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The Public Sector Decarbonisation Scheme ("PSDS") was launched in 2020 to help meet the UK government’s carbon emission targets and reach Net Zero by 2050. So far, over £2.5 billion has been made available to public sector bodies to enable them to fund heat decarbonisation and other energy efficiency measures within their properties. 

Phase 3c of the PSDS was announced on the 12 July 2023, and under this phase, the Department for Energy Security and Net Zero has allocated up to £230million in funding.  The portal is expected to open for applications in October 2023.

Who is eligible to apply?

To be eligible to apply for the funding, applicants must be "contracting authorities" as defined in the Public Contracts Regulations 2015.

Last year, Phase 3b allocated sector soft caps for the first time to ensure a fairer distribution of funding between the three sectors – health, education or other.   This will continue for Phase 3c.  Each sector will receive a minimum of 30% of the available funding and will have a "soft" cap of 35% of the available funding which may only be exceeded if other sectors do not reach the cap.  The funding is allocated on a first come, first served basis so it is key to submit your application as soon as possible once the application portal opens.

Applicants are required to match fund at least 12% of total project costs, and for Phase 3c, projects may span two financial years. All projects must complete by 31 March 2026.

Heat decarbonisation and the "whole building" approach

Heat decarbonisation continues to be the driving factor of the fund and in order to apply applicants must be seeking to replace their current fossil fuel heating plants with a low carbon alternative. The current heat plant must be at least 10 years old and must be at the end of its useful life. The fund also expects applicants to take a "whole building" approach and must seek to reduce energy demand within their buildings (ie through improving the building fabric or installing energy efficiency measures). In order to maintain the focus on low carbon heating, these additional "whole building" measures will be capped at 58% of the total grant awarded.

We will cover the issues surrounding heat decarbonisation and the "whole building" approach in further detail in our second article in this series.

What are the property considerations?

 The applicant must either own the building concerned or have a "long-lease arrangement" in place under which the applicant is responsible for the "operation and maintenance of building services". Neither "long-lease arrangement" or "operation and maintenance of building services" are defined in the guidance, but the applicant must be responsible for the heating system at the property.   A copy of the lease must be submitted with the application, together with details of its effect on the delivery of the project. The government has confirmed that it is not a requirement that the applicant pays the energy bills at the property. Based on our interpretation of the guidance we have compiled the table below as to eligibility to apply:  

Eligible to apply

1. Applicant owns and occupies the freehold to the property.

2. Applicant holds the property under a long lease, under which it has agreed to be responsible for heating system.

3. Applicant owns the freehold to the property but leases it to an occupational tenant. The lease obliges the applicant as landlord to repair and maintain the heating system.

Not eligible to apply

4. Applicant owns the freehold to the property but leases it to an occupational tenant. The lease obliges the tenant to repair and maintain the heating system.

In scenarios 2 and 3, the terms of the lease will need to be checked carefully to ensure that the applicant can do what it needs to do in terms of alterations and additions to the property and ensure that it does not breach either the landlord or tenant covenants. The lease may need to be varied and the alterations captured by way of a licence to alter. Rent review provisions must also be considered to ascertain the effect of the works on later rent reviews.

Subsidy control considerations

Phase 3b introduced different terms and conditions for "economic actors" and "non-economic actors", and this is continued for Phase 3c. To recap, PSDS projects are often not classified as a subsidy because the public sector recipient benefitting from the grant is not an "economic actor" carrying out "economic activity", in other words the public sector is delivering public services rather than selling goods and services so there is no subsidy according to the Subsidy Control Act 2022.

However, it is important to note that whilst most public sector activity is non-economic, public authorities can and do offer non-statutory services and activities for a commercial purpose in certain scenarios and the PSDS application guidance reminds authorities of this.  The Subsidy Control Act 2022 and Statutory Guidance provide some helpful information as to what activities will and won't be classed as economic activity, for example, funding different types of infrastructure, R&D, education, health and cultural activities.

Questions that authorities will need to consider at an early stage in order to answer the subsidy application questions are

  1. Who receives the ultimate benefit of the PSDS works?

  2. What activity is the public authority doing on the land?

  3. Are there other organisations in occupation of the land (e.g. an outsourced operator or a sub-tenant)?

  4. What activities they are carrying out?

If your organisation needs any assistance with any issues discussed in this article, please do get in touch.

Lucie Allen is a Senior Associate specialising in property transactions for public sector bodies, with experience in projects utilising PSDS funding.

Julian Jarrett is an Associate specialising in local authority finance and subsidy control considerations.

Rubi Winspear is a Senior Associate in the energy and sustainability team specialising in the delivery of government grants and incentives in the energy sector.