nhs energy management wales

8/8/2019 NHS Energy Management Wales

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NHS energy management in Wales

December 2005www.wao.gov.uk


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I have prepared this report for presentation to the National Assembly under the Governmentof Wales Act 1998.

The Wales Audit Office study team that assisted me in preparing this report comprisedPaul Dimblebee, Christian McCracken, and Matthew Mortlock.

Jeremy Colman Auditor General for Wales

Wales Audit Office2-4 Park GroveCardiff

CF10 3PA

The Auditor General is totally independent of the National Assembly and Government.He examines and certifies the accounts of the Assembly and its sponsored and relatedpublic bodies, including NHS bodies in Wales. He also has the statutory power to report tothe Assembly on the economy, efficiency and effectiveness with which those organisationshave used, and may improve the use of, their resources in discharging their functions.

The Auditor General also appoints auditors to local government bodies in Wales,

conducts and promotes value for money studies in the local government sector andinspects for compliance with best value requirements under the Wales Programmefor Improvement. However, in order to protect the constitutional position of localgovernment, he does not report to the Assembly specifically on such localgovernment work.

The Auditor General and his staff together comprise the Wales Audit Office.For further information about the Wales Audit Office please write to the Auditor General atthe address above, telephone 029 2026 0260, email: [email protected], or see web sitehttp://www.wao.gov.uk


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Report presented by the Auditor General for Wales tothe National Assembly on 15 December 2005


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Contents

Appendices

Appendix 1: Study methodology 45

Appendix 2: Evaluation of the timing of electricity and gas procurementundertaken by Welsh Health Supplies between August 2000 and February 2004 46

Appendix 3: Components of NHS trusts electricity and gas costs 47

Appendix 4: Results of an energy bill checking exercise across the NHS trusts

in Wales 48

Appendix 5: The NHS Energy Efficiency Project established by Welsh HealthEstates and the Carbon Trust in Wales 49

Appendix 6: Barriers to improvements in energy efficiency 50



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6

Summary


1 The National Health Service in Wales is asignificant user of energy. In 2004/2005, the15 NHS trusts in Wales 1 consumed more than2.8 million gigajoules of energy across theirestates, equivalent to the annual consumptionof around 32,000 households, at a total cost of almost 20 million.

2 Following a period of three years during whichtrusts benefited from relatively stable and,in some cases, falling energy prices, averagemarket prices for electricity and gas increasedby around 107 and 130 per cent respectivelybetween January 2004 and September 2005.

These increases, and the generally volatilenature of the energy markets, present achallenge for energy procurement. Rising pricesalso highlight the need for NHS trusts tomanage energy consumption effectively in orderto control costs and support progress towardsNHS Wales targets for energy consumptionand efficiency, as well as the United KingdomGovernments target for a 20 per cent reductionin carbon dioxide emissions between 1990and 2010.

3 This report considers whether NHS trusts inWales have been successful in controlling theirenergy costs over recent years and theprospects for the future. In particular,it examines whether trusts have got a good dealin their procurement of electricity and gas, 2 andhave made good progress in reducing energyconsumption and improving energy efficiency.

4 The report concludes that NHS trusts in Waleshave experienced mixed fortunes in the pricespaid for electricity and gas in recent yearsreflecting, to varying degrees, volatile wholesaleenergy prices and decisions on when to procurefuture supplies. However, NHS trusts arestruggling to achieve significant reductions inenergy consumption and need to take action tofurther improve energy efficiency.

NHS trusts have experienced mixedfortunes in the prices paid for electricityand gas in recent years, and increasinglyvolatile energy prices have led to a moreflexible approach to procurement

5 Electricity and gas are traded commodities withmarket prices subject to significant fluctuation(more than 10 per cent in a single day, inextreme cases). Therefore, the timing of energyprocurement is most critical to the priceobtained. However, not all energy expenditure isinfluenced through procurement. For example,charges for the transmission and distribution of electricity and gas supplies are determined by

geographical location or levels and patternsof consumption.

6 The procurement of nearly all the electricity andgas purchased by NHS trusts is administered byWelsh Health Supplies, which managescontracts on trusts behalf. In determining whento purchase future energy supplies, and to guideits overall procurement strategy, Welsh HealthSupplies relies on external advice, notably from

1 Powys Local Health Board is included in these consumption figures and will be referred to as a trust for the purposes of this report as it provides secondary care services.

2 We focused upon the procurement of electricity and gas as these comprise 91 per cent of the total energy expenditure across the 15 NHS trusts in Wales.


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7NHS energy management in Wales

independent energy market analysts, althoughthe final decisions rest with the trusts. With thebenefit of hindsight, depending on subsequentmarket price movements the timing of WelshHealth Supplies purchases has produced bothgood results and bad results, for example whenanalysts predictions of future market trendssubsequently did not materialise.

7 In recent years, Welsh Health Supplies has usedcontract extensions, rather than repeatedcompetitive tenders, to book future electricityand gas supplies. This provides greater flexibility,and avoids the administration costs associatedwith a lengthy tender process. The use of contract extensions has, in most cases, enabledsupplies to be booked when market prices havebeen at a similar or lower level than if competitive tenders had been completed to afixed calendar, perhaps one or two monthsahead of each contract renewal date.

8 The pattern and reliability of predictedconsumption are also important factors indetermining the prices obtained, becausesuppliers have to balance their own dailypurchases and sales of energy. For low demandelectricity supplies (with a maximum demand of less than 100 kilowatts) and gas supplies,the quality of consumption data to support theprocurement process is limited. High demand

electricity supplies, by contrast, have automatedhalf hourly meter readings.

9 Price is not the only consideration in energyprocurement. Supplier performance is important,and trusts may also elect to pay a premium forrenewable green electricity. From April 2005,all major hospital sites in Wales are beingsupplied with green electricity, at a net additionalcost of around 53,000 per annum.

10 The most recent contracts for energy supplieshave featured:

a competitive tenders based on supplier marginand administration costs only, rather than allinclusive prices;

b longer terms, aimed at reducing suppliermargin and administration costs andimproving quality of service; and

c flexible purchasing, whereby any amount of gas or electricity can be bought for any periodat any time, as opposed to annual fixed prices.

11 Tendering on the basis of supplier margin andadministration costs allowed the contracts to beestablished prior to future energy prices beingbooked, providing greater flexibility in the timingof purchases. However, the timing of the mostrecent tender processes left only one monthbetween contract award and commencement.Welsh Health Supplies used flexible purchasingto spread the risks of buying in a (then) risingmarket, but earlier award of the contracts, and alonger period within which to book future energyprices, could have produced better results.

12 The new purchasing strategy is likely to requireWelsh Health Supplies to monitor movements inmarket prices even more closely and make more

frequent purchasing decisions. To avoid the needto agree the exact timing of each purchasingdecision with the NHS trusts at short notice,Welsh Health Supplies and trusts haveestablished an energy price risk managementgroup to review market trends and agree targetprices and periods of purchase. Despite this,there remains a risk that opportunities to takeadvantage of favourable market prices may bemissed, particularly when key Welsh HealthSupplies staff are absent from the workplace orhave other workload demands. Welsh HealthSupplies energy procurement team has


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8 NHS energy management in Wales

experienced particular staffing pressures overthe past year as a result of long-term sicknessabsence and retirements, but will, in future, beworking more flexibly across the different energysupply contracts to reduce this risk.Nevertheless, the expected introduction of competition in water supplies is likely to havefurther resource implications, as might workbeing undertaken by the Welsh AssemblyGovernments Value Wales team to assess thepotential for wider collaboration in energyprocurement across the Welsh public sector.

13 We identified errors in trusts electricity and gasbills which suggested a possible overcharge of as much as 59,500 across the sector in2003/2004. More frequent price changeswithin the new contracts are likely to increasethe risk of incorrect billing, and will place agreater emphasis on trusts to ensure that theyare being charged at the correct rate forenergy consumed.

NHS trusts are struggling to reduce theirprimary energy consumption and need tofurther improve energy efficiency

14 Net energy consumption across NHS trusts inWales fell by around 5 per cent between1999/2000 and 2004/2005, but primary energyconsumption increased by 0.6 per cent

against a target 15 per cent reduction by 2010. This reflects reductions in fossil fuel consumptionbut increasing electrical consumption, whichcontributes disproportionately to the calculationof primary energy consumption figures 3.

15 Energy efficiency is measured in terms of gigajoules per 100 cubic metres of heatedspace. NHS trusts have improved their energyefficiency from an average consumption of

64 gigajoules per 100 cubic metres in2001/2002, to 57 gigajoules per 100 cubicmetres in 2004/2005. Overall, 79 per cent of theestate recorded energy consumption of less than65 gigajoules per 100 cubic metres in2004/2005, against a target of 75 per cent of theestate by 2005 and 95 per cent by 2008.However, individually, five trusts remain well shortof the 2005 target and will need to significantlyimprove energy efficiency to meet the 2008target. Increasing service delivery, use of information technology and demand for airconditioning, as well as the general age of theNHS estate and extent of backlog maintenance,all present significant challenges to futurereductions in consumption or improvements inenergy efficiency.

16 Welsh Health Estates has concerns about thereliability of some of the energy performance datareported by trusts. Although it challenges anydata that it considers to be unusual, such aslarge changes in reported consumption,its capacity to validate the information providedby trusts is limited. Further, the energy targetsand the way they are measured may not be themost appropriate. For example, the energyreduction target can be interpreted as anequivalent reduction in carbon dioxide emissions.Because electricity procured externally on greentariffs is not counted towards emissions, trusts

can achieve the target by buying green electricity,without achieving any reductions in consumption.

17 The commitment of NHS trusts, and the priorityand resources allocated, to energy managementvaried considerably. By September 2004, only sixtrusts had an agreed energy policy, althoughthese were of mixed quality. Further, although the

Assembly Government required trusts to developenvironmental policies and to submit their first

3 Net consumption refers to the actual quantity of energy consumed by NHS trusts, including energy generated on site. Primary consumption is based only on energy

purchased from external supplies, or as part of contract energy management arrangements, and applies a multiplying factor (of 2.6 for 2004/2005) to the electrical

consumption to account for inefficiencies or losses in electricity generation and its transmission and distribution to customers.


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annual energy action plans to Welsh HealthEstates by April 2003, by September 2004 only11 trusts had an environmental policy and justnine had an energy action plan.

Trusts were also required to demonstrate,by August 2005, a clear commitment to thedevelopment of an environmental managementsystem, although minimum standards for thesesystems were not prescribed.

18 Although charging energy costs to trusts centralbudgets provides little incentive for staff to useenergy efficiently, some trusts had madeconsiderable efforts to raise-awareness of energy issues among their staff. However, threetrusts had undertaken no awareness raisingactivity in the 18 months prior to our survey,while only seven trusts included energy issueswithin their induction programme for new staff.Welsh Health Estates and the Carbon Trust aretogether developing an energy campaign toolkitwhich should assist trusts efforts to raise theprofile of energy management, building on workcarried out at North West Wales NHS Trust.

19 The appointment of a dedicated energy managercan help to drive improvement and, where trustsspend more than 1 million annually on energy,such an appointment is likely to be self-financingfrom the savings delivered. Of the nine trustswith annual energy expenditure of more than

1 million in 2004/2005, four had establishedsuch a post at the time of our survey, althoughtwo more trusts employed staff who devoted atleast 70 per cent of their time to energymanagement. With the exception of NorthGlamorgan NHS Trust, in the six trusts withannual energy expenditure of less than1 million, no individual spent more than15 per cent of their time on energy management.

20 A joint project between Welsh Health Estatesand the Carbon Trust in Wales estimated that anadditional capital investment of 3.3 million,

combined with improved energy managementprocedures, would help NHS trusts collectivelyto achieve a 15 per cent reduction in primaryenergy consumption. Once achieved, this wasestimated to yield annual energy-savings worth2.2 million (at 2002/2003 prices). Local energysurveys conducted across the NHS estate inrecent years have also identified potentialefficiencies, many achievable at little or no cost,while our questionnaire survey of NHS trustsshowed that certain energy-saving measures,such as automatic power down facilities oncomputing equipment, had yet to be extensivelyimplemented. Action that could be taken morewidely to reduce energy consumption andimprove efficiency includes:

a extending the use of systems to monitor andtarget energy consumption, includingsub-metering of buildings and automatedmetering technology to facilitate improvedanalysis of consumption patterns;

b increased use of building energy managementsystems to control consumption; and

c integrating energy efficiency considerationswithin major capital projects, maintenanceprogrammes and the procurement of plantand equipment.

21 Although some action can be taken to saveenergy at no financial cost, trusts also need toinvest to maximise opportunities for improvedenergy efficiency. Only four trusts hadring-fenced budgets for energy saving measures,and most trusts noted that energy relatedschemes are not a high priority for capitalinvestment. Where energy saving schemes aresupported, this is often on the basis of a short,one or two year, payback. To secure significantcapital investment for energy related schemes,six trusts have entered into private sectorcontract energy management partnerships.


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22 On-site generation of energy, through theapplication of combined heat and power orrenewable technologies, offers potential savings.Hospitals are better placed than manyorganisations to use combined heat and powerdue to their consistently high demand forenergy. However, in recent years financialviability concerns have limited the widerapplication of combined heat and power,which supplied around 8 per cent of the totalelectricity consumed by NHS trusts in2004/2005.

23 Recent developments in renewable technologieshave included the installation of solar panelling atBronllys Hospital (Powys Local Health Board),generating around 6 per cent of the Hospitalselectricity. However, the capital cost of somerenewable technologies is so high in relation tothe cost savings that result that investment isunlikely unless supported by external grantfunding, as was the case for Bronllys Hospital.

24 In contrast to England, Northern Ireland andScotland, the Welsh Assembly Government hasnot developed a specific funding programme forenergy-saving projects across the public sectorin Wales. However, the Health and Social CareDepartment has now set aside specific fundingas part of its Capital Investment Programme topromote investment in energy saving measures.

Recommendations

i The benefits of carrying out recent competitivetenders on the basis of supplier margin andadministration costs only were limited, as thetiming left just one month within which to bookforward energy prices. When planning futuretender exercises on this basis, Welsh HealthSupplies should allow a suitable lead time,of at least six months, within which to bookenergy prices.

ii The success of the new energy procurementstrategy will depend, for a large part, on thecontinuous availability within Welsh HealthSupplies of sufficient staff with appropriateexpertise. Welsh Health Supplies shouldcarry out a strategic review of its resourceneeds for energy procurement. The reviewshould take into consideration theincreasing financial risks in energyprocurement, the consequences of notproviding cover for staff absence or loss,and any move towards greater collaborationin energy procurement across the publicsector in Wales.

iii Improved monitoring of consumption throughmetering offers potential benefits in terms of theprocurement of energy, where more robustinformation on likely consumption patterns maydeliver lower prices and improved information forbill checking, and the management of energyconsumption. Only eight NHS trusts haddeveloped specific systems for monitoring andtargeting energy consumption. Welsh HealthSupplies and Welsh Health Estates shouldevaluate the likely costs and benefits of thewider application of automated meterreading technology across NHS trusts inWales, possibly on an all Wales basis,or even on a wider basis across the publicsector in Wales. All NHS trusts should

develop systems for monitoring energyconsumption and use the informationcollected to target resources at potentialenergy-saving opportunities.

iv NHS trusts in Wales have made only limitedprogress towards meeting the Welsh AssemblyGovernments energy consumption andefficiency targets. However, the appropriatenessof these targets and the way they are measuredare questionable. The AssemblyGovernments Health and Social CareDepartment and Welsh Health Estates


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should reconsider, in parallel with therevision of the UK-wide Energy Code forNHS buildings, the energy related targetsfor the NHS in Wales. In particular,they should:

a measure energy efficiency performancebased on consumption by floor area,rather than by heated volume;

b not count reductions in carbon dioxideemissions from the procurement of greenelectricity towards the primary energyconsumption target, as this reduces theincentive to achieve real reductions inconsumption; and

c develop new targets for carbon dioxideemissions, on-site generation fromcombined heat and power and renewableenergy sources, and procurement ofgreen electricity from external sources.

v Trusts were required, by August 2005, to committhemselves to the development of anenvironmental management system, with mostopting for the Green Dragon accreditationstandard, on the basis that it offers a five levelphased approach. Where trusts have adoptedthe Green Dragon standard, the AssemblyGovernments Health and Social Care

Department should clarify the minimumlevel of accreditation it regards assatisfactory and set a clear timetable fortrusts to achieve this.

vi Staff, and to some extent patients, can make asignificant contribution to improved energyefficiency through general housekeeping.All NHS trusts should re-examine themeasures they take to encourage staff touse energy efficiently, building on the sortsof examples presented in this report. Inparticular, we recommend that all trusts

explore ways of providing financialincentives to individual departments tosave energy.

vii Because of their small size and relatively lowlevels of energy expenditure, several trusts applyonly limited priority and resources to energymanagement. However, in the light ofincreasing energy prices, all NHS trustsshould review their commitment to energymanagement. We also recommend thattrusts seek opportunities to collaboratewith other trusts, or other public bodies intheir locality, and that Welsh Health Estatesshould work with other centralorganisations, such as the Welsh LocalGovernment Association or the HigherEducation Funding Council for Wales,to facilitate such collaboration.

viii External reviews and energy surveys in thepast three years have identified opportunitiesfor some potentially significant savings.Rising energy prices will have resulted in ashorter payback on the investment required todeliver these savings. The AssemblyGovernments Health and Social CareDepartment, with assistance from WelshHealth Estates, should challenge NHStrusts on the extent of the action they havetaken in response to external reviews and

energy surveys.

ix On-site energy generation, through combinedheat and power or renewable technologies,offers scope for energy savings, althoughfinancial constraints have limited their installationin recent years. Welsh Health Estates shouldcollaborate with the Carbon Trust to reviewcurrent, and potential future, applicationsof combined heat and power acrossNHS trusts in Wales, as well as renewableenergy technologies. They shouldencourage trusts to develop business


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plans for potentially viable projects andsupport them in bids for funding fromexternal sources.

x Major capital projects provide opportunities toimprove energy efficiency. Trusts shouldinvolve their energy management lead in theplanning and design of such projects.Where the Assembly Governments Healthand Social Care Department awards capitalfunding for new build or majorrefurbishment projects, it should take stepsto ensure that the energy efficiencymeasures set out at the design stage havebeen implemented.

xi The Assembly Governments Health and SocialCare Department has now set aside specificfunding for energy-saving measures as part of its Capital Investment Programme.The Department should establish clearenergy management related criteria, whichtrusts would be expected to meet in orderto qualify for this funding.


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Part 1: NHS trusts in Wales have experienced

mixed fortunes in the prices they have paid forenergy in recent years, and increasingly volatileenergy prices have led to a more flexibleapproach to procurement

1.1 In 2004/2005, the NHS trusts in Walesconsumed more than 2.8 million gigajoules of energy across their estates, at a total cost of almost 20 million ( Figure 1 ). Procurement of energy is more complicated than theprocurement of general goods and requiresspecialist expertise. Electricity and gas arevolatile traded commodities with market pricessubject to significant fluctuation (more than10 per cent in a single day, in extreme cases).

The time at which price offers are accepted istherefore a critical factor in determining finalcosts. Energy buyers also have to considerissues similar to those faced when taking out amortgage, such as how long to fix prices for(the longer the fixed period the less competitivethe short term price is likely to be). To assist their

decision making, energy buyers need to be wellinformed of projected energy price trends.

1.2 This part of the report examines:

I arrangements for the procurement of electricity and gas on behalf of the 15 NHStrusts in Wales and the factors that influencethese arrangements;

I the extent to which trusts have securedcompetitive prices for electricity and gas since2001; and

I the revised strategy for the procurement of electricity and gas, and its potential to securevalue for money over the longer term.

Figure 1. Energy consumption, expenditure, and carbon dioxide emissions across the NHS trust estate inWales during 2004/2005 a

Notes

a These figures do not include Welsh Ambulance Services NHS Trust buildings, for which robust consumption data is not available, or theconsumption of fuel for vehicles.

b Local steam and hot water denotes supplies generated on one hospital site but supplied to another site within the same trust, or purchased backfrom a private company as part of contract energy management arrangements. Similar arrangements apply to some of the electricity consumed,although this is aggregated with the figures shown for electricity above.

Source: NHS Estates and Facilities Performance Management System (EFPMS) data

Energy type Energyconsumption

(million gigajoules)

Carbon dioxideemissions

(thousand tonnes)

Costs( millions,

inclusive of VAT)

Electricity 0.8 71 8.6

Gas 1.7 95 9.2

Oil 0.2 16 1.4

Local steam and hot water b 0.2 12 0.4

Total energy 2.8 194 19.6


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Welsh Health Supplies administersthe procurement of most of theelectricity and gas used by NHS trustsin Wales

1.3 Welsh Health Supplies 4 administers theprocurement of around 97 per cent of theelectricity and 90 per cent of the gas purchasedby NHS trusts in Wales 5. Centralised energyprocurement is used increasingly in the publicsector, reflecting the lack of specialist expertisewithin individual organisations, potentialefficiencies in the procurement process and,to a limited extent, increased purchasing power.For example, the Purchasing and Supply

Agency undertakes energy procurement onbehalf of much of the NHS in England, and theOffice of Government Commerce provides anenergy procurement service to a range of publicbodies across the United Kingdom. Purchasingconsortia also serve many of the local authoritiesand higher education institutions in Wales.

1.4 During the conduct of electricity and gasprocurement exercises, Welsh Health Suppliesand NHS trusts work together closely ( Figure 2 ).Welsh Health Supplies acts as the contractingauthority, managing the procurement process inaccordance with European Union procurementregulations and securing the best possible deal

on behalf of the trusts. However, it is the truststhat are ultimately responsible for decisions onoverall procurement strategy and the acceptanceof price offers. Welsh Health Supplies alsomanages the contracts during their lifetime andhelps resolve any problems between trusts andtheir suppliers.

1.5 Welsh Health Supplies energy procurementteam comprises three staff, each withresponsibility for the procurement of electricity,gas or oil, overseen by a utilities team leader,with additional support from a contractsmanager. Our consultants described the team aswell informed buyers with a considerableunderstanding of energy markets andestablished methods for procurement, althoughtwo of the most experienced members of theteam have since retired.

1.6 The advice and guidance provided to trusts byWelsh Health Supplies is based on advicereceived from a range of sources, includingindependent energy market analysts and energysuppliers. Welsh Health Supplies is also amember of the Major Energy Users Council,which provides information to energy buyersacross the United Kingdom and a forum forsharing experiences. Access to this type of knowledge is fundamental to sustained successin energy procurement, and it is unlikely that anyindividual NHS trust could commit the resourcesto secure it.

4 Welsh Health Supplies is managed by Bro Morgannwg NHS Trust, although funding for its four core contracting services (energy; facilities; pharmacy; medical and

surgical) is top-sliced from the NHS Wales budget and NHS trusts in Wales do not pay for the services it provides.

5 At four main sites - Neath Port Talbot Hospital (Bro Morgannwg NHS Trust), Llandough Hospital (Cardiff and Vale NHS Trust), Abergele Hospital (Conwy & DenbighshireNHS Trust) and Prince Charles Hospital (North Glamorgan NHS Trust) - some or all of the energy consumed is purchased as part of local contract energy management or

Private Finance Initiative arrangements.


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Figure 2. Overview of the competitive tender process for electricity and gas undertaken by Welsh HealthSupplies on behalf of NHS trusts in Wales

Note

Welsh Health Supplies takes account of the views of NHS trusts and draws on external advice from market analysts, other energy buyers and energysuppliers themselves at all stages of this process, pre and post contract award .

Source: Welsh Health Supplies

Welsh Health Supplies reviewscontract specification

Welsh Health Supplies collates returns

Welsh Health Supplies requests confirmationof site profile information from trusts or

incumbent suppliers

Welsh HealthSupplies issues

OJEC advert

Welsh Health Suppliesnegotiates with potentialsuppliers and facilitates

a pre-tender meetingbetween suppliers and

the trusts

Welsh HealthSupplies

facilitates meetingbetween trustsand suppliers

NO

M

M

M

M

M

Furtherclarification required?

Furtherclarification required from potential

suppliers?

M

Welsh Health Supplies preparesand issues tenders

Welsh Health Supplies receives

and analyses tenders

Welsh Health Supplies prepares arecommendation for each trust

Welsh Health Suppliesestablishes the contract

Welsh Health Supplies gathersinformation on the performance

of potential suppliers

M

M

M

M

Welsh Health Supplies managesthe contract post award

M

Welsh Health Suppliesworks with trusts to

resolve issues

NO

Canissues be resolved?

M

Trusts make ownarrangements

M

YES

Trustsmake a decision andapprove the contract

award?

M

M

NOM

M

M YES

YES

M

M

NO

M

YES


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Welsh Health Supplies procures gas andelectricity either by competitive tender orcontract extension

1.7 Welsh Health Supplies procures gas in a singlecontract round, while electricity is separated intotwo contract rounds based on the level of demand at individual sites ( Figure 3 ).

Although tendered collectively, the sites includedin each contract round have historically receivedindividual prices from suppliers, based on theirconsumption profiles, and trusts have been ableto choose different suppliers for different sites,preventing cross-subsidisation. Therefore, whilethere have been economies of scale throughcentral administration of the procurementprocess, the total volume of demand acrossthe 15 NHS trusts in Wales has not directlyresulted in lower prices. However, Welsh HealthSupplies has been in a stronger position thanindividual trusts to negotiate the terms andconditions of contracts.

1.8 Purchasing within a volatile market is inevitablyrisky and, since 2001, Welsh Health Supplieshas made frequent use of the opportunity toextend its existing contracts, where permitted todo so by European Union procurementregulations, rather than undertaking regularcompetitive tenders (Appendix 2). Subject toagreement with suppliers and the NHS trusts,prices for contract extensions could be bookedat any time in advance of the period to whichthey related. Welsh Health Supplies monitoredmarket price trends and, on the basis of advicefrom external market analysts, recommendedthe time at which prices should be booked,either to take advantage of markedly low pricesor to lock out the risk of future price rises.

1.9 Welsh Health Supplies told us that it sought toobtain the best prices available for trusts, whileminimising the risks faced. The use of contractextensions has been consistent with this lowrisk approach, enabling greater flexibility to

Figure 3. Profile of the gas and electricity contracts procured by Welsh Health Supplies

Notes

a Interruptible gas supplies can be cut off temporarily in order to meet the needs of firm supply customers, but consequently are cheaper. There arecurrently 13 sites with interruptible gas supplies, although these account for around 40 to 45 per cent of the total gas consumption.

b These sites have automated half hourly meter readings and consumption could potentially be charged at a different rate in each half hour, reflecting

fluctuations in national demand. However, NHS trusts have opted for a two rate-day and night-pricing structure.

Source: Wales Audit Office analysis of Welsh Health Supplies records.

Contract features Gas Electricity

High demand sites Low demand sites

Number of NHS Trust sites included (asat May 2005)

392 56 443

Approximate annual value of contractsas at May 2005 (excluding VAT)

7.9 million 7.5 million 900,000

Description Includes a combination of firm andinterruptible gas supplies a

The maximum electrical demand atthese sites will exceed 100 kilowatts b

The maximum electrical demand doesnot exceed 100 kilowatts

Number of suppliers servicing thecontracts

Three suppliers One supplier from April 2005(previously two suppliers)

Two suppliers


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respond quickly to market movements andbook future prices at short notice. It has alsohelped avoid the uncertainty and administrationassociated with changing supplier, and thechallenge of stimulating interest fromsuppliers, for whom short-term multiple sitecontracts can be particularly unattractive.Our consultants explained that someorganisations were receiving only two offers fornew contracts, usually from the incumbentsupplier and one other.

1.10 Following competitive tenders, new contractshave been let for gas (from September 2004)and for high demand electricity (from

April 2005). The gas tender attracted offersfrom four suppliers, three of which were existingNHS trust suppliers prior to September 2004.

The high demand electricity tender also attractedoffers from four suppliers, but only one was anexisting NHS trust supplier.

Not all energy expenditure is influencedthrough procurement and price is not the onlyconsideration in selecting energy suppliers

1.11 Electricity and gas costs include a range of components, some of which are fixed regulatedcharges regardless of the choice of supplier,being based on geographical location or totalconsumption. The introduction of the climate

change levy, from April 2001, also added0.43 pence per kilowatt hour to electricity costsand 0.15 pence per kilowatt hour to gas costs,although some sites can receive full or partialexemption from the levy (Appendix 3).

1.12 A procurement exercise only influences the unitenergy cost, reflecting market prices at the timeof tender or contract extension, and anysupplier margin and administration costs.

These elements might typically comprise70 per cent of total costs before VAT for highdemand electricity, 45 per cent of costs for low

demand electricity, and 75 per cent of costs forgas, although the supplier margin andadministration elements typically represent lessthan 3 per cent of total costs.

1.13 Price is an important, but not the only,consideration in selecting energy suppliers(Case Study A ). Three NHS trusts ratedcontinuity of service, and two trusts ratedaccurate and regular invoicing, as moreimportant than price. Welsh Health Suppliesexplained that suppliers performance in theseaspects is variable. From 2006, new Europeantendering rules will require Welsh HealthSupplies to publish the weightings attached tocriteria, such as service quality, whenevaluating bids, although these criteria havealways been an informal part of the decisionmaking process.

Case Study A. Consideration of factorsother than price in selecting energysuppliers

The successful supplier for the new five year highdemand electricity contract from April 2005 did not offerthe lowest price which, if taken up, could have savedaround 90,000 per annum across the 15 NHS trusts.However, Welsh Health Supplies and the NHS trusts,

following advice from external market analysts and otherenergy buyers, judged that the successful supplier had abetter service record, and was also able to guaranteerenewable green electricity for the first three yearsof the contract at a lower premium than the otherpotential suppliers.

Source: Wales Audit Office analysis of Welsh Health Supplies records


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Procurement of renewable green electricityhas increased in recent years

1.14 Renewable green electricity sources includewind power, wave/tidal power, solarphotovoltaics, small scale hydro generation andbiomass (from forestry or crops). These result inzero carbon emissions or, in the case of biomass, are carbon neutral as the carbonemitted when burnt is equivalent to thatabsorbed during growth. These sources of supply have historically attracted a pricepremium in comparison to traditional brownsupplies from gas, coal or nuclear powerstations, although they are exempt from theclimate change levy.

1.15 NHS trusts are responsible for deciding whetherto purchase green electricity, depending on itsavailability from their chosen suppliers. All NHStrust sites on the high demand electricitycontract have taken up the option of greensupplies from 1 April 2005, at a premium of 0.385 pence per kilowatt hour but withexemption from the climate change levy(at 0.43 pence per kilowatt hour). Howeverbecause some sites have full or partialexemption from the levy, regardless of thesource of supply, the net additional cost of thegreen supply contract across the NHStrusts will be around 53,000 per annum.

North West Wales NHS Trust also has a greenelectricity supply for all its sites on the lowdemand contract.

1.16 This take-up of green electricity will help NHStrusts achieve the target for a 15 per centreduction in primary energy consumption, or anequivalent reduction in carbon dioxideemissions, by 2010. It also representssignificant progress towards the AssemblyGovernments desire that all electricity used inpublic buildings in Wales will be supplied fromgreen sources by 2010.

NHS trusts were generally satisfied with theenergy procurement service provided by WelshHealth Supplies

1.17 In almost all cases, NHS trusts rated thecompetitiveness of the prices obtained by WelshHealth Supplies, its provision of information onenergy market price trends or to supportdecisions on the award of contracts,and assistance in resolving problems with energysuppliers, as good or excellent. Their onlyconcerns related to the tight timescales availableto evaluate price offers from suppliers.However these timescales are determined bymarket conditions affecting all energy buyers,with offers being commonly withdrawn if thewholesale market experiences more than a1 per cent movement in price. Requests to holdprices for a longer period may simply result insuppliers building a premium into their offer tocover the risk of market movement. Quickdecisions are therefore essential and, in somecases, trusts have had to make a decision toextend a contract in less than twenty fourhours, without time to firmly assess the impacton their budgets.

1.18 Following approval by the NHS WalesProcurement Board, NHS trusts have changedtheir financial procedures to speed up decisionmaking, by delegating responsibility for

approval of energy contracts further down themanagement chain than is normal forcontracts of this value. Welsh Health Supplieshas also recently established an energy pricerisk management group to agree, in advance,target price thresholds for future periods,allowing it to take advantage of favourablemarket prices without needing to refer backto trusts.


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NHS trusts have experienced mixedfortunes in the prices they have paid forenergy in recent yearsThe prices paid for electricity and gasremained relatively stable between 2001and 2003, but increased sharply during 2004and 2005

1.19 The average prices paid by trusts for electricityand gas increased sharply for 2004/2005(Figure 4 ). These increases reflect the upwardtrend in market prices since April 2004(Figure 5 ).

1.20 Seven trusts reported that the increased pricesfor their gas and low demand electricity supplies,which took effect in the middle of the 2004/2005financial year, had not been reflected in theirenergy budgets for that year. This is despiteWelsh Health Supplies having warned trusts thatprices were likely to increase, and means thatresources may have had to be diverted fromother areas to meet energy costs.

1.21 Further significant price increases are beingexperienced following the competitive tenderfor high demand electricity supplies from

April 2005 and the extension of contracts forlow demand electricity supplies from October2005, reflecting rising market prices sinceJanuary 2005. For example, the averageenergy cost and supplier margin for highdemand supplies increased by 109 per cent,to 5.8 pence per kilowatt hour, for 2005/2006.

Trusts can also expect further increases in gascosts for the 2005/2006 contract period,unless market prices fall back significantly fromtheir current levels.

1.22 It is difficult reliably to compare the prices paidby NHS trusts with those paid by otherorganisations, because a sites consumptionprofile and the timing of any procurementexercise are critical factors in the aggregatedunit prices used for comparison, and no twosites are the same. Furthermore, it is oftenimpossible to separate out, from the all inclusiveunit prices, the fixed elements that are not

Figure 4: Average electricity and gas prices (pence per kilowatt hour) paid by NHS trusts in Walessince 2001 a

Notes

a Figures are based on those sites for which prices were available in each contract year, and exclude VAT, Climate Change Levy and any premiumspaid for renewable green electricity.

b The contract year runs from April to March for high demand electricity, from October to September for low demand electricity, and fromSeptember to August for gas.

Source: Wales Audit Office analysis of Welsh Health Supplies records

Contract year b

High demand electricity supplies

Energy cost and suppliermargin only

Low demand electricitysupplies

All inclusive price

Firm and interruptible gassupplies

All inclusive price

2001/2002 2.5 4.1 0.96

2002/2003 2.4 4.0 0.92

2003/2004 2.2 4.0 0.95

2004/2005 2.8 5.1 1.35


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influenced by the procurement process,particularly in respect of gas and low demandelectricity supplies (Appendix 3). As a result,Welsh Health Supplies explained that it hadbeen unable to obtain reliable benchmarkingdata in the past, and had reservations about themeaningfulness of any such comparison.

1.23 Although it is not possible to draw any firmconclusions from their findings, we neverthelessasked our consultants to compare the averageprices paid by NHS trusts for their gas and highdemand electricity supplies against the pricespaid by a range of other public and privatesector organisations for which the consultantsheld energy pricing data, to identify the extent of any differences in pricing. Between April 2001and March 2005, the prices paid by NHS trustsfor the energy and supplier margin componentsof their electricity costs were, on average, fiveper cent higher. All inclusive gas prices between

September 2001 and August 2004 were, onaverage, 6 per cent higher, although they wereonly 3 per cent higher when compared withother public sector organisations. Part of thisdifference will have been influenced by the factthat Wales has some of the highest gastransportation charges in the United Kingdom.

Sites with consistent levels of consumptiongenerally attract lower prices

1.24 Consistency of consumption and the perceivedreliability of a sites consumption profile directlyinfluence the final prices offered by suppliers.For example, baseload electricity (the level of consumption that remains consistent throughoutthe year at all times) attracts a lower price thanresidual electricity (to meet excess demandabove the baseload). This is because suppliersneed to balance their own energy purchasesand sales on a daily basis.

Figure 5: Wholesale market prices for gas and electricity, 1 April 2003 to 21 September 2005

Source: John Hall Associates

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0

01/04/03 01/07/03 01/10/03 01/01/04 01/04/04 01/07/04 01/10/04 01/01/05 01/04/05 01/07/05 21/09/05

Electricity

P e n c e p e r

k i l o w a

t t h o u r

Gas


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1.25 The accuracy of consumption data is not such aconcern for high demand electricity supplies,where electronic half hourly meter readings areavailable. However, the best informationavailable to potential suppliers of gas has beena monthly consumption profile based onfigures reported by individual NHS trusts and,for suppliers of low demand electricity, projectedannual consumption. Improved monitoring of consumption, possibly through the widerapplication of automated metering technology,would enable more robust data to be providedto suppliers and, as a result, may deliver morecompetitive prices. Our consultants advised thatthe difference between a credible and a poor setof data may be as much as 2 per cent of thetotal cost.

The timing of energy procurement is critical tothe price obtained, and, in retrospect, WelshHealth Supplies has achieved both positiveand negative results

1.26 In determining when to seek prices for NHStrusts energy supplies, through competitivetender or contract extension, Welsh HealthSupplies draws on advice from external marketanalysts. However, the outcomes of energyprocurement decisions can only be judgedretrospectively in the light of subsequent pricemovements which often confound the earlier

predictions of these analysts.

1.27 Our consultants examined the timing of thevarious energy procurement exercisesundertaken by Welsh Health Supplies between

August 2000 and February 2004, prior to themore recent competitive tenders for new fiveyear gas and high demand electricity contracts.

They compared the position of the wholesalemarket at these times with the range in marketprices over the 18 months prior to the start of each fixed price contract period (Appendix 2).

1.28 Overall performance is around the middle of therange, reflecting the low risk approach adoptedby Welsh Health Supplies. However, there havebeen both positive and negative outcomes atdifferent times. The use of contract extensionshas also, in most cases, enabled Welsh HealthSupplies to book future supplies when marketprices have been at a similar or lower level thanif it had adopted a calendar-based approach toprocurement, completing a competitive tenderbetween one and two months ahead of eachcontract renewal date.

1.29 The high demand electricity contract wasextended between April 2002 and March 2003,with prices booked in December 2001. At thattime, electricity prices were at their lowest pointsince April 2001 and market analysts werepredicting increasing prices over the winterperiod. The decision to extend therefore madegood sense while offering reduced costscompared with 2001/2002. However, thepredicted price rises did not occur, with pricesfalling by a further 10 per cent between January2002 and March 2002. Although the decisionon the 2002/2003 contract had already beentaken, Welsh Health Supplies took goodadvantage of these falling prices by booking in

April 2002 a further years supply, from April2003 to March 2004.

1.30 However, Welsh Health Supplies experiencedmixed results in extending the high demandelectricity contract for the period between April2004 and March 2005. In February 2003, forcommercial reasons, one of the two suppliers(Supplier one) offered an early opportunity tobook particularly competitive prices for the13 sites it supplied ( Figure 6 ). This resulted incomparable prices between 2003/2004 and2004/2005, although 10 sites took up thealternative offer of green electricity atadditional cost.


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1.31 Welsh Health Supplies also sought prices inMarch 2003 from the supplier of the other44 high demand sites (Supplier two), but theseappeared less favourable than the prices offeredby the first supplier and would have resulted inprice increases of between 6 and 12 per cent forindividual sites. The advice at the time fromexternal market analysts was that prices werelikely to display an upwards trend between then

and the contract renewal date of April 2004,meaning that organisations would be wise tobook prices as early as possible if they could geta good deal. Welsh Health Suppliesrecommended that trusts should not acceptthese prices as, in its opinion, they did notrepresent a good deal at the time, given theapparent difference in the prices offered by thetwo suppliers. Welsh Health Supplies againsought prices for these 44 sites in July 2003,although the offer, which showed a marginalreduction on the March 2003 offer, wasagain rejected.

1.32 From July 2003 onwards, market pricescontinued to fluctuate, but there was asignificant upwards trend, and Welsh HealthSupplies eventually extended the contract on20 November 2003. This followed advice frommarket analysts that the risk of prices going upeven further outweighed the chance of anyreductions, although this was not reflected in thesubsequent price movements. By that point,

the market price had risen by 19 per cent sinceJuly 2003 and, overall, the final 2004/2005prices accepted for these 44 sites represented a32 per cent increase on the prices paid for2003/2004. Had the prices offered in March2003 been accepted, we estimate that these44 high demand sites would have saved around650,000 in 2004/2005. In hindsight,Welsh Health Supplies has recognised that itsperception of the prices originally offered by thesecond supplier was affected by the artificiallylow prices offered, for commercial reasons, bythe first supplier.

Figure 6: The timing of the procurement of electricity for high demand sites for April 2004 to March 2005and the market price trend for such contracts


Market price, 2.2 pence, whenbooked with supplier two (20 November 2003)

Market price, 1.74 pence, whenbooked with supplier one (11 February 2003)

P e n c e p e r

k i l o w a

t t h o u r

2.4

2.3

2.2

2.1

2.0

1.9

1.8

1.7

1.6

1.5

01/10/02 01/12/02 01/02/03 01/04/03 01/06/03 01/08/03 01/10/03 01/12/03 01/02/04 01/04/04


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1.33 The low demand electricity contract, for all trustsother than North West Wales, was extended onfixed prices between October 2002 andSeptember 2004. Welsh Health Suppliesachieved success by booking prices in June2002 when the market price was 1.64 penceper kilowatt hour, compared to the price rangeof 1.5 to 2.0 pence per kilowatt hour in the18 months prior to October 2002. Prices forthe subsequent contract extension for all trusts,from October 2004 to September 2005, werebooked in February 2004 when market pricesreached their highest level for 12 months,contributing to a 25 per cent increase in the allinclusive prices for these sites. However, WelshHealth Supplies successfully avoided bookingthis electricity nearer to October 2004, whenmarket prices would have been up to 45 percent higher than in February 2004 ( Figure 7 ).

1.34 Welsh Health Supplies also achieved success inits 2003/2004 gas contract extension.Following advice from market analysts,prices were booked in January 2003, well aheadof the contract renewal date in September 2003,when market prices would have been up to13 per cent higher ( Figure 8 ). Welsh HealthSupplies estimated that the early decision toextend these contracts, which was justifiedbecause of the looming military action in Iraqand broadly comparable pricing with 2002/2003,saved NHS trusts in Wales up to 600,000between September 2003 and August 2004.

Figure 7: The timing of the procurement of electricity for low demand sites for October 2004 toSeptember 2005 and the market price trend for such contracts


Market price, 2.4 pence, whenbooked with suppliers

(04 February 2004 and 11 February 2004)

P e n c e p e r

k i l o w a

t t h o u r

3.4

3.2

3.0

2.8

2.6

2.4

2.2

2.0

1.8

1.6

01/04/03 01/06/03 01/08/03 01/10/03 01/12/03 01/02/04 01/04/04 01/06/03 01/08/04 01/10/04


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Welsh Health Supplies has changed itsapproach to energy procurement tosecure better value for money over thelonger term, although it is too early to

judge the success of thesearrangements

1.35 In recent competitive tenders for the gas and

high demand electricity contracts, running fromSeptember 2004 and April 2005 respectively,Welsh Health Supplies adopted a differentapproach in terms of the tender process,contract length and the method by whichprices are agreed and reviewed over thecontract term ( Figure 9 ). These changes havethe potential to deliver better value for moneyand broadly reflect a strategy that isincreasingly being adopted by other largepublic and private sector energy buyers.

The core purpose of the new strategy is toenable Welsh Health Supplies to maximise the

flexibility it has to book future unit energy pricesat a time, and for a period, of its choosing.

1.36 Prior to the new five-year contract, electricitysuppliers refused to provide Welsh HealthSupplies with an indication of the level of theirsupplier margin and administration charges,which were merged with the unit energy costs.

As a result, it is not possible to demonstrate

whether the new five-year contract has directlyresulted in a reduction in these costs. Two of the three gas suppliers provided thisinformation for 2003/2004, allowingcomparison with the 2004-2009 contract for93 sites. Of these sites, 63 saw a reduction intheir supplier margin and administration costsin the 2004-2009 contract, two had identicalcosts for both periods and 28 sites hadhigher costs.

Figure 8: The timing of the procurement of gas for September 2003 to August 2004 and the market pricetrend for such contracts


Market price, 0.68 pence, whenbooked with suppliers

(24 January 2003)

P e n c e p e r

k i l o w a

t t h o u r

0.80

0.75

0.70

0.65

0.60

01/03/02 01/05/02 01/07/02 01/09/02 01/11/02 01/01/03 01/03/03 01/05/03 01/07/03 01/09/03


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1.37 One of the main features of the new contractsis a more flexible approach to price setting, asan alternative to annual fixed prices. This optionhas been available for gas contracts for sometime and our consultants explained that, overthe longer term, it had yielded better resultsthan annual fixed pricing. However, flexiblepricing is less well established for electricityprocurement, having only been available since

April 2004. This type of electricity contract is

only currently available to purchasers thatconsume in excess of 120 gigawatt hours perannum. It was therefore reliant on all NHStrusts in Wales agreeing to a single supplieracross their high demand sites.

1.38 A competitive tender based on the suppliermargin and administration elements of the totalenergy cost should allow a longer lead time tobook the unit energy prices, which comprisethe majority of the total costs. However, thetender processes undertaken by Welsh HealthSupplies took longer than expected, largely asa result of the amount of pre-tender negotiationrequired with potential suppliers to establish theframework for these new style contracts.

The new gas contract, from September 2004,was awarded at the end of July 2004, while thehigh demand electricity contract, from

April 2005, was awarded at the end of February2005. In each case, this left only one monthwithin which to book the unit energy pricesfrom the start of each contract period.

Figure 9: A comparison of Welsh Health Supplies old and new approaches to the procurement of gas andhigh demand electricity supplies

Source: Wales Audit Office review of Welsh Health Supplies records

Old approach New approach Potential benefits of the new approach

Tender process Gas: Tenders evaluated on the allinclusive delivered price includingtransmission and metering costs.

Electricity: Tenders evaluated on thecombined energy cost, supplier marginand administration cost, but excludingother, regulated costs.

Tenders evaluated only on the suppliermargin and administration costs.

For electricity, the margin andadministration charges are the sameacross all sites.

The contract award could therefore occur well ahead of thecontract start date, enabling successful contractors toundertake any administration relating to the establishment ofthe contract and minimising disruption.

The energy cost element could then be booked at any pointprior to the start of the contract term, helping avoid asituation where the tender exercise coincides withparticularly high or volatile market prices.

Contract length Gas: Two years with the possibility ofextension for up to a further five years.

Electricity : One year with thepossibility of extension for up to afurther three years.

Five years with the option to extend fora further five years.

Gives the supplier confidence in a long-term commitmentand enables them to spread administration costs over alonger period, thereby reducing annual costs. It should alsolead to an improved quality of service from suppliers.

Price setting Annual fixed prices. Flexible pricing within which anyamount of gas or electricity could bebought for any period at any point.

The electricity contract also offers theoption of purchasing the baseloadelectricity at a different point to theresidual electricity, thereby spreadingthe risk.

Prices could be booked for a month at a time, or fixed forlonger periods. This should allow NHS trusts to spread therisks and to take advantage of favourable market conditionsas they occur.

In theory, trusts could elect to take different approacheswithin the overall contract, dependent on the relativeimportance placed on budget control or price. For example,annual fixed prices give greater budgetary control but maynot give the best price over the longer term.


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The new gas and high demand electricitycontracts coincided with a significant increasein market prices

1.39 Independent market analysis early in 2004suggested that gas prices were unlikely to risesignificantly prior to completion of the tenderexercise for the new gas contract, reducing therisk presented by not taking the option to extendthe previous contract. Also, Welsh HealthSupplies did not feel that there was a strongenough case to extend the previous contractgiven that market price movements in 2003meant sites were likely to experience up to a20 per cent increase in their all inclusivegas costs.

1.40 In hindsight, had the previous contract beenextended and prices booked in January 2004(eight months ahead of the start date, as wasthe case for the 2003/2004 extension), NHStrusts would have avoided the significant,although unexpected, increase in gas prices thatoccurred later in 2004, saving, we estimate,around 350,000 between September 2004 and

August 2005.

1.41 The new gas contracts allow Welsh HealthSupplies to spread risk in a volatile marketthrough flexible purchasing. Prices with one of the three suppliers, supplying just over half the

sites but only 8 per cent of total consumption,were fixed for a whole year at the start of August2004. The majority of consumption, with theother two gas suppliers, was booked on a moreflexible basis throughout the contract period, inblocks of between one and five months. Thisstrategy was intended to spread the risk of buying a whole years gas supply when priceswere high.

1.42 NHS trusts experienced an average 42 per centincrease in their all inclusive gas prices between2003/2004 and 2004/2005. However, in the

event, there was no significant difference in theextent of the increase experienced by those siteson annual fixed prices and those for which thegas was purchased on a more flexible basis.

1.43 The new five-year electricity contract for highdemand sites, from April 2005, also coincidedwith rising prices, although in this case acompetitive tender had to be carried outbecause there was no option to extend theprevious contract. The new contract was notformalised until the end of February 2005 and,because Welsh Health Supplies expected themarket price to fall back, it did not book pricesuntil 18 March 2005. Again, in hindsight, it wouldhave been better to purchase electricity as soonas possible, as market prices increased by 8 percent in the first two weeks of March. In anattempt to minimise the risk of further increases,and allow sufficient time for the new contract tobecome established before having to makefurther purchasing decisions, Welsh HealthSupplies purchased six months worth of electricity, to September 2005.

1.44 Prior to a decision being made on the successfulsupplier for the contract, Welsh Health Supplieshad predicted an uplift in unit charges forelectricity (excluding fixed/regulated costs) of between 30 per cent and 80 per cent,depending on the supplier sites were with

previously. However, increasing market pricesaround the time of the initial tender award, andsubsequently, are likely to result in an averageincrease of more than 100 per cent, with somesites experiencing an increase of up to200 per cent.

The new energy contracts have implications forboth Welsh Health Supplies and NHS trusts

1.45 Although annual fixed prices remain an option,the new style contracts have already resulted inmore frequent purchasing decisions and


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changes in price. This has implications for thedecision making process between Welsh HealthSupplies and the NHS trusts, and for the localmanagement of budgets. Recognising this,Welsh Health Supplies has established anenergy price risk management group, involvingenergy budget setters or holders from the NHStrusts. This group, which convened for the firstof its quarterly meetings in July 2005, will reviewenergy market trends and agree target pricesand periods of purchase. The intention is thattrusts will set their energy budgets accordinglyand Welsh Health Supplies would seek toprocure energy within the target price range.

This approach will not necessarily result in thelowest prices but should deliver greater budgetcertainty, and it will be for the NHS trustscollectively to determine the relative importanceof these factors 6 .

1.46 To assist in monitoring the likely impact of changing market prices, Welsh Health Supplieshas signed up to a web based service that willtrack prices every 15 minutes and measure thelikely impact of price movements on itscontracts. This facility will help inform decisionmaking, although there will also need to be clearprotocols for reporting back to trusts, in light of subsequent market trends, the relative successof decisions that are taken.

1.47 Despite these developments, there is still a riskthat, through absence of key staff from theworkplace or other workload demands, WelshHealth Supplies could miss out on opportunitiesto purchase energy at favourable times. The factthat members of the Welsh Health Suppliesenergy procurement team have previously takenindividual responsibility for the various energycontracts, rather than operating more flexiblyacross them, increases this risk. However, Welsh

Health Supplies told us that it hopes its newlonger term contracts will enable it to deploy itsstaff more flexibly across the different contracts.

1.48 As in many other parts of the NHS, staff recruitment and retention remain a challenge andpresent a further risk to the effectivemanagement of the new contracts. Welsh HealthSupplies energy team has experiencedparticular staffing pressures over the past yearas a result of long-term sickness absence andthe retirement, in May 2005, of the member of staff responsible for electricity procurement. Inseeking to fill this post, Welsh Health Supplieshas been unable to find as experienced areplacement. The utilities team leader also retiredin September 2005, although his replacementhad been working alongside the utilities teamprior to this retirement.

1.49 The energy procurement team is alsoresponsible for administration of the NHS clinicalwaste management contract, while Welsh HealthSupplies is taking on additional work inconnection with the development of the NHSHealthcare Waste Strategy. Welsh HealthSupplies explained that it would like also toplace responsibility for this work within its energyprocurement team, but the teams limited staff resources has meant that the work has had tobe distributed across other teams. The

introduction of competitive procurement forwater supplies, expected sometime in the nearfuture, is also likely to generate additional work.In keeping with the objectives of the AssemblyGovernments Making the Connections and Better Value Wales strategies, Value Wales isinvestigating the potential for wider collaborationin energy procurement across the Welsh publicsector. This too could have resource implicationsfor Welsh Health Supplies.

6 Trusts could adopt different target price parameters, with different purchasing decisions for different trusts within the overall contract framework. However, Welsh Health

Supplies has indicated that, for ease of administration in the early stages of these contracts, it will be looking to agree a common approach across all trusts.


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1.50 More frequent price changes also increase theneed for trusts to carefully monitor their energybills to ensure that they are being chargedcorrectly. Our consultants examination of asample of validated bills from 19 large hospitalsites in Wales identified errors which, if replicatedacross the sector, suggest a possible overchargeof 59,500 in 2003/2004 (Appendix 4). Some of these errors, which Welsh Health Suppliesconsiders to be common across the energysupply industry, arose from inconsistent unitprices or overlaps in the dates charged(Case Study B ).


Welsh Health Supplies has used electronicauctions to deliver procurement savings, butdoes not believe that the approach is bestsuited to its energy contracts

1.51 Welsh Health Supplies conducts all tenderselectronically via its website, and hassuccessfully used on-line auctions for theprocurement of some products, notably thesupply of blood-collection bottles. However, ourconsultants explained that electronic auctions forenergy procurement have not always provedsuccessful and Welsh Health Supplies hasrejected this approach because of thecomplexity of its energy contracts and thenumber of variables involved. Welsh HealthSupplies also questioned whether the savingsquoted by certain organisations that have usedelectronic auctions are more a reflection of thetrend in market prices at the time, or therobustness of organisations previous tenderingprocesses, than like for like savings delivered bythis approach.

1.52 Welsh Health Supplies has purchased anelectronic auction software package with anunlimited licence. This should help avoidsignificant additional development costs were itto revisit the use of electronic auctions in anyfuture energy related tenders.

Case Study B. Examples of errorsidentified in NHS trusts electricity andgas bills

Bronllys Hospital (Powys Local Health Board) during negotiations over the extension of the gascontracts for September 2003 to August 2004,Welsh Health Supplies requested that the charges forthree separate meters at Bronglais Hospital (Ceredigionand Mid Wales NHS Trust) be aggregated to give a singleunit price for invoicing purposes. An administrative errormeant that, in the revised pricing schedules, the samecharge was also attributed to Bronllys Hospital. As aresult, instead of being invoiced at the agreed rate of1.0689 pence per kilowatt hour, Bronllys Hospital wascharged 1.089 pence per kilowatt hour, resulting in an

overpayment of 948 over the contract period.

Morriston Hospital (Swansea NHS Trust) overlapping dates on two invoices mean that MorristonHospital was charged twice for electricity consumed on31 March 2003, at a cost of 1,124. The Trust is nowpursuing a refund from the relevant supplier.


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Part 2: NHS trusts are struggling to reduceprimary energy consumption and need to furtherimprove energy efficiency

2.1 In November 2001, the Auditor General for Walesreported on the progress made by the NHS inWales towards the United Kingdom wide NHStarget for a 20 per cent reduction in primary

energy consumption between 1990/1991 and1999/2000 7. Against this target the NHS inWales achieved a 9 per cent reduction.

The report recommended that NHS trusts,give priority to energy-saving measures, fromsimply promoting energy consumptionawareness to investing in energy efficient plant.

2.2 This part of our report examines the progressNHS trusts in Wales are making towards theirlatest energy targets and the factors influencing

improvement, including:

I the extent of corporate commitment toenergy management;

I the potential to reduce energy consumption,given appropriate priority and investment; and

I the financial resources available for investmentin energy saving measures.

The achievement of energyconsumption and efficiency targets willbe a major challenge

2.3 Welsh Health Circulars (2000) 50 and (2002)116 set out the key targets for the NHS in Walesrelating to energy consumption and efficiency(Figure 10 ). Welsh Health Estates monitorsprogress towards these targets annually. Thetargets also form part of the balanced scorecardperformance management regime for NHS trusts.In October 2004, the Assembly Governments

Health and Social Care Department wrote toNHS trusts to remind them of the importanceplaced on achieving the targets.

7 Auditor General for Wales report, Managing the Estate of the National Health Service in Wales , November 2001.

Figure 10: Energy consumption and efficiencytargets for the NHS in Wales

Note

Progress against these targets is measured only for main hospital sitesand, in the case of the energy efficiency targets, relates only to theessential estate (that deemed to have a long term health use of five yearsor more). The energy efficiency targets relate to individual NHS trusts, butthe primary energy target is an all Wales target based on the aggregateconsumption across the trusts.

Source: Welsh Health Circulars (2000) 50 Introduction of an Estates

Performance Management System and (2002) 116 Environmental Management Policy for the NHS Estate

Energy Consumption Target

A 15 per cent reduction in primary energy consumption across the NHStrusts in Wales between March 2000 and March 2010 (or an equivalentreduction in carbon dioxide emissions).

Measurement of primary energy consumption is based on energy consumed thatis purchased from external suppliers or as part of contract energy managementarrangements, and applies a multiplying factor to the electrical consumption toaccount for inefficiencies or losses in the genera tion of electricity and itstransmission and distribution to individual sites. These factors have recently beenrevised by the Department for Environment, Food and Rural Affairs and now standat 2.68 for the 1999-00 base year and 2.6 for 2004/2005.

Electricity sourced externally on renewable green tariffs is counted towardsprimary energy consumption, but not towards the equivalent carbondioxide emissions.

Energy Efficiency Targets

Of the NHS estate, 75 per cent to be in EstateCode Category B for energyperformance (annual consumption of less than 65 gigajoules per 100 cubicmetres of heated space) by 2005, and 95 per cent by 2008.

A separate target of less than 55 gigajoules per 100 cubic metres is in place forall new buildings. Existing buildings were set the target of 65 gigajoules of energyper 100 cubic metres, but with no specific deadline for achieving this.Thesetargets are based on the net energy consumption of sites, taking account of anyadditional energy consumed that is generated on site by combined heat andpower systems. In this case, no multiplying factors are applied to the electricalconsumption.


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Primary energy consumption has increased by0.6 per cent since 1999/2000

2.4 Overall, primary energy consumption by NHStrusts increased by 0.6 per cent between1999/2000 and 2004/2005, although there wasa reduction of 1.9 per cent between 2003/2004and 2004/2005, due in large part to the sell off,by Pembrokeshire and Derwen NHS Trust, of themajority of its St Davids Hospital, Carmarthensite. However, Welsh Health Estates hasreported that net energy consumption fell byaround 5 per cent between 1999/2000 and2004/2005. This reflects a trend of decreasingfossil fuel consumption but increasing electricalconsumption, which contributesdisproportionately to the primary energy figures.Despite some rationalisation of the estate, theoverall increase in primary energy consumptionalso needs to be set against an 8 per centincrease in heated volume across the mainhospital sites used for comparison, since1999/2000.

2.5 Carbon dioxide emissions fell by around 5 percent between 1999/2000 and 2004/2005,largely because electricity sourced externally onrenewable green tariffs is not counted whencalculating carbon dioxide emissions.Green electricity has now been guaranteed until2008 for the main hospital sites in Wales.

Assuming that these sites remain on greenelectricity supplies through to 2010, this shouldenable trusts to achieve the 2010 primaryenergy, or equivalent carbon emission,reduction target. However, enabling trusts tomeet this target through the procurement of green electricity reduces the incentive to achievereal reductions in energy consumption.

Take-up of green electricity will also not impacton the energy efficiency targets which arebased on net consumption regardless of theenergy source.

Energy efficiency has improved, althoughsignificant further progress is needed if theenergy efficiency targets are to be met

2.6 NHS trusts in Wales consumed an average57 gigajoules of energy per 100 cubic metres in2004/2005, although there is significant variationin the performance of individual trusts(Figure 11 ). This represents an improvementfrom an average 64 gigajoules per 100 cubicmetres in 2001/2002. Collectively, in 2004/2005,

Average energyefficiency

performance-mainhospital sites

(GJ/100m 3)

Percentage oftotal estate in

EstateCodeCategory B

(


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There are concerns about the reliability of theenergy performance data provided by trusts,while the current energy consumption andefficiency targets may no longer be appropriate

2.9 Welsh Health Estates has expressed someconcern about the reliability and consistency of energy consumption reporting from year to yearby a number of trusts and this may affect theyear on year trends reported. Although WelshHealth Estates attempts to validate the datareceived annually from trusts, its capacity to dothis is limited and it focuses on questioning anyunusual patterns, such as significant changes intrusts consumption. Our own analysis of thedata for 2004/2005 identified a range of anomalies relating either to the consumptiondata provided for certain sites or the status of sites in terms of the supply of green or brownelectricity from external suppliers. Welsh HealthEstates has addressed these issues in its finalanalysis of the data for 2004/2005, butrecognises that there may be otherdiscrepancies that it has been unable to identify.

2.10 The energy targets for the NHS in Wales areexpressed in gigajoules, whereas energyconsumption is generally billed and monitored bytrusts in kilowatt hours (one gigajoule equals 278kilowatt hours). Conversion between these unitscould lead to confusion. The measurement of

energy efficiency by heated volume is alsoquestionable, as it:

I limits the potential for comparison with othersectors, where performance is generallymeasured by floor area;

I masks the impact of high ceilings, which areamong the most significant causes of poorenergy efficiency; and

Iis the only estates indicator that uses aheated volume measure, making it costly tocollate and prone to error.

2.11 These concerns were highlighted in theconsultants report from a joint Carbon Trust andWelsh Health Estates project within GwentHealthcare NHS Trust (Appendix 5), which alsocriticised the focus on primary rather than netenergy consumption. In addition, the reportrecommended that Welsh Health Estatesdevelop a carbon intensity measure, nowreflected in its annual Estate Condition andPerformance Report as kilogrammes of carbondioxide emitted per kilowatt hour of energyconsumed. It also recommended thedevelopment of a consumption measure toreflect trusts relative activity rates, although thisis yet to be implemented.

2.12 The energy targets are also out of step with theincreasing international focus on carbonemissions and renewable energy rather thanabsolute consumption. The UK GovernmentsReview of the Climate Change Programmesuggested two new targets of 10 per cent of electricity to be produced from renewablesources by 31 March 2008 and 15 per cent of electricity to be provided by good qualitycombined heat and power by 2010.Meanwhile, the Assembly GovernmentsSustainable Development Action Plan included inits top ten actions the aim that all AssemblyGovernment buildings will, by 2010,be exclusively using renewable electricity,

procured from external suppliers or generatedon-site through the application of renewabletechnologies or combined heat and power.

The Action Plan states a desire to move towardsa similar target for all public buildings in Wales.

At a UK level, the Building ResearchEstablishment, on behalf of the Department of Health, is rewriting the Energy Code for NHSbuildings, with consideration being given toreplacing the heated volume target with one thatencourages reduced carbon emissions.


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Corporate commitment to managingenergy consumption is mixed

2.13 Six trusts considered that the low corporatepriority given to energy management was anextremely significant barrier to improving energyefficiency (Appendix 6). This commitment couldbe demonstrated in various ways, including:

a regular consideration of energy performanceby trust boards and senior management;

b the development of effective policies andstrategies relating to energy matters;

c incorporation of energy management within awider strategic commitment to environmentaland sustainability issues;

d efforts to raise staff and patient awareness of energy efficiency issues; and

e the allocation of staff resources to energymanagement.

Board level interest in energy performancevaries

2.14 Six of the fifteen trusts stated that energyperformance was reported to the Trust Boardannually or more frequently (each month in the

case of North Glamorgan NHS Trust) 8.Where energy performance is reported,this generally includes a range of information onconsumption, carbon dioxide emissions andprogress towards NHS energy targets. In twotrusts, energy performance was never reportedto the Trust Board, even though the estatesdepartments were represented onthe Boards.

Few NHS trusts had policy frameworks inplace to support effective energy management

2.15 By September 2004, six trusts had an energypolicy in place and a further five trusts hadpolicies under development ( Figure 13 ).Most existing policies had been written orreviewed, and approved by trust boards, in theprevious two years. However, the policy in NorthEast Wales NHS Trust dated from October 2000,prior to developments such as the introductionof the climate change levy, and was onlyendorsed at the estates department level. The

Trust intends to develop a revised policy as partof the implementation of its wider environmentalmanagement system.

2.16 The development and publication of an energypolicy should demonstrate the commitment of an organisation to effective energy management.However, despite having had energy policiesapproved by their trust boards, estatesmanagers at two NHS trusts identified the lowcorporate priority given to energy managementas an extremely significant barrier to improvedenergy efficiency.

2.17 There is no single model for an energy policy, theeffectiveness of which is largely determined bythe activity it stimulates. However, of the sixpolicies developed:

a only three set out clear lines of responsibilityfor policy implementation;

b two made no clear commitment to regularreporting on progress in pursuit of thepolicy aims;

c just one made reference to specificmeasurable targets, although otherscommented on general goals;

8 In some cases, energy performance was reported to trust boards as part of the annual update of their estates strategies. For the purpose of our analysis we have not

counted this as, in years (such as 2004) when estates strategies were not required to be updated, there would be no reporting on energy performance.


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d only one made any commitment to raisingstaff awareness; and

e none made any firm commitment to exploringlow carbon energy sources.

2.18 Welsh Health Circular (2002) 116 required NHStrusts to submit annual action plans to WelshHealth Estates setting out how they intended toachieve the energy consumption and efficiencytargets 9. The deadline for the first of these

Note

G Developed and approved.

H Under development at the time of our survey.

S ource: Wales Audit Office survey of NHS trusts in Wales and NHS Estates and Facilities Performance Management System (EFPMS) data

Energyexpenditure

2004/2005 (000s)

Energy

policy

Energy

action plan

Environmental

policy

Bro Morgannwg 1,286 H G G

Cardiff and Vale 3,908 G G G

Carmarthenshire 1,057 G G G

Ceredigion & Mid Wales 356 H H G

Conwy & Denbighshire 1,379 H G G

Gwent Healthcare 2,434 G G G

North East Wales 1,374 G G

North Glamorgan 754 G G G

North West Wales 1,413 G G

Pembrokeshire & Derwen 637 G G

Pontypridd & Rhondda 1,244 H H H

Powys Local Health Board 710 H G G

Swansea 2,580 G

Velindre 495 H

Welsh Ambulance Services Not available H

Figure 13: Policy frameworks in support of energy management

9 Welsh Health Circular (2002) 116: Environmental Management Policy for the NHS Estate


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plans was 31 March 2003 but, by September2004, only nine of the fifteen trusts haddeveloped such a plan, in some cases inadvance of a formal energy policy. Welsh HealthEstates has expressed concern about therobustness of some of these action plans,despite issuing guidance to trusts on theirstructure and content.

2.19 Welsh Health Circular (2002) 116 also requiredNHS trusts to develop environmental policies by

April 2003. By the time of our survey, inSeptember 2004, eleven trusts had developedsuch a policy, although a further three trusts hadpolicies under development. Although notspecifically required to have them, none of thetrusts had developed an overarching sustainabledevelopment policy within which commitmentsto tackling carbon dioxide emissions might beexpected to feature.

The introduction of environmental managementsystems should help raise the profile of energymanagement related issues

2.20 Welsh Health Circular (2002) 116 required NHStrusts to introduce environmental managementsystems. These are intended to reduceorganisations impact on the environmentthrough a process of continual performanceimprovement, including energy performance.

The Circular provided no detail on the minimumstandard expected of these systems, but therea

nhs energy management wales

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