NICOLA Sturgeon’s plan to create a cut-price state energy firm faces “significant challenges” and could run at a multi-million pound loss for several years, her advisers have warned.

Consultants EY said the SNP’s goal of setting up a publicly-owned energy company by 2021 was feasible, but there were remained large questions marks over its finances.

In a £315,000 report commissioned by ministers, EY said many of Scotland’s 2.4m household customers might switch to the “Energy Co” if it offered cheap gas and electricity.

The Strategic Outline Case for the company said it could help people lower their bills, and so tackle fuel poverty, by encouraging greater energy efficiency.

If that in turn boosted household spending power, it could ultimately boost the economy.

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The report identified finance as the biggest risk around the not-for-profit scheme.

It said there were significant challenges in setting up a new energy company "in a highly complex and competitive market", which already has 42 domestic suppliers in Scotland.

It said the “overriding strategic question for SG [Scottish Government] is how to make the Energy Co. cost competitive in a low margin market".

Although “the scale of funding required for set-up and operating costs” were unknown, they were likely to be “significant” at first.

To avoid falling foul of state aid rules, the company would need to be run as a commercial enterprise, probably a public corporation, and would require significant working capital.

The cumulative requirement for the first five years could be around £30m, it said.

“The Energy Co. may trade at a deficit for a considerable period,” the report warned, and called for detailed costings to be made as part of the next phase of its development.

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Ms Sturgeon announced her energy company plan at the SNP conference last October.

She said: "Energy would be bought wholesale or generated here in Scotland - renewable, of course - and sold to customers as close to cost price as possible.

"No shareholders to worry about. No corporate bonuses to consider. It would give people - particularly those on low incomes - more choice and the option of a supplier whose only job is to secure the lowest price for consumers."

The EY report identifies two main delivery options - a cosmetic “white label” model using an existing energy firm to supply fresh branding and marketing for Scotland, and a “full capability model”, which would be a substantial, fully licensed stand-alone energy company.

The white label model would be cheaper and carry less risk, but would also limit the Scottish Government’s ability to set retail prices, while the latter model be costlier but more powerful.

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Robin Hood Energy, an energy company and licensed supplier operated by Nottinghamshire City Council, has a white label arrangement with Leeds, Islington and Liverpool Councils.

Depending on the option chosen, the set up costs could be in the range of £500,000 to £3.5m with an annual operating cost of between £2.8 and £9m.

The report said ministers could also choose to piggyback on an existing socially minded supplier, or create a new government-owned company, or use a “federal model” with a top level government firm supplying smaller, council-run energy firms.

EY said the Scottish Government needed to settle on its preferred options as it worked an Outline Business Case later this year, and Final Business Case in 2019 and 2020.

Despite Ms Sturgeon’s reference to renewable energy, the report said the initial primary focus of the company would be electricity and gas supply from all sources.

Longer-term, it might offer other utilities, such as broadband, and invest in renewables.

The report concluded: "It is possible to establish an Energy Co. to achieve the stated objective of delivering competitively priced energy to help alleviate fuel poverty in Scotland.

"We also, however, recognise the challenges of doing this in a highly innovative, competitive and evolving energy retail market.”

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Tory MSP Alexander Burnett said: “Nicola Sturgeon may think this will appeal to the left-wing elements of her own party. But as her own advisers state, it could leave the taxpayer plugging the gaps and do nothing to keep energy bills down.

“If the SNP really wants to lower energy bills, it should pursue a balanced approach to energy sources, and explore the possibility of things like fracking.”

A Scottish Government spokesperson said: “We continue our work to identify how best to ensure the publicly-owned energy company tackles fuel poverty and supports economic development. A public consultation will begin later this year.”