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- Utility Procurement Case Study - Royal Docks
Royal Docks, LDA
public sector strategic approach
When the London Development Agency (LDA) recently announced that it was to spend £6 m building a new electricity network for the Royal Docks, it was rightly hailed as a landmark deal for this flagship Thames Gateway development.
But behind the good news is a story of market and regulatory failure, which threatened to scuttle LDA’s ambitious plans for this strategically vital development, an impasse only broken when the LDA decided that failure was not an option.
The Royal Docks were at the heart of Britain's international trade for well over 100 years. Today, they are undergoing a major transformation, which will turn them from derelict sites into a new commercial, residential, and leisure district for east London.
Situated on the north bank of the River Thames, three miles east of Canary Wharf, the Royal Docks is one of Europe's largest regeneration projects, occupying 425 acres of land and 235 acres of water featuring a projected 10,000 new homes.
The perennial problem for LDA, and for many other regeneration agencies in the capital, is a chronic lack of capacity on the electricity network.
Estimates suggest that in all, new developments in the London Thames Gateway could require over 800MW more energy by 2016.
One might imagine that the privatised utilities would step into the breach and make a strategic investment in the necessary infrastructure, in the knowledge that their investment would be rewarded as developers, encouraged by the availability of capacity, moved on site.
However, and in defence of the utilities, the regulatory framework is complex and, to protect consumers, does not encourage utility businesses to be entrepreneurial and prevents them from making speculative investments.
In these circumstances the burden then falls on developers, who, in turn, are understandably unwilling to make sometimes multi-million pound investments in infrastructure, which do not bring rights of ownership or even guarantees of supply.
The size of the up front investment can also place intolerable risks on the developer’s financial return model. The result of this polarised position is often inertia or a piecemeal approach to development.
To deliver on its commitments to the people of London, the LDA had to break the deadlock and so they decided to implement the construction of a new network to kick-start the development.
The new network, to be built by EDF Energy, will provide up to 82 MVA of electrical power to meet the Royal Docks’ anticipated energy needs for the next 12 years.
The project involves the installation of 60,000 meters of high voltage cable to provide an infrastructure with sufficient power capacity for development of the area for the foreseeable future.
The LDA will fund the work with a £6 m grant from the Office of the Deputy Prime Minister’s Communities Plan Fund. The model is similar to an earlier project that provided a private network for the first major developments in the area that included the Excel exhibition centre and the University of East London.
Whilst LDA are pleased to be able to make this happen, they remain dissatisfied with the circumstances that, they feel, left them with no alternative.
Kieran McStravick, LDA’s Royal Docks Project Manager said, “We firmly believe that this is a failure of the market to strategically invest in large regeneration areas with multiple development sites and the public sector has been left to initiate a solution and fund it. We have invested £6 m of public money yet the infrastructure will be owned and operated by EDF Energy so therefore the majority of the risk is borne by the public sector.
“Although we have reserved capacity for 12 years and we will see some return from enhanced capital receipts from our development partners, we feel that a more equitable solution, at the very least, would have been a sharing of the risks with the successful electricity company, yet this was not possible due to the regulatory framework.
“We were also disappointed by the absence of a competitive market despite the de-regulation of the industry. When we did go out to tender, only two electricity companies responded, EDF and Scottish and Southern, which does not, in our view, represent a healthy competition for a contract of this size and significance.
“Despite the procurement problems, the project takes a strategic approach to the power needs of the Royal Docks as a whole and the work will be finished in approximately 18 months. By adopting this approach, we believe we have achieved real economies of scale. It will also make the area a more attractive development prospect for our development partners as a vital piece of infrastructure will now be built.”
LDA Executive Director of Regeneration and Development Tony Winterbottom said, “This deal will make a major contribution to meeting the Gateway’s energy needs and will act as a catalyst to the Royal Docks’ continued renewal. Instead of leaving developers and energy providers to wait for each other to make the first move, we are driving the area’s transformation and showing how serious we are about creating communities that have all the services and facilities they need to thrive.”
All photographs courtesy of the LDA
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