Purpose

To approve the award of contract for the Colville Heat Network Design, Build, Operate and Maintain (DBOM) project. The decision will enable the Council to deliver a low-carbon heat network connecting the Colville and Britannia developments, meeting planning obligations, decarbonising heat supply, and contributing to the borough’s net-zero carbon objectives.

Decision

RESOLVED:

To approve the award of the Design, Build, Operate and Maintain (DBOM) contract for the Colville Heat Network to Supplier A for 15 years at an estimated contract value of £34.81m (incl. VAT) with a provision for 10 years extension (estimated as £10.2m incl. VAT) subject to finalisation of contractual documents and Cabinet approval of the additional capital budget required for the scheme.

Reasons For Decision 

1. The recommended award enables the Council to move from development and planning into delivery of one of its flagship low-carbon infrastructure projects. The decision supports the transition away from individual fossil fuel heating systems towards a more efficient heat network model, reducing carbon emissions while providing resilient heat infrastructure capable of adapting as the wider energy system decarbonises.
2. The recommended approach balances climate objectives with the Council’s responsibilities around affordability, value for money and effective risk management. The negotiated DBOM model ensures that specialist expertise is secured for both construction and long-term operation, with contractual commitments linked to energy efficiency, carbon performance and service reliability.
3. The current position reflects the outcome of the design development phase and ongoing commercial negotiations with the preferred DBOM contractor. The proposed contract value remains within the financial framework established in the Outline Business Case and reflects updated technical design assumptions and open-book pricing developed during the Design Contract stage. Capital costs are primarily driven by the final configuration of the energy centre, the routing and length of distribution pipework, the integration of the system with both existing infrastructure and new developments within the Colville regeneration programme. Known technical risks have now been identified and provisionally priced, including an allowance for matching increased standards of the industry and demands of the new regulatory regime associated with the existing network.
4. Since the initial procurement stage, the scope of the DBOM contract has evolved to incorporate additional known elements, including upgrades demanded by higher standards in the industry and new regulatory requirements together with potential future connections. These elements have been identified, assessed and incorporated into the negotiated contract structure, its technical specification schedules and pricing through an open-book approach.
5. The Council has ensured that these adjustments do not constitute a material change to the original scope of the procurement and remain compliant with the Utilities Contracts Regulations 2016. Relevant, appropriate contractual mechanisms have been included to manage future modifications in accordance with regulatory requirements, including consideration of thresholds for permissible contract variations - the original contract construct remains in compliance with Regulation 50.
6. The current design has progressed to approximately RIBA Stage 3+ (this being (Spatial Coordination), with some elements further advanced into early RIBA 4. As the design progresses through RIBA Stage 4 (Technical Design) and Stage 5 (Manufacturing & Construction), remaining design risks are expected to reduce as technical details are finalised and validated. One significant change since earlier project stages is the revised heat pump specification. The selected heat pumps are expected to achieve a seasonal coefficient of performance of approximately 3.0, compared with earlier assumptions of around 2.08. This improves system efficiency but introduces additional engineering considerations, including increased equipment size, weight and noise levels. As a result, a provisional allowance of approximately £0.85m has been included for mitigation measures such as acoustic attenuation, subject to approval for the variation of the Colville Block E Planning Permission .
7. Several key variables influence the affordability and deliverability of the scheme. The most significant external factor is the relationship between gas prices and electricity prices, as the network relies on electrically powered heat pumps supported by gas backup generation whilst heat pricing is set against a gas counterfactual matching both the requirements of the Council and subsequently the target set through the upcoming Heat Zoning Regulations. Changes in the relative cost of these fuels could materially affect operating costs and long-term financial performance. Capital costs are also influenced by the design of the energy centre and pipework network and by the construction of the existing Britannia heat network infrastructure, which has been identified as an element of the current infrastructure that no longer matches the new industry standards. The least cost option for long-term management of this infrastructure has previously been estimated at approximately £5.75m, although this work sits outside the core DBOM contract scope. The cost for this increase in standards is included within this report to gain the benefit of the improved customer delivery and service and to maximise the financial benefit of the DBOM contract in transferring infrastructure risk including performance to the contractor who is best placed to manage it.
8. Other important variables include the long-term performance of the heat generation equipment, lifecycle maintenance and replacement costs and the performance of secondary distribution systems within connected buildings. Limited data is currently available on the condition and efficiency of some of these systems which creates uncertainty regarding potential heat losses and future improvement requirements although the largest risks have been identified and provided for. Standards in the heat network industry have increased dramatically in the last 6-7 years learning from issues causing customer service failures and excess costs of operation - the CP1 standard against which the DBOM contract is set is significantly higher technically than the CP1 standard that was in force when the Britannia heat network was constructed.  Regulatory change also represents an emerging factor. Ofgem became the regulator for heat networks in January 2026, and further regulation is expected over the coming years especially focussed on longevity and performance of systems, customer delivery standards especially for vulnerable customers and heat pricing. The network will be required to comply with the forthcoming Heat Network Technical Assurance Standards (HNTAS), which are currently subject to consultation but are expected to become mandatory and retrospective representing a further step up in industry standards.
9. The financial model also depends on the scale and timing of heat demand from connected buildings and developments. Heat demand from existing buildings has been measured where possible, while demand from new developments has been estimated based on design information and construction programmes. Variations in demand could affect project revenues, although higher demand would provide an upside benefit, while lower demand would reduce income. The timing of new building connections is also important. Delays to development programmes may delay heat sales, although these delays will be partially offset by lower early-stage operating costs and lower interest costs.
10. Based on the current financial model, the project remains financially viable over the 40-year assessment period. The model shows a small negative cash position at the end of the modelling period lower than asset values, reflecting the long-term balance between capital investment, operating costs and heat sales revenue. The Net Present Value of the scheme is currently estimated at approximately £0.9m, which reflects the timing of upfront infrastructure investment compared with revenue generation over time and is typical for infrastructure projects of this type where heat charges are capped strongly against the equivalent cost of heating properties using individual gas boilers.
11. The principal risks to long-term viability relate to sustained changes in energy market conditions, particularly a prolonged reduction in gas prices relative to electricity prices. Additional risks include the potential loss of the proposed New Era connection and the potential loss of additional grant funding from the Green Heat Network Fund (GHNF). The financial model currently assumes that an additional £1.73 million GHNF grant will be secured. If this funding were not awarded, additional funding from the Council would be required.
12. Mitigation measures are available for some of these risks. Government policy is expected to introduce an industrial energy strategy aimed at reducing electricity costs for heat networks as signalled in the Warm Homes Plan in which the Government committed the industry to use the current cost of heating with gas as the basis for pricing for heat networks brought forward in future. The Government has begun consultation about such strategies but this can only be treated as a possible risk mitigation and should not be relied upon at present. In addition, if the New Era connection does not proceed, alternative connection opportunities may be explored with nearby housing developments adjacent to Britannia Leisure Centre. Taking these factors into account, the negotiated DBOM proposal represents a deliverable and viable solution for progressing the Colville Heat Network at this stage of design and commercial negotiation.

Financial Risk and Sensitivity

1. The Council has undertaken detailed sensitivity analysis to understand the impact of key variables on the long-term affordability and viability of the scheme. The most significant risks relate to:

·  Variations in the relationship between electricity and gas prices, which directly affect operating costs vs revenue;

·  The timing and scale of heat demand from connected developments, including the New Era scheme;

·  The availability of external grant funding, including the Green Heat Network Fund; and

·  Changes in borrowing costs, including fluctuations in PWLB interest rates.

1. In particular, current market intelligence indicates a potential short-to medium-term reduction in gas prices relative to electricity prices when the current geopolitics holding prices high is over. Given the scheme’s reliance on electrically driven heat pumps supported by gas backup boilers, this presents a material risk to operating margins in the early years of operation balanced by the cyclical nature of the energy market which predicts higher rates following a period of lower rates.
2. To manage these risks, working with our retained advisors Buro Happold, the financial model has been developed on a prudent basis and includes sensitivity testing across both downside and upside scenarios. Governance arrangements will be put in place to monitor these variables throughout the contract lifecycle, with provisions to report back to Members where material changes affect the financial position
3. The risk to this project from reduced energy costs should be set against the overall position for the Council. High energy costs would help this project to be financially viable but would also be costly across the Council as a whole whilst lower energy costs represent a risk to this project but a significant benefit both to residents and the Council.
4. Notwithstanding these risks, the analysis demonstrates that the scheme remains deliverable within the approved financial framework, subject to active management of the key assumptions set out above.
5. The Council’s confidence in proceeding to award is based on the maturity of the design developed through the negotiation process, independent technical and commercial assurance, and the establishment of clearer contractual responsibilities between the Council and the DBOM contractor. The process has enabled key risks identified at earlier stages of the project to be better understood, quantified and allocated to the party best placed to manage them. This conclusion is supported by the independent cost consultancy (FairHeat) review, which concluded that, whilst residual risks remain, these are understood and can be managed through the proposed contractual and governance arrangements. 
6. Under the DBOM model, the contractor will take responsibility for the design, construction, commissioning, operation and maintenance of the heat network in accordance with agreed contractual performance requirements. The Council will retain responsibility for strategic decisions, governance oversight and specific risks which are outside the contractor’s control, including decisions relating to existing infrastructure which does not meet the current CP1 standards, where appropriate. This allocation of risk represents a balanced commercial position which supports delivery certainty while protecting the Council’s long-term interests.
7. Delivery will be managed through a structured governance approach during design completion, construction, commissioning and mobilisation. Key programme interfaces, including alignment with the Colville and Britannia developments and other related delivery programmes, will continue to be managed collaboratively through agreed governance arrangements, technical assurance processes and formal contract management procedures.

Alternative Options Considered and Rejected

1. A range of commercial, procurement and delivery options were considered during development of the Business Case and throughout the subsequent procurement and negotiation phases. These options were assessed against their impact on affordability, programme delivery, procurement compliance and overall project viability to be set against the fully assessed cost of this proposal including the relevant standards upgrades net of the GHNF Grant (£21.27m):

·  Abandon the heat network (Estimated cost £21 - 47.0m)

This option is not viable as the delivery of a heat network is a mandatory planning requirement for the Colville and Britannia developments. In addition, nine buildings (existing and under construction) have been designed without provision for individual plant rooms and therefore have no alternative means of heat supply.

Alternative solutions, such as individual or communal heat pump systems, would require significant redesign and retrofit of the buildings and are considered impractical within the current programme. These options would also likely result in higher capital and lifecycle costs when compared to a single integrated heat network solution. The delay caused would also mean loss of rental revenue and sales revenue at Britannia.

On this basis, the option to abandon the heat network is not deliverable and has been discounted.

·  Delay approval of the DBOM contract by 6 - 12 months (Estimated cost £25 - 37m)

This option was considered to allow further time to resolve outstanding technical and commercial risks. However, delaying the decision would likely result in the loss of the Green Heat Network Fund (GHNF) grant currently supporting the project (£2.9m), together with the potential loss of the additional £1.73m grant funding currently being applied for. A delay would also prevent the network from connecting the New Era development within the required programme timeframe, as heat supply must be operational before approval could realistically be secured under this scenario. Capital costs would also be likely to increase during the delay period, with no certainty that operational costs would reduce. Taken together, these factors would make the project financially non-viable. A delay would also create a significant risk that the current bidder may withdraw from the process.

In addition, officers have considered the procurement implications of a significant delay or material change to the commercial approach. The current negotiated position has been developed in accordance with Regulation 50 of the Utilities Contracts Regulations 2016, following the approved procurement route and legal advice. A fundamental change to the scope, commercial model or allocation of risk at this stage could move the project outside the parameters of the current procurement process and may require a new procurement exercise, resulting in further delay and uncertainty.

·  Re-tendering the project

Re-tendering the DBOM contract under a competitive negotiated procedure was considered but rejected due to very limited market appetite during the original procurement primarily because the market is so busy. The initial tender process generated only a single bidder, reflecting the specialist and complex nature of the project. Re-tendering would therefore carry a high risk of receiving no bids while introducing substantial delay - at least 12 months - to the programme and associated housing delivery.

·  Framework call-off

Officers considered whether an existing public sector framework could be used to deliver the project. However, no available frameworks were identified that could accommodate the technical scope, design requirements and long-term lifecycle obligations associated with the Colville Heat Network.

·  Separating Design & Build and Operation & Maintenance into separate contracts (Estimated cost £22 - 27m)

Separating the Design & Build (D&B) and Operation & Maintenance (O&M) elements into separate contracts was considered. This option would require a new procurement exercise or extension of the existing Kier contract and would delay implementation of the heat network by at least 12 months, with no guarantee that costs would reduce although a £2m procurement cost reduction is assumed in the lower end estimate. It would also introduce a significant interface risk between construction and operational responsibilities, increasing the likelihood of disputes and leaving additional technical and commercial liability with the Council. The resulting programme delay would also defer completion of Colville Phase 4, resulting in lost rental income estimated at approximately £70,000 per week (approximately £3.6m).

·  Awarding Design & Build to the preferred bidder and procuring O&M separately

An option to award a Design & Build contract to the preferred bidder while tendering the O&M services separately was also considered. This option was rejected because it would represent a material deviation from the scope of the original DBOM procurement and therefore constitute a non-compliant procurement under the Utilities Contracts Regulations 2016.

·  Insourcing (estimated cost £34 - 51m)

Insourcing delivery and operation of the heat network was revisited during the Business Case process and again during the 2025 negotiations. This option was rejected due to insufficient internal engineering, commercial and operational capacity to design and construct the energy centre and heat network infrastructure. Recruitment of the required specialist expertise would likely delay the project by at least 12-24 months, risking the loss of GHNF funding and the New Era connection. In addition, the Council does not currently hold the specialist operational or construction expertise required to manage large-scale air source heat pumps operating at variable temperatures across multiple buildings.

·  Accepting the original tender submission

Accepting the initial tender submission was rejected because it retained the existing Britannia heat network pipework and included substantial risk allowances. Accepting this bid would result in an estimated additional cost of approximately £20m over the 15-year operational period and was therefore considered financially unviable and therefore unacceptable.

·  Progressing with the DBOM as proposed but not upgrading older parts of the network to meet current standards.

Given the evidence seen from other schemes, it is likely that these parts of the pipework will fail in under 15-25 years. Thus, the cost to replace is inevitable within the 40 year assessment period but will be associated with customer supply problems, heat losses requiring compensation and temporary supply costs. Further, the replacement would probably be incurred in several parts which would in itself drive up costs. Finally, allowing this network to deteriorate into failure would risk contaminating the rest of the network constructed to match CP1. The economic rationale and disruption avoidance makes this option unattractive.

1. Taking these factors into account, the negotiated DBOM solution represents the most deliverable, compliant and financially viable option available to the Council at this stage. The July 2025 Business Case reaffirmed outsourcing through a single integrated DBOM contract as the preferred approach, while recognising that insourcing opportunities for certain elements of the heat network supply chain, such as metering and billing services, may be explored in the future as internal capability and regulatory frameworks develop.