There are opportunities for cities to generate their own energy and compete with big utilities as well as helping to create a cleaner, smarter and more affordable energy system and provide local employment, according to a new think tank report.

Although the report concentrates on British cities, many of its recommendations will be applicable everywhere. As far as the UK is concerned, the IPPR think tank has identified that existing local authority powers are sufficient to permit cities to go down this route, and are just waiting to be realised. However, it says that there is more that the national government can do to help unlock the full potential of cities.

This report considers what cities can do in two areas:

1. engaging in the energy supply market, and
2. raising finance for investment in low-carbon energy infrastructure – particularly local energy generation.

This would both unlock the potential of local low-carbon generation, and help bring an end to the overcharging of low-income consumers by energy companies.

The report analyses the British energy economy and finds that the majority of investment in new infrastructure is being done by overseas companies, who are quite likely to use overseas supply chains. By contrast, cities investing themselves will do much to boost the local economy.

As an example it cites a target by the city of Munich in Germany to supply the entire municipality of 1 million people with renewable electricity by 2025. This city has already invested €900 million in renewable energy projects, and it has plans to invest a total of €9 billion to deliver its 2025 target.

Some British cities are already going down this route. These include the Greater London Authority and members of the Core Cities group which includes Nottingham and Bristol, who intend to engage in the energy supply market.

Oil city Aberdeen is planning to become a global pioneer in using hydrogen produced from excess power in its nearby offshore wind farms and already has a fleet of hydrogen-fuelled buses to take advantage of this. The Restore Solar City project aims to install 1 GW of solar PV by 2020. Local community groups are able to invest in installations on council properties rent-free.

Cities and local authorities command high levels of trust (see survey results, right) from their local communities, meaning that city-energy suppliers could prove to be very popular. At present the big six electricity and gas suppliers in the UK are up there with banks as figures of hate, with complaints at an all-time high.

The report lists several energy supply business model options for cities:

• Fully licensed supplier: a city sets up and runs an independent supplier, taking full responsibility for delivery and meeting licence conditions – as is being pursued by Nottingham city council.
• Joint venture: a city works with one or more third parties to set up and run an independent supplier.
• Licence lite: a city becomes a 'junior supplier' with responsibility for some aspects of delivery and meeting licence conditions, while a partner 'senior supplier' is responsible for the rest of the business – as is being pursued by the GLA.
• Partnership: a city works in partnership with an existing, licensed supplier and takes responsibility for some operational aspects of the supply business in its area.
• White label: a city licenses use of its brand to an existing supplier who uses it to market to customers in the local area. To assist cities in determining which model they might pursue, this report includes a detailed analysis of the pros and cons of the different approaches.

But where would the investment come from?

Well, the Lancashire County Pension Fund has already committed about £200 million to low-carbon projects, including a £12 million investment in Westmill Solar, a UK solar cooperative. Pension funds are one of three ways identified by the report in which cities could access significant levels of finance that could be channelled into low-carbon energy investment. These go above and beyond existing options, including the Public Works Loan Board and EU funding, which are uncertain sources.

1. Municipal bonds: bonds have been used in the past for municipal energy infrastructure and offer cities and local authorities a way to raise finance that is independent from national government. Cities should establish a collective bond agency to issue 'green' bonds on their behalf to minimise the fixed costs and complexities of single bond issuances, including for low-carbon infrastructure.
2. Pension fund investments: with a total of £150 billion invested, the 101 Local Government Pension schemes in the UK together represent the second-largest pension fund in the country. If only a small portion of this money was directed towards low-carbon projects it could make a huge contribution to the UK's investment needs.
3. The Green Investment Bank (GIB): the GIB could be a key driver of capital to cities for energy infrastructure investment. Already the GIB is providing funding for local authorities that want to upgrade their street lighting as part of a major project to retrofit all of Britain's street lights, starting with Glasgow.

A typical windfarm generates an annual income through the business rate retention scheme of £50,000 for local authorities, the cities could also ensure that local communities benefit from national subsidies. Bristol is one council that is already doing this by making council roof space free to potential investors in solar panels which will ensure some of the subsidies for decarbonization are captured in the city.

Cities should therefore consider engaging in the energy supply market where this can support efforts to tackle energy affordability and promote local generation.

The IPPR recommends that local authority organisations, including the Association for Public Service Excellence, the Local Government Association (LGA) and the Local Government Information Unit, should prioritise supporting local authorities to understand the various business models that are available.

Cities should work with the Green Investment Bank on discrete low-carbon infrastructure projects where there is a clear rate of return on investment and cities should back plans by the Local Government Association to create a collective agency for the issuance of local authority bonds, including green municipal bonds of the kind already used in South Africa.

Clear and transparent rules governing the market should be established to instil investor confidence.

Local authority pension funds should, on an individual basis, sign up to the Principles for Responsible Investment (PRI). They should ensure that the investment managers they appoint are taking environmental, social and corporate governance (ESG) factors into account by writing this requirement into their investment manager agreements and requiring them to report back on how they are managing these factors across all assets within their portfolios.

Cities indeed could become the powerhouses of the future, helping to generate much of their own energy, a crucial factor in achieving proper sustainability.