The Carbon Energy Fund (CEF) was established as a partnership between the Carbon and Energy Fund and NHS Shared Business Services, and has since been reviewed and ratified by NHS National Services Scotland. The process is designed to encourage innovation from prospective bidders for the supply, maintenance and energy management service provision for large-scale energy investment opportunities within NHS estates. The third party service provider’s costs, in the form of a unitary charge, are covered by guaranteed savings from reduced energy consumption and GHG emissions.
NHS Grampian agreed to pilot the CEF model for NHSScotland Boards. An Invitation to Mini Competition (ITMC) for Foresterhill, Royal Cornhill and Dr Gray’s sites was prepared and issued to the CEF framework contractors. Following short-listing and evaluation by the project team, supported by the Carbon Energy Fund’s advisors, Vital Energy were appointed Preferred Bidder on 11 November 2014.
The preferred bid includes the following project scope:-
· Energy link (heat and power) between Foresterhill and Royal Cornhill Hospital sites,
· A new main HV incomer substation and modifications to the High Voltage network at Foresterhill;
· Replacement chiller units at Foresterhill;
· SCADA system for Foresterhill, Royal Cornhill and Dr Gray’s;
· Modifications to the CDU and Laundry steam/condensate return system at Foresterhill;
· New heat link, new plate heat exchangers and modifications to condensate system at Dental School;
· Specific meter upgrades;
· The decommissioning of the East Boilerhouse at Foresterhill;
· The installation of replacement gas boilers at Dr Gray’s Hospital;
· The potential for some further ‘added value’ downstream energy efficiency options (e.g. LED lighting, etc.).
Financial Aspects
The anticipated NHS capital equivalent investment, by the contractor, in this enhanced energy infrastructure is £7.7 million. On completion the initiatives are anticipated to deliver a reduction in overall GHG emissions of circa 16%.
The following table summarises the net annual guaranteed savings (at 2014/15 prices) that will be delivered under the proposed project:-
Summary - Revenue Impact of Investment / £000sFinancing costs / 445
Operation & Maintenance / 539
Total Annual Costs / 984
Cash Releasing Savings / (1,627)
Electricity Export / (211)
Future Cost Avoidance / (298)
Total Guaranteed Savings / (2,136)
Savings net of financing and operating costs / (1,152)
Note: the cost of investment and the level of guaranteed savings are calculated placing reliance on NHS Grampian’s asbestos register and current energy utilisation data. Any variation in the accuracy of this baseline data, together with any delay or failure to obtain planning consents for the necessary work is at NHS Grampians risk.
Risk Mitigation
Failure to progress the planned project will result in existing infrastructure being no longer fit for purpose (Strategic Risk number 855).
Failure to significantly reduce energy consumption and GHG emissions on our major sites, will not only mean that we do not comply with national targets, but will also result in increased costs from rising wholesale prices and increased carbon allowances, taxes and levies arising from the increasingly rigorous compliance regime, diverting resource from direct patient care.
Recommendation
The Scottish Government Health and Social Care Directorates Capital Investment Group is asked to approve the Outline Business Case to proceed with the Pilot Carbon and Energy Fund (CEF) project for replacement energy efficient plant at Foresterhill Campus, Dr Gray’s and Royal Cornhill Hospital.
1.0 Introduction
1.0 introduction
The purpose of this Outline Business Case (OBC) is to seek approval for investment in energy efficient infrastructure at three large, strategically important sites within the NHS Grampian estate: Royal Cornhill Hospital, Dr Gray’s Hospital and the Foresterhill Campus (which includes Aberdeen Royal infirmary, Royal Aberdeen Children’s Hospital, Aberdeen Maternity Hospital and Aberdeen Dental School).
This follows the approval by the Capital Investment Group of an Initial Agreement (IA) on the subject in August 2013. This OBC has been prepared in accordance with both the Scottish Capital Investment Manual and the requirements of HM Treasury’s Green Book (A Guide to Investment Appraisal in the Public Sector). The format uses the ‘Five Case Model’, which comprises the following key components:
· Strategic Case;
· Economic Case;
· Commercial Case;
· Financial Case;
· Management Case.
2 Strategic Case
2.1 Introduction
The planned project fits clearly with NHS Grampian’s strategic theme of delivering high quality care in the right place through providing safer, effective and sustainable services.
2.2 Strategic Context
The project’s fit to national and local strategy is summarised below:
2.2.1 National Strategy
The Climate Change (Scotland) Act 2009 sets legally binding targets in relation to greenhouse gas (GHG) emissions reduction (42% by 2020, based on a 1990 baseline; 50% by 2030; 80% by 2050). In June 2013, the Scottish Government reported the final GHG emissions for Scotland in calendar year 2011[1] - a reduction of 25.7% against the 1990 baseline. As this did not meet the target set by Scottish Government, the necessary 2020 GHG emission reductions have been revised from 40% to 44.2%. In practice, this means that a further 18.5% reduction in emissions is required by 2020. The 2027 target has been revised from 56.16% to 57.82%, whilst 2050 remains unchanged at 80%. The CCSA also includes requirements around renewable energy generation, climate change adaptation and energy/ sustainability monitoring and reporting. As a public sector body, NHS Grampian has both explicit and implicit duties to reduce greenhouse gas emissions to meet CCSA requirements.
NHSScotland Targets: From April 2015, a new targeting regime for energy consumption and GHG emissions reduction will come into force across the NHS Boards. There are two sets of targets: a basic target of a 6.8% reduction in energy consumption and GHG emissions by 2020 (from a 2014/15 baseline), and a stretch target of a 14.9% reduction across both categories. In the last year of reporting against HEAT target performance (FY 2014/15), NHS Grampian is missing its energy consumption reduction target by c 1.3% and its GHG emissions reduction target by c 0.8%.
The Healthcare Quality Strategy for NHSScotland: This sets out NHSScotland’s three quality ambitions for the service: person centred, safe, effective. In the context of property, this translates as improvements in patient experience and environment (person centred), minimisation of backlog risks (safe), and reductions in cost, energy consumption and greenhouse gas emissions (effective).
NHSScotland Sustainable Development Strategy: A Sustainable Development Strategy for NHSScotland was announced in February 2012. The Strategy contains 14 mandatory requirements for NHS Boards, including the establishment of a Sustainable Development champion and the development of a Sustainable Development Action Plan (incorporating climate change mitigation and adaptation).
2.2.2 Local Strategy
Grampian Health Plan: The Health Plan sets out the overall strategy and guidance for the development of the health system in Grampian.
NHS Grampian Healthfit 2020: This is the practical vision for the health system in Grampian taking account of the direction set out in the Health Plan. It sets out specifically how many elements of the health system could and should be organised up to 2020 if current good practice was to be applied consistently and comprehensively. The 2020 vision will not remain static but will continue to be developed to aid understanding on what is possible in Grampian as a whole and within individual communities. A key feature of the vision is its consistency with the original Healthfit vision for Grampian developed in 2002 but recently updated and endorsed by the Board for health priorities in the Grampian area until 2020. It demonstrates that Healthfit has provided the firm foundation for continuous change to improve and modernise the health system in Grampian.
The NHS Grampian Health and Care Framework which is a set of strategies, guidance and tools that supports the Healthfit approach to health and healthcare. It also supports the detailed implementation of the Grampian Health Plan approved by the Board.
NHS Grampian Property and Asset Management Plan (PAMP) which aims to ensure that assets are used efficiently, coherently and strategically to support the future clinical and corporate needs of the Board consistent with our forecast for service need. In relation to this, NHS Grampian also undertakes a regular review of its ‘Backlog maintenance’. This stands at circa £163 million (before uplifts for fees, VAT etc).
2.3 Drivers for Change
2.3.1 Legislation and Policy
To comply with the requirements of the Climate change (Scotland) Act 2009 and to meet the specific NHSScotland targets NHS Grampian must significantly improve its performance in terms of energy consumption and GHG emissions
As a public body that has a huge impact on day-to-day life in Scotland, NHSScotland supports the Scottish Government’s climate change aspirations and as such, has a number of associated targets and policies in place. These include the NHSScotland energy and GHG targets and the NHSScotland Sustainable Development Policy which sets out 14 mandatory requirements for NHS Boards in relation to sustainability, including actions on climate change mitigation and climate change adaptation.