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Energy Commodities Category Plan

Schools Forum 8.7.15 – Item 7


Contents

1

2

Category overview

3

4

Recommendations and timelines .

Category procurement design principles

Annex: • Steering Group• Stakeholder engagement• Demand profile • LASER Background• Explanation of key buying methodologies • PESTEL market analysis • Price composition analysis • Price market trends

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Impact of recommendations on spend and demand profile


Energy/Utilities Category Tree DiagramHierarchy

Fuel cards and vehicle lubricants in fleet category


Current Spend Profile

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Electricity % Gas %Spend (£k per

annum) Spend (£k per

annum)

Corporate

2,423 15%

1,221 16%Street Lighting/Traffic Signals

3,883 24%

- 0%

Fire

261 2%

191 2%

Police (managed Service)

1,254 8%

387 5%

Schools

5,544 34%

4,810 61%

Colleges

1,422 9%

472 6%

Districts

1,375 8%

664 8%

Other Partners

233 1%

125 2%

Total

16,396 100%

7,871 100%

HCC rebate

134

68

PIA

14,791 90%

7,458 95%

PWP

1,605 10%

412 5%


Category Procurement Design Principles

• A blended portfolio to spread risk

• Price predictability and stability for schools ‒ Secondary schools may contact Procurement if they wish to opt out of the price stability model

• Flexible solution to support changes in demand• e.g. in response to

‒ in response to increased demand from new schools‒ in response to increased demand from new partners joining the HCC procurement arrangement‒ reduced demand due to service led energy efficiency measures‒ Self generation reducing demand from external sources‒ The Hampshire Energy Strategy Action Plan 2014-2018

http://documents.hants.gov.uk/climate-change/HampshireEnergyStrategyActionPlanESAP1.pdf

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Executive summary of recommendations (PPA)

• Commit to a 10 year Power Purchase Agreement fixed price (+RPI) deal direct with a Generator for a min of 15GWh and maximum of 20GWh depending on level of partner opt in for the 10 year duration. This represents c. 10-15% of the total portfolio.

• This methodology will be allocated across the portfolio as follows:-‒ Corporate (including Fire)‒ Constabulary ‒ Street Lighting and Traffic Signals‒ Schools ‒ Partners/Colleges – as they specifically nominate

• Although the PPA deal will be brokered by LASER, there will be no constraints over moving the

rest of the portfolio to another Buying Partner other than LASER within the 10 year duration.

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Executive summary of recommendations (LASER)

• Enter a 2 year contract with LASER for remainder of electricity and gas

• To integrate Constabulary spend into the County Council Corporate portfolio‒ Currently under a separate LASER Managed Service Contract

• Allocate all schools spend as a mix of PPA (which would represent 10-20%) and the remainder Purchase In Advance (PIA) since they need budget certainty

• All Corporate spend as a mix of PPA (10-20%) and the rest PWP. ‒ includes Fire Service, Constabulary, Street Lighting and Traffic Signals‒ PPA gives an element of price certainty‒ PWP is a managed ‘basket’, since LASER buy methodically at a variety of different

lead times to the market. PWP is a portfolio that is closer to the market rate than PIA but not fully exposed to market fluctuations. Whilst energy prices are low, we recommend PWP since we are not paying such a risk premium as in PIA.

• Partners such as Districts and Colleges are to be given the choice to commit part of their portfolio to the 10 year PPA and advise their preferred allocation of remaining spend across PIA and PWP. 7


Executive summary of recommendations (Other)

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• Enhanced billing data has been put in place for Street Lighting where the geographic spread and manageable number of meter points may present opportunities to adjust the profile of usage to minimise distribution costs and peak charging

• Within the lifetime of the 2 year contract with LASER , secure the resources to conduct a more detailed review of alternative Buying Partners such as Crown Commercial Services (CCS) and Buying Methodologies such as Day Ahead

‒ The option to bring Energy Procurement in-house is discounted since the Authority does not have the capacity, skills or critical mass. Government best practice recommends that Authorities procure via specialist Buying Partners.

• Annual review: The Category Steering Group will hold an annual review of Energy Procurement arrangements including ‒ the performance of the contracts

‒ adjustment of demand for example to accommodate new partners and to move spend across the PWP and PIA purchase options for the next year of delivery within the flexibility of the LASER framework.

• There is a single tender contract for Preserved Electricity with Scottish and Southern for £1m of which c. 75% is partner spend. This expires 31.10.15 and will be renewed via Single Tender. There is no alternative provision for these requirements.


Commodities Sub CategoryTimelines

• Draft BLaPP Report (see below) 15 May

• LASER meeting 15 May

• Commodities workshop, Energy Steering Group 3 June

• BLaPP mtg 30 June

• ESG Baseline and Strategy 18 June

• EMPR 23 July

• Notification to LASER end Aug

• Current contracts expire 30 Sep’1615 May Reports to Emma18 May Report reviewed by DMT22 May BLAPP Chairman’s Briefing despatch 2 June BLAPP Chairman’s briefing18 June BLAPP Final despatch30 June BLAPP meeting


Proposed spend profile

Scenario from 2016 if minimum PPA commitment of 15GWh Electricity % Gas %

Spend (£k per annum)

Spend (£k per annum)

Corporate 2,423 15% 1,221 16%Street Lighting/Traffic Signals 3,883 24% - Fire 261 2% 191 2%Police (Managed Service) 1,254 8% 387 5%Schools 5,544 34% 4,810 61%Colleges 1,422 9% 472 6%Districts 1,375 8% 664 8%Other Partners 233 1% 125 2%Total 16,396 100% 7,871 100%HCC rebate 148 72 PPA 15GWh* 1,640 10% 0%

PIA (88% Schools' electricity spend not via PPA, all Schools' gas) 4,879 30% 4,810 61%

PWP (non PPA Corporate, Street Lighting, Police, assume partners PWP ) 9,877 60% 3,060 39%

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Volume profile: Current and proposed

Current

PIA volume (kWh)

139,713,505 91%

226,651,525 95%

PWP volume (kWh)

14,263,746 9%

12,452,863 5%

Total volume (kWh)

153,977,251 100%

239,104,388 100%

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Proposed

PPA volume (kWh)

15,000,000 10% 0%

PIA volume (kWh)

45,974,078 30% 144,723,784 61%

PWP volume (kWh)

93,003,173 60%

94,380,604 39%

Total volume (kWh)

153,977,251 100%

239,104,388 100%


Annex• Stakeholder engagement• Demand profile • LASER Background• Explanation of key buying methodologies • PESTEL market analysis • Price composition analysis • Price market trends


Energy/Utilities Category Procurement Steering GroupTerms of Reference

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Demand profile

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LASER Background

• The existing energy commodities contracts are procured via LASER Energy Buying Group (LASER), a public sector buying organisation led by Kent County Council.

• The current LASER framework runs for 4 years from October 2012 to September 2016.

• LASER was founded in 1989 to manage the procurement opportunities created by the deregulation of the gas and electricity markets.

• LASER has been purchasing energy flexibly since 2008 and successfully manages flexible gas and electricity procurement on behalf of 115 Local Authorities (London Boroughs, County Councils, Unitary Authorities and District/Borough and Parish Councils) and 45 wider public sector bodies.

• Current contracted volumes for electricity 2.5 TWh (£250 million per annum) and gas 4.2 TWh of consumption volume (£100 million per annum) of energy. This equates to approximately 2.1% of the UK’s non-domestic gas demand and 1.3% of non-domestic electricity.15


Key Buying Methodologies

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Methodology Commentary

PPAPower Purchase Agreement

• typically for 10 years and for a minimum of 15GW (which equates to c. 10% of the portfolio)

• The main benefits are: price protection - contract prices are fixed for the contract duration which means budget certainty - budgets can be predicted and therefore managed and security - provides protection from volatility in the energy market.

PWPPurchase Within Period (PWP)

• A portion of the energy requirements are purchased in advance of a contract year (1st October) period, but a certain volume may be left open giving the option to purchase closer to the supply period to take advantage of falls in the market. Bi-annual reconciliation takes place. Financial controls are in place to keep the risk of higher energy prices to a minimum. PWP is effectively a risk managed ‘basket’.

• PWP has less budget certainty than PIA, but provides greater market opportunities.

PIAPurchase In Advance (PIA)

• All energy requirements are purchased in advance of the contract supply period, providing budget certainty for the following 12 months.


External market analysis

Political

• Infrastructure, Transmission and Generation is regulated by OFGEM.

• DECC’s 2050 Pathway - Capturing the full electricity efficiency potential of the UK

• DECC’s Energy Security Strategy 2012• https://www.gov.uk/government/uploads/system/

uploads/attachment_data/file/65626/7035-capturing-full-elec-eff-potential-edr.pdf

• https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65643/7101-energy-security-strategy.pdf

Technological

Social

• Ageing population increases demand for heating• Consumerism increases demand

Economic

• Market is Oligopolistic with few Suppliers• Commodity prices impacted by Supply and Demand,

linked to Global events such as Weather predictions, Political decisions / instability and FEx rate.

• Commodity prices are traded globally (by non end users) making them subject to speculation and spikes.

• About 50-60% of an Electricity Bill is product / commodity.

• Generation to Electricity now impacted by Large Combustion Plant Directive and Carbon Emissions reductions initiatives.

• As a result of EMR,, two extra levies will be introduced: Capacity Market (CM) and Feed in Tariff Contracts for Difference (FiT CfD).

• OPEC: Organization of the Petroleum Exporting Countries About 40% of the world Oil production comes from the 12 OPEC countries, but estimated that about 81% of all reserves are within these countries. A number of these are in very political unstable regions.

Environmental

• Weather impacts demand • Weather impacts market price• Contracts for Difference encourage low carbon plant

Legal

• Electricity Market Reform 2012 (EMR) which has the goal of providing security of supply whilst decarbonising electricity generation

• £110 billion of investment needed to replace and upgrade the UK’s electricity infrastructure

• https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65634/7090-electricity-market-reform-policy-overview-.pdf

A PESTEL analysis overview or the macroeconomic factors has been considered as part of the initiatives development

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Electricity price compositionSource: LASER

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Gas price compositionSource: LASER

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Market Price TrendsSource: Wholesale UK Power Price (baseload) DECC

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Documents

deloitte uk screen

demand profile slide

fleet category slide

increased demand

schools secondary schools

new schools

category overview

price rpi