Environmental Credits Pricing Model – Nutrient Neutrality
In many areas of Norfolk, residential developments must demonstrate nutrient neutrality to secure planning permission, with neutrality credits often the only practical way of doing so. A lack of credits to address this nutrient neutrality issue has resulted in approximately 16,000 new homes being delayed. Norfolk Environmental Credits (NEC) was established as a nonprofit company to provide mitigation credits and enable the delivery of these much-needed homes. To deliver these credits to housebuilders, NEC planned to invest in mitigations created by landowners, such as the creation of wetlands.
A key challenge for NEC was identifying a fair credit pricing approach that ensured the financial viability of the company. To provide a clear understanding in this area 31ten was commissioned to build a bespoke pricing model. This credit pricing model would allow an evidence-based approach to the credit pricing and provide clarity on how future demand for credits could be met, alongside financial forecasts.
The Role
To provide a clear understanding of the implications of different credit pricing approaches, 31ten created a bespoke financial model that forecasted the sale of credits and resulting cashflows. The model took inputs including cost data for the mitigations, supply of mitigations, demand for credits and company operating costs.
The resulting projected company cashflows allowed the identification of credit pricing that would ensure financial sustainability. Once the model was created, 31ten assisted with scenario modelling based on a range of possible approaches to mitigation provision, economic circumstances and cost levels. This approach enabled NEC and its board to make an informed decision on how to approach pricing.
The model was designed with sufficient granularity to model a wide range of future scenarios, while simplifying more nuanced details that would not have a material impact on the outputs. This approach ensured the model was as usable as possible and time could be spent where it would add the most value to the project. 31ten worked closely alongside NEC throughout the commission as business planning progressed and the team’s understanding grew, thus ensuring that the modelling fully reflected the real-world factors that would affect the nonprofit.
Key Outcomes
31ten successfully delivered the pricing model and wider analysis that informed NEC’s decision on its initial pricing approach. Key outcomes included:
- A flexible model that could be used for business planning, which accommodated varied assumptions and schedule mitigations across an 80-year period.
- Clear and evidence-backed outputs including pricing and value-for-money comparisons.
- Clear scenario testing that allowed the board to make an informed decision on pricing.
- A model that will allow ongoing support on pricing reviews for future credit tranches, ensuring that future pricing responds to changes where appropriate.
31ten worked proactively to develop a credit pricing model for Norfolk Environmental Credits Ltd, working collaboratively with our Programme Team and Board of Directors to design a bespoke model to determine nutrient credit pricing. This work has enabled decision-making based on real-life scenario modelling and sensitivity analysis. The model will continue to be developed as the joint venture expands. The consultants from 31ten quickly orientated themselves with this emerging and complex area of work, providing clarity on approach through an evidence-based approach and an iterative design process.
Tom Sayer
General Manager – Norfolk Environmental Credits Ltd.
