Health Campus Programme

Energy Centre Project

Full Business Case

Executive Summary

August 2009

DRAFT


EXECUTIVE SUMMARY

Foresterhill Campus Energy Centre

TABLE OF CONTENTS

1.0EXECUTIVE SUMMARY......

1.1.Strategic case......

1.2.Economic case......

1.3.Commercial case......

1.4.Financial case......

1.5.Management case......

1.6.Recommendation......

APPENDICES

Appendix A – Summarised cost plan

Appendix B – Project programme

Appendix C – Project risk register

Appendix D – Economic Appraisal

Appendix E – Project Information

Appendix F – BREEAM assessment

Appendix G Technical solution

Appendix H – Cashflow forecast

INTRODUCTION

This Full Business Case (FBC) seeks approval to invest £12.49m in a contract for the Design and Construction of a new Energy Centre to serve the current and future needs of the Foresterhill sites energy and heating requirements.

1.0EXECUTIVE SUMMARY

1.1.Strategic case.

1.1.1 The strategic context

The NHS Grampian long term strategy recognises the increasing importance of the Foresterhill site and the intention is to fully utilise it as effectively as possible. The strategy anticipates changes in population structure, workforce, technology and services being redesigned to improve treatment and care for patients. As part of the strategy, NHS Grampian has developed this business case for the provision of the future energy needs for the Foresterhill site.

The strategic drivers for this investment are as follows;

  • An ongoing programme of rationalisation and re-development of facilities on the site
  • Increasing steam and electrical demand load profiles
  • Ageing boiler plant
  • Plans for reduction of CO2 emissions
  • Continuing downward pressures on revenue.

1.1.2 The case for change

NHS Grampian recognises the changing energy demands as the re-design and phased implementation of development on the Foresterhill Site takes place. In addition, the current energy provisions are reaching the end of their working life and do not meet expected performance in terms of cost, sustainability and security of supply. Part of the Board’s strategy is to investigate the optimum approach to the provision of future energy needs.

In summary, the case for change arises from the following:

  • Failing and insecure current energy production facilities with boiler plant nearing the end of its economic life and the high associated labour costs;
  • New/redeveloped services, and facilities under development increasing the energy demand;
  • The increased energy requirements associated with the future developments at the Foresterhill site;
  • Steep increases in energy costs, driven by the volatility of the world energy market; and
  • NHS Grampian, NHS, Scottish Government and Central Government initiatives to implement more sustainable energy production methods to reduce carbon emissions.

1.2.Economic case

1.2.1 OBC long list and short list

Following a long/shortlisting process the following four options were identified as having the potential to address some or all of the issues outlined above. These were:

  • Option 0:- Do Nothing
  • Option 1:- Provide New Dual Fuel Boilers (2 @ 10.5MWth and 1@ 6.5MWth) – the “Do Minimum” option.
  • Option 2:- Provide New Gas Turbine CHP (1 @ 3.9MWe/7MWth) and New Dual Fuel Boilers (2 @ 10.5MWth).
  • Option 3:- Provide New Gas Turbine CHP (1 @ 3.9MWe/7MWth), New Biomass Boiler (1 @ 1.5MWth) and New Dual Fuel Boilers (2 @ 6.5MWth).
  • Option 4:- Provide New Gas Turbine CHP (1 @ 3.9MWe/7MWth), New Biomass Steam Turbine CHP (1 @ 277kWe/1.5MWth) and New Dual Fuel Boilers (2 @ 6.5MWth).

The "Do Nothing" option was discounted since it cannot address the pressure for change or the Board’s objective of providing the Foresterhill site with a secure and sustainable source of energy at the lowest possible capital and revenue cost over the next 20 years.

Option 1 the “Do Minimum” optionwas discounted as this option also fails to address the boards objective to provide the Foresterhill Site with a secure and sustainable source of energy at the lowest possible capital and revenue cost over the next 20 years and has no potential to trade carbon credits, in addition to this there is no opportunity to seek grant funding and opex costs are inefficient

Option 2 was discounted as the option is restricted to duel fuel use, nor does the option meet all political objectives and will not attract funding opportunities

Option 4 was discounted due to the high capital expenditure, new technology yet to be proven and lengthy construction period that may have an impact on the Foresterhill master plan

Table 1- Qualitative benefits criteria

Critical Success Factor Score / Lifecycle Cost / Indicator of Value for Money
NPV
Score
Option 1 – Dual Fuel Boilers / 3.78 / £111.78m / £29.6m/point
Option 2 – GT CHP and Dual Fuel Boilers / 6.09 / £63.81m / £10.5m/point
Option 3 – GT CHP, Biomass and Dual Fuel Boilers / 6.64 / £67.1m / £10.1m/point
Option 4 – GT and Biomass ST CHP and Dual Fuel Boilers / 6.44 / £72.38m / £11.24m/point

The preferred option, denoted as Option 3, is for the installation of 2 No. replacement dual fuel (natural gas/35 sec fuel oil) 6.5MWth steam boilers, 1 No. new 1.5MWth biomass boiler and 1 No. new 3.9MWe gas turbine CHP unit. The preferred site is a new build to the north of the existing West Boilerhouse.

The target cost of the preferred option (Option 3) of £12.49m is the same as the cost approved in the Outline Business Case (OBC). A capital cost of £12.174m was used in the Economic Appraisal undertaken in the OBC i.e. this sum did not include the NHS Grampian direct costs. The “Indicator of Value for Money” has been re-calculated using the target cost of £12.49m resulting in a NPV score of £10.2m/point. The inclusion of these direct costs has not, therefore, resulted in any significant change to the outcome of the Economic Appraisal.

The principal benefits accruing to the Board are:

  • The replacement of ageing boiler plant and equipment;
  • The provision of steam and power capacity more closely matched to the load profiles via automated sequencing of the new plant;
  • The introduction of measures that assist in addressing essential targets on environmental performance and energy efficiency;
  • A 17% reduction in present day CO2 emissions (equating to 4,525 tonnes per annum); and
  • A 37% reduction in present day annual revenue costs (equating to £2,341,122 per annum).

1.2.2 The procurement.

In line with guidance from Health Facilities Scotland the project has been procured via Frameworks Scotland. Each of the Principle Supply Chain Partners (PSCP) who Health Facilities Scotland had selected for the Framework were invited to submit an Expression of Interest submissions and attend an open day. Following this the PSCPs were interviewed and scored. The result of this selection process was that Laing O’Rourke were appointed as the PSCP to develop and construct the scheme.

The PSCP has been responsible for developing the design solution in conjunction with NHS Grampian and market testing the proposed solution. The capital cost of the scheme included within this business case reflects the agreed Target Cost plus other capital costs that will be incurred by NHS Grampian.

1.2.3 The preferred option

The preferred option was selected during the OBC process and the technical solution further refined during the preparation of the FBC

1.3.Commercial case

1.3.1 Agreed products and services

The design and construction of the new energy centre will be contracted to the selected PSCP utilising the Frameworks Scotland procurement route.

The ongoing maintenance of the facility and purchase of fuel will be retained by NHS Grampian

1.3.2 Agreed risk allocation

As the scheme has been developed the risks within the scheme have been identified, allocated and quantified in a number of workshops. This has resulted in the agreed risk register which can be found in Appendix C which records the allocation and quantification of risk.

1.3.3 Key contractual arrangements

The design and construction of the new energy centre will be undertaken using the Frameworks Scotland suite of contract documents which is based on the NEC 3 form of contract. A target costhas beenagreed with the PSCP. Subject to the instruction, early warning and compensation event mechanisms within the NEC 3 contract the amount paid for the project by NHS Grampian is the actual cost of the works adjusted as follows:

  • In the event the actual cost exceeds the target cost the additional cost will be borne by the PSCP and no additional cost is borne by NHS Grampian
  • In the event that the actual cost is less than the target cost the first five percent of the difference is equally shared between NHS Grampian and the PSCP any remaining difference is wholly retained by NHS Grampian

The staff currently deployed within the existing energy centre will be redeployed within NHS Grampian to undertake similar tasks.

TUPE does not apply to this project.

1.3.4 Agreed implementation timescales

The key milestones and delivery dates are as follows:

Table 2- Milestone Dates

Milestone / Target Date
AIG & NHS Board Approval OBC Version C / Dec 2008
Submission of Detailed Planning Application / Dec 2008
Appointment of PSCP Framework Contractor / Feb 2009
Detailed Design / From Mar 2009
Amended OBC Version D – AIG Approval / May 2009
SGHD & CIG submission / June 2009
Detailed Planning Approval / July 2009
PSCP issue FBC to NHSG / 17 July 2009
NHSG Approvals / Aug 2009
Enabling works commence / Aug 2009
Full Business Case (with agreed Target Cost) submission / September 2009 (papers to CIG by 25th August)
Energy Centre Comes Online / Spring 2011

1.4.Financial case

The estimated initial capital cost to NHS Grampian of this option is £10.04m, including risk allowances, VAT and allowing for confirmed £2.45m funding from Scottish Government Health Directorate. Other NHS Grampian direct costs (e.g. cost advisor, technical supervisor, etc) take the total project cost to £12.49m. The overall installation programme is 26months from acceptance of the planning application.

1.4.1Overall affordability and balance sheet treatment

The capital cost estimates for each option have been developed in considerable detail in partnership with NHS Grampian’s Preferred Supply Chain Partner (PSCP) Laing O’Rourke as part of the Frameworks Scotland procurement route. Detailed discussions have also been undertaken with plant suppliers to ensure a robust cost estimate for both capital, maintenance and lifecycle costs at 2009 prices.

The detailed cost plan is contained in Appendix A

The Scottish Government Health Directorate has agreed to provide funding to assist with the capital cost of the renewable options. SGHD has confirmed that a contribution of £2.45m for options 3 and 4 will be made (these options having renewable energy elements). This level of funding was confirmed by SGHD in October 2008.

Given the large scale of anticipated savings on energy supplies, the revenue cost implications of the preferred option are affordable within existing 5 year revenue financial plans.

The new Energy Centre will be on the balance sheet of NHS Grampian in accordance with the rules governing all of its assets.

The University of Aberdeen has agreed to enter into a contract with NHS Grampian to take steam and electricity from the new energy centre to existing and planned University facilities at the Foresterhill site.

Payment terms by the University to NHS Grampian for the energy are currently being negotiated on the basis of consumption with a fixed annual charge to contribute to the revenue cost of the scheme. In addition, the University accepts that it will incur some capital costs for changes to the distribution system. The University anticipates, subject to confirmation, that these would be determined as part of the feasibility studies for each of their planned developments.

The unit charges for the steam and electricity will be the same as the charges that NHS Grampian is paying. No capital payments by the University have been allowed for in respect of the investment in the new Energy Centre.

The consumption payments assumed in the financial model are as follows, based on a projected annual consumption of 12,223,110kWh of steam and 12,243,469kWh of electricity:-

Table 3 - Annual Consumption Payment by University of Aberdeen

Heat / Power
Option 1 / £271,772 / -
Option 2 / £271,772 / £1,536,555
Option 3 (Preferred) / £271,772 / £1,808,327
Option 4 / £271,772 / £1,808,327

1.5.Management case

1.5.1 Project management arrangements

The technical leadership and project management will be provided internally through the NHS Grampian Estates Team. The internal project manager will be supported as appropriate by the cost advisor (Gardner & Theobald) appointed for the project under the Frameworks Scotland arrangements and the PSCP team led by Laing O’Rourke.

The governance arrangements are covered by the Health Campus Programme.

The Health Campus programme structure has been organised to ensure that the high priority approved projects and those currently under consideration can be taken forward efficiently in support of the health Plan implementation. The main aims are to:

  • ensure that decision making can be integrated with NHS Grampian’s normal management processes as much as possible
  • clinical leadership and project management support can be targeted effectively and efficiently
  • best practice is applied in terms of project management and governance

1.5.2 Benefits realisation and risk management

The benefits identified within this FBC and set out below will be monitored during the development of the scheme through to completion of the Post project evaluation to maximise the opportunities for them to be realised.

  • To provide reliable and efficient energy supplies to the Foresterhill site to meet requirements in respect of patient care, staff and visitors over the next 20 years;
  • To minimise energy supply costs;
  • To reduce carbon emissions through improved energy generation efficiency;
  • To incorporate flexibility in the energy supplies to meet the requirements of future expansion; and
  • To fulfil statutory requirements.

1.5.3 Risk management

The project uses a standard Frameworks Scotland NEC 3 target cost contract with a pain/gain mechanism along with a costed project risk register. Throughout Stage 3 ( i.e. the FBC development period) of the framework a number of technical workshops were conducted to establish the most beneficial solutions for the project. In addition to this, risk workshops were held on a monthly basis which led to the development of the risk register which can be found within Appendix C.

1.5.4 Post project evaluation arrangements

Post Project Evaluation will be undertaken to improve future project briefing, project management, and implementation for future projects. It will also be used to measure the performance of the completed facility against the benefits identified within this business case.

It is anticipated that during the course of the construction works that Health Facilities Scotland will roll out a performance measurement system on all Frameworks Scotland projects based on a series of Key Performance Indicators (KPIs). It is anticipated that these KPIs will be utilised as they come on line and as far as they are applicable given the nature and timing of the project.

1.6.Recommendation

The NHS Grampian Asset Investment Group approved the Energy Centre Full Business Case on 27 July 2009 and recommended its approval to the Grampian NHS Board.

NHS Grampian confirms that:

  • the development fits with the Local Delivery Plan and the objectives of the Board as set out in the NHS Grampian Health Plan
  • an appraisal of a full range of options has been considered and evaluated following the guidance in the Scottish Capital Investment Manual (SCIM) considering costs, benefits and risks
  • the Full Business Case has been approved by NHS Grampian Board and that the revenue consequences have been agreed
  • procurement options have been adequately explored
  • a plan for governance and implementation has been agreed
  • the delivery of the project aims will maximise the use of the Board’s estate and are consistent with the Foresterhill development framework

The Full Business Case is signed off by NHS Grampian Chair and Chief Executive, for submission to the Scottish Government and approval is sought to implement the proposals through the Frameworks Scotland arrangements.

David CameronRichard Carey

ChairmanChief Executive

NHS GrampianNHS Grampian

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APPENDICES

See SEPARATE DOCUMENTS

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