Managing the impact of higher energy costs on community leisure provision

Introduction

We understand that many leisure operators are concerned about rising energy costs.

This guidance is designed to help local authorities who’ve have outsourced the management of their facilities to external operators to consider the actions they can take to help mitigate the impact and risk associated with this situation.

It may also help local authorities that manage their leisure facilities in-house and leisure operators.

The hints and tips contained within these pages are drawn from discussions with multiple leisure operators and local authorities across England.

We recognise that many local authorities and leisure operators are already taking action to mitigate the impact of rising utility costs. For these organisations, the actions contained within this guidance may provide a helpful checklist for comparison.

The government has announced a financial support package for communities and businesses to deal with the rising energy costs.

Further information is to be provided by government regarding the details of this and the impact on local councils and operators. It should be noted, however, that the approach to managing the impact of higher energy costs and the mitigation actions contained within this guidance remain valid.

A spinning class at a gym

Background

Energy costs represent a large proportion of a leisure facility’s operating budget - typically the second highest cost after staffing - and are forecast to significantly rise to make up around 20%-25% of expenditure by 2023 based on current projections.

There are different contracting arrangements across the sector regarding where the risk and liabilities sit in relation to energy costs, and addressing these will be a challenge whatever operating model is in place.

Whilst local authorities recognise the significant health and wider social value benefits that sport and leisure provision deliver, the impact of rising energy and other costs across the wide portfolio of statutory services that local authorities have to deliver will severely restrict their ability to provide additional support to cover rising costs in sport and leisure facilities. This will happen regardless of the local delivery model or contractual arrangements around utilities.

Some councils have already made the transition to low-energy, sustainable facilities, and this may be an opportunity to accelerate plans for the rest of the leisure estate.

The importance of the service provided by the leisure sector, its contribution to keeping communities healthy, and the wider social value it creates upfront is of great importance and it mustn’t be overlooked. Please check the LGA/ukactive Briefing note for councils about the impact of rising energy costs on the leisure sector by the Local Government Association, which also encourages partnership working between LAs and operators to mitigate the risks associated by the increase of energy costs.

Be proactive

There’s a very real risk, without additional support and mitigating actions being put in place, that the energy cost crisis may jeopardise the sustainability of leisure contracts and ultimately your leisure facilities stock. It’s therefore important to:

Recap and ensure there’s clarity and understanding on your contractual arrangements, including the terms and conditions of your contracts, and find out whether there are any utility tariff protections, cap and collar, or energy benchmarking conditions in place. Being fully informed of the detail of the contractual arrangements will help prepare your authority for any negotiations with your operator and/or any financial adjustments to the contract.
Be proactive in working with your leisure operator to work through what it means for them and their wider portfolio, as well as your contract, and what action can be taken to mitigate the impact of higher energy costs. Consider liaising with other local authorities that have the same operator to be fully aware of the impact on the operator’s business.

Understanding the energy market

Understanding energy consumption

To help you do this, you can ask your operator(s):

How they monitor and manage their energy consumption at your sites.
If they have, or are planning to, invest in energy monitoring systems.
Whether they’ve got an energy management team and how they’ve engaged them.
How they proactively look to identify any unusual consumption patterns and investigate any issues.
To undertake an energy-cost benchmarking exercise, or work with them to help them do this. The Moving Communities tool can help to identify cost comparisons.

Understand existing energy tariffs and benchmarking

It’s important to work with your operator(s) to understand their existing energy tariffs and associated terms and conditions. Key things to consider are:

If they’re on a fixed-term contract, ensure both you and they understand the terms and conditions, and key dates associated with the contract. Explore whether they can lock and unlock rates and what their plans are once the existing term has ended.
If they’re on a flexible, variable rate contract ensure you understand the implications of this too.
Asking your operator(s) how far they can financially forecast ahead with confidence (making assumptions about consumption and tariffs). If they’ve got locked-in rates this is likely to be easier, at least until the rate ends.
Whether your contract(s) has any benchmarking conditions in place. If it doesn’t, you may want to encourage your operator to use benchmarking to determine how their tariffs and expenditure compares to others.

Review how energy is purchased

It’s important to understand how your energy is purchased and that your operator(s) has a good deal. You can investigate and review this by:

Asking your operator(s) how they buy their energy and how they ensure they get the best deals (e.g. do they use an energy broker or energy advisor?).
Encouraging your operator(s) to use the expertise of an energy broker (if they don’t already) to help in the decision-making process and help determine if it’s beneficial to purchase all or part of their energy in advance at a fixed rate. Exploring fixed-term contracts with a minimum base threshold can allow for money-saving opportunities that are linked to reductions in consumption.
Investigating whether the in-house purchase of energy would achieve better value if they were incorporated into wider council utility contracts.

Understand the potential impacts

Leisure operators operate on very slim margins (usually between 1%-3%). They often don’t have the level of reserves built up that are required for unforeseen circumstances such as the energy crisis.

Those that did are likely to have had these severely depleted as a result of the Covid-19 pandemic. Operators are also facing other significant financial pressures outside of the volatility of the energy cost crisis.

These include the increase in the National Living Wage and associated pay differentials, the need to pay more to recruit and retain skilled personnel, ongoing recovery from Covid-19 and wider inflationary pressures in terms of the cost of goods services and chemicals etc. It’s important to;

Establish the impact of increased utility costs on operational budgets and determine what these are as a proportion of their turnover (e.g. 2019 utilities made up between 10%-15% of operational expenditure compared to a forecast 20%-25% in 2023).
Determine the impact of other pressures, and how these affect your contract and your operator’s business model.

Reduce energy consumption and improve energy efficiency

It’s important to work in partnership with your operator(s) to ensure that your leisure facilities are applying all reasonable energy efficiency measures in the short, medium, and long term. Reducing energy consumption usually requires cultural and operational change. Be sure to work with your operator(s) to ensure they have considered:

The changes they can make to help reduce energy consumption including conducting an analysis of consumption and the creation of an internal strategy to drive change.
Practical measures that can be taken such as:
- Turning off lights and equipment when not in use.
- Using pool covers to retain heat and reduce evaporation.
- Using building management systems and remote monitoring to track energy use and quickly identify and resolve any issues.
- Decreasing variable speed drive pumps overnight to reduce consumption.
- Reviewing backwashing regimes to reduce water and energy consumption.
- Reducing or increasing temperatures within facilities where possible (e.g. reducing pool and sauna temperatures and increasing studio temperatures whilst ensuring these are subject to health and safety impact assessments).
Training their operational staff and local managers on the steps they can take to achieve better energy efficiency.
The resources available from their central energy management team to support local managers in monitoring and managing energy consumption, including remote monitoring and regular meetings to discuss consumption and performance.

The immediate priority is likely to save money over the short term by taking actions to reduce energy consumption, so work with your operator(s) to ensure all possible energy- saving mitigations have been considered and implemented.

Invest to save

Decarbonisation, reducing carbon emissions and improving energy efficiency should of course remain a priority commitment. It’s important to:

Work with your operator to investigate potential investments in green technologies (e.g. example LED lighting, solar panels, new boiler technologies, pool covers, heat pumps, energy management systems etc). Consider what can be delivered within a reasonable payback period, like the life of the contract, if delivered by the operator(s) and/or the asset/building if undertaken by the council. The current high energy costs may make the business case for some investment projects more compelling as it’ll reduce the payback period.
Ensure all available grant programmes and other potential funding opportunities are being explored such as the Public Sector Decarbonisation Scheme: Phase 3.

Finances

Business/cost modelling and open-book accounting

It’s beneficial to work with your operator(s) to encourage them to create new business plans and cost models that fully consider how they can mitigate against the impacts of the energy cost crisis. Many operators have already begun to take very positive steps to reducing energy consumption, and local councils should initially familiarise themselves with these. Building on any steps already undertaken, you can encourage your operator to think about:

All relevant energy efficiency measures and associated reductions in energy consumption that could be achieved as a result of these.
Ensuring they have the most efficient staffing levels in place. In some instances, there may be scope to reduce energy and other operating costs by reducing opening hours for some facilities and activity areas.
Whether your facilities and the activity areas within them are being utilised as effectively as possible. There may be opportunities to review, reprogramme and/or repurpose any underperforming areas if more financially viable alternative uses can be identified.
Revenue growth opportunities, including reviewing investment opportunities where there’s a business case to do so.

To enable you to understand and help them achieve the above, encourage your operator(s) to continue or start open-book accounting arrangements whereby the operator shares detailed financial information on income and expenditure to provide the authority with a clear picture of the impact of the energy crisis on your contract. Open- book accounting was commonplace during the pandemic and subsequent recovery stage where operators were receiving financial support from local authorities.

Get the pricing right

Protecting public services is important. Most contracts will have provision to increase user fees and charges by inflation once a year. However, given the wider cost of living crisis for customers, you and your operator(s) may be reluctant to significantly increase all your prices by inflation.

Pricing increases can reduce the accessibility of your facilities for those who cannot afford higher prices. They can also raise concerns around loss of custom for some activities, such as fitness, where there’s intense competition and users could decide to move to cheaper alternative providers.

Nonetheless, it’s likely that prices will inevitably have to rise just to stay in line with inflation and that for some more high-cost activities (such as swimming) prices often don’t reflect the actual costs of provision. It’s important to work with your operators to:

Review concessions against your council’s own policies for your communities. Ensure concessionary pricing is effectively targeted at those groups who can’t afford to pay standard rates and help to meet social outcomes. This may require you to make difficult decisions about who concessions are applied to and the scale of concessions offered to ensure that they’re being applied equitably.
Consider the impact of sensible and sustainable pricing adjustments where necessary.
Review prices and programming to ensure facilities are being effectively utilised and income from fees and charges is optimised.
Where possible, discuss with your leisure operator the potential to set fees and charges at market rates for appropriate activities with concessions restricted to those most in need.
You may consider it appropriate to allow your operator(s) to apply a price supplement for those activities that take place in energy-intensive facilities, such as swimming pools, and provide the public with transparency as to the impact of energy costs on provision.
Monitor the impact of any adjustments in pricing and concessions on footfall and participation, especially with regard to accessibility and local community representation.

For any changes in price, at a time when the cost of living is increasing and further pressures are being felt in other services, we’d encourage all local councils to fully consider the impact on your local community and their access to the vital services and support that leisure provides for health, wellbeing and community development.

Where possible, consultation with users, members and local community groups is encouraged to understand the impact of any price increases.

Consider renegotiating your existing contracts

The impact and risk associated with the energy cost crisis is wide reaching and we know that local governments are facing considerable financial pressures. It’s however really important to work to protect the public sector leisure service provision as far as you can.

It’s highly unlikely that a change of operating model will solve the challenges of rising energy costs, but working to manage these risks with your current operator is encouraged. If you’re able to, consider renegotiating your contracts to share some of the utility cost impacts including:

Supporting a more consistent approach to allocating risk around utilities within contracts, whereby operators continue to carry utilities consumption risk and councils carry utilities tariff risk above defined thresholds.
Looking to renegotiate contracts to accept some share of utility tariff risk for a defined period (where there isn’t such provision within a contract) in return for securing reductions in energy consumption and investment in energy saving measures.
Careful consideration should be given to any proposed changes in your contracts to ensure the council is complying with its duties under the Public Contract Regulations. It’s recommended that procurement and legal colleagues are involved in the process.

Review your provision

If applying the measures outlined on previous pages isn’t sufficient in moving a contract into a sustainable position, you may be forced to seriously consider the future of your least financially viable and/or most energy intensive facilities. In these scenarios, local councils are encouraged to:

Carry out feasibility studies to explore the impact of rationalising their provision and/or upgrading and/or replacing financially unviable and energy inefficient facilities where there’s sufficient community demand to support this provision. If you’re considering having to remove facilities from your contract(s) and temporarily or permanently close them, you need to ensure that you’re satisfied that there’s sufficient alternative provision available within a reasonable travel time, accepting that this may not be possible in every circumstance.
Work with neighbouring councils to review your provision jointly where possible.
Carefully consider the costs and potential wider implications for physical and mental wellbeing for your local communities and other critical local authority services. In the event of any closures or reduced opening hours, using any available social value figures such as Moving Communities data.

We’d advocate that closure of any community leisure facilities should be a decision of the last resort, after the full implications of both the economic and social costs are assessed, as well as the economic and social impact on other critical services such as social care, primary care and community safety.
Further to this, a decision to close a facility should only be undertaken if this is assessed and agreed as critical to the continued delivery of the rest of your service for community leisure provision.

We’d also advocate that any short to medium-term changes to provision be then further considered within a strategic review of future provision and investment planning for your leisure service. A review about the investment required to reduce future longer-term costs such as making leisure facilities more energy efficient, redevelopment of leisure buildings, replacement of older provision including opportunities for relocation of other complementary community services, as well as understanding local needs and demands, should be considered.

Make the case for leisure

It’s important to ensure that the elevated energy costs for your leisure facilities are being properly considered as part of wider local government discussions and plans for addressing the energy cost crisis.

It’s important that these costs are fully heard and understood and aren’t seen as a problem for your leisure operator(s) to resolve independently. To help:

Ensure the financial impact of any tariff risk/benchmarking exercise and/or contract renegotiations are factored into your budget-planning processes.
Ensure leisure has a voice in any lobbying that you’re doing at a regional and local level. Operators and councils have identified several key areas that could help, including suggesting utility price caps, VAT relief, additional rate relief, corporation tax reductions etc. However, none of these are likely to fully resolve the situation.
Work with colleagues from other councils to ensure a consistency of approach where possible as this will be beneficial for operators.
Ensure colleagues are aware of, and appreciate, the wider health and wellbeing benefits investment in sport and leisure brings to local communities, citing figures for the social value of sport and leisure in your authority.

Managing the impact of higher energy costs on community leisure provision

Introduction

Background

Be proactive

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