The Academy Trust Handbook 2024 is making it easier for trusts to borrow money for investments that support renewable activity or energy efficiency. This is welcome, but there are risks.
This year, the rules on when finance leases need to be approved by the Education and Skills Funding Agency (ESFA) have been relaxed so prior approval is not required for leases related to LED lighting systems or “to support renewable activity”.
This is a positive step forward that will help schools achieve their sustainability goals and save costs, even as they wait for further details to be released.
However, just because schools can borrow money doesn’t mean they necessarily should. Schools must ensure their deals maintain the principles of value for money, regularity and propriety.
This deregulation could be allowing trusts to take on financial commitments they are unprepared for, which can end with unforeseen costs.
It is not always obvious whether an arrangement is an operating or a finance lease. Both involve a lessee/school paying to use something that is owned by a third party, but a finance lease tends to be for the entirety of the equipment’s working life.
In effect, a finance lease transfers all of the risks of ownership of the equipment to the lessee who will eventually pay the entirety of the capital cost, plus interest.
Due to the risks that trusts could be saddling themselves with expensive debt or inappropriate products, the government has created a list of approved suppliers and frameworks for this new relaxation of the rules.
Trusts can only enter into finance leases for certain items that are considered to be ‘safe bets’. This list now includes ‘leases to support renewable activity’.
While there are many different types of renewable activities, the most obvious one is installing solar panels. This is a relatively low-cost technology that is widely understood, and is most active during the day, when schools are using most power.
Suppliers should be carefully vetted – even though they are officially ‘approved’
These installations are often funded by contracts which are referred to as power purchase agreements (PPA), but these may actually be finance leases in disguise.
A PPA is contract where a generator sells electricity to their consumer for an agreed price. That price can be substantially lower than the price a school would normally get for electricity from the national grid as it comes without many of the ‘non-commodity’ costs normally associated with electricity. For example, the cost of transporting and distributing power which can be two-thirds of the cost of power.
PPAs do come with their own disadvantages, however. They are typically long-term agreements lasting up to 25 years and may also be structured so that any new costs that appear over this time are met by the customer.
Before entering into a finance lease, suppliers should be carefully vetted – even though they are officially ‘approved’. It’s vital that schools are not complacent with their due diligence as there may be non-approved suppliers who will still try to make money from this change.
Once an agreement has been entered into, it can be difficult to get out of even if it doesn’t meet the government’s regulatory requirements.
Once a suitable supplier has been identified, schools should feel empowered to negotiate a lease with as favourable terms as possible. There are many safeguards that should be considered to ensure that these long-term agreements continue to make financial sense over the course of a 20-year period.
Ensuring there are provisions to take account of changes in law or regulation is therefore essential for future safeguarding.
By relaxing the rules around finance leases, the government has taken steps to help schools improve the quality of their facilities and become more sustainable. It also gives them more freedom to make financial decisions that suit their individual circumstances.
While any agreements that are entered into should be approached with consideration and caution, this change will ultimately help schools improve their long-term cost, and environmental efficiency.
