Operational PFI Projects: The Road to 'Net Zero'

Published 27 July 2023

The vast majority of PFI contracts were signed between the mid-90s and the mid-2010s, all long before 'net zero' targets were set by the UK Government.  However, with retrofit decarbonisation of public buildings currently high up on the Government's agenda, and public sector organisations tasked with reducing their carbon footprint, the focus is on how operational PFI projects can achieve net zero during their remaining years.

On 5^th July, the Infrastructure and Projects Authority (IPA) published its 'Decarbonisation of Operational PFI Projects' handbook (the "Handbook"), which sets out recommended good practice for how contracting authorities should work with their private sector project partners to plan and deliver decarbonisation interventions on their operational PFI projects.

The Handbook - produced by the IPA with input from its 'Net Zero Working Group' whose members include investors, MSA providers and FM contractors - proposes that a standardised approach to decarbonisation is adopted.  It is intended to operate alongside the existing PFI contractual framework irrespective of which version of SOPC it is based on.

For operational PFI facilities the focus should be on reducing 'operational carbon' – on the basis that decisions affecting the 'whole life carbon' of the asset that relate to design and construction have already been taken – and in particular it is recommended that interventions focus initially on:

• Scope 1 direct emissions – being those generated from sources owned and controlled by contracting authorities (e.g. from on-site fossil fuel heating systems); and

• Scope 2 indirect emissions – being those generated from purchased electricity, steam, heating, or cooling).

There is a two-staged approach to delivering decarbonisation interventions recommended in the Handbook:

1. Development of a decarbonisation plan

Five principles are recommended in the Handbook to prepare and implement an effective decarbonisation plan.  These are:

• Data first – the first step is to gather information about existing energy consumption and carbon reduction. This data will form the baseline from which net zero targets can be set and monitored.
• Know your contract – contracting authorities need to review their existing project agreement carefully to understand the way in which energy provision, management and risk allocation is addressed and how the change mechanism operates.
• Engage Stakeholders – collaboration between the public and private sector is going to be key in delivering a decarbonisation plan. The Handbook highlights the benefits of accessing the expertise of project partners with technological knowledge and experience of equipment/assets and decarbonisation measures. The need to consider lender and stakeholder approval is also acknowledged. 
• Prioritise – There is no one size fits all. What may be an effective range of decarbonisation measures/solutions on one project may not be the same on another.  The decarbonisation plan should be tailored to your project, site, built environment asset and various factors such as age, PPM including lifecycle activities, available budget and how long is left to run on the contract. 
• Make a plan – the contracting authority and project company should agree a decarbonisation plan that includes include short, medium and long-term options, identifies the baseline omissions position and allows ongoing progress monitoring.

2. Delivering net zero changes via the change or variation process in the project agreement

The Handbook adopts a five-staged approach to the contract change process, providing recommended checklists, considerations and actions for each of the five stages:

• Stage 1 (Net Zero Change Feasibility Period): from the point of assessing and shortlisting of options.
• Stage 2: (Net Zero Change Stage 1): to the Authority issuing a Stage 1 change notice for Net Zero Outline Proposals
• Stage 3 (Net Zero Change Stage 2): through to issue of a Stage 2 request notice for Net Zero Detailed Proposals
• Stage 4 (Net Zero Change Implementation Period): progressing to delivery of the change.
• Stage 5 (Net Zero Change Verification Period): monitoring of the selected interventions

In our view as well as the project agreement change process a particular area for early consideration – but one which is not majored on in the Handbook, and is often overlooked in practice – should be the contractual framework for delivering the design & build solution for the decarbonisation works.  In particular, which party is appointing the D&B contractor and the professional team, when and on what terms – and is there proposed to be a novation of any of those appointments further down the line and if so how is that to be achieved?

It will take pragmatism and collaboration to successfully achieve net zero in operational PFI projects, but the Handbook is a welcome first step on the road to achieving a unified approach to decarbonisation of operational PFI schemes.  

DAC Beachcroft’s Infrastructure & Projects lawyers advise a range of contracting authorities, SPVs, FM contractors, and investors, on operational PFI projects.  We are currently advising clients on decarbonisation activities on operational PFI and NHS LIFT schemes.

If you require advice on decarbonising your operational PFI scheme, please contact our PFI experts Alison Martin and Ioan Davies.