iESE National Energy Review

Introduction

Public sector spend on electricity and gas exceeds £2.4billion (2009/10) making us the largest buyer in the UK market. The Efficiency Reform Group (ERG) has mandated that all Central Government departments will be using flexible procurement for purchasing energy delivered by Buying Solutions effective 1st January 2011. Like most complex commodity areas, energy prices and their subsequent risk profiles, evolve with time hence standardising across Central Government departments will allow careful performance management to determine if further improvements and cost savings can be made. Wider public sector bodies can learn from this approach.

With increasing pressures on local authorities to find cashable savings without impacting front line services, it is imperative that each council is securing the ‘best deal’ for their energy requirements. Improvement & Efficiency South East (iESE) has produced guidance on the purchase of gas and electricity in the form of the ‘Best Deals Service: South East Gas & Electricity Review’. A further trigger for change has come from the ‘Procurement, Capital and Shared Assets Productivity Programme’ led by Andrew Smith, Chief Executive of Hampshire Council and Councillor Paul Bettison, Leader of Bracknell Forest Council. This review will form a suite of products available to the wider public sector as a direct result of the Procurement, Capital and Shared Assets Productivity Programme.

Characteristics of good energy procurement

The Office of Government Commerce (OGC) has produced some guidance on energy procurement, namely ‘Energy Buying: Working Together for better results’ and ‘Energy Buying: The effective way to manage risks’. Both these documents can be found on the OGC website. One key statement which iESE would support is ‘One of the smartest ways for public sector organisations to buy energy is to use recommended frameworks that offer flexible purchasing, have aggregated volumes, and enable best practice risk management’.

Characteristics of good energy procurement have been well recorded. iESE would suggest the following:

  1. Knowing how much energy your organisation uses and actively monitoring, managing and reducing that usage
  2. Ensure you have a robust risk management strategy with clear reporting
  3. All 3rd party charges are fully disclosed and transparent (such as commission and supplier rebates)
  4. Have a thorough understanding of all EU Directives pertinent when buying energy
  5. Understanding different purchasing options and their strengths and weaknesses in relation to your organisation’s requirements
  6. Clear understanding of the agreed pricing model and regular reviews of whether the pricing model is good value in light of any changes to usage patterns
  7. Active contract management in place (see below)
  8. Understanding the current national energy market (from wholesale gas purchasing to electricity monitoring and measurement)

Characteristics of good energy contract management

Good energy contract management guarantees excellent operational and financial performance whilst minimising risk to the local authority. OGC characterize this in their guidance ‘Principles for service contracts: Contract Management Guidelines’. They highlight 3 core areas:

  1. Service delivery management
  2. Relationship management
  3. Contract administration

It is advisable when examining energy expenditure and possible re-procurement that contract management principles are adhered to. Whilst PBOs will provide a certain level of support such as ensuring you receive the best possible price from suppliers – there are a number of core duties that need to be completed that require only local authority attention . The below table will help understand where PBOs can add value and which activities fall within the local authority contract management remit.

Energy Procurement & Contract Management - PBO Perspective / Energy Procurement & Contract Management – Local Authority Perspective
  1. Energy advice, information and specialist guidance
  2. Can provide excellent end-to-end procurement services
  3. Value from suppliers
  4. Resolves supplier issues and risks (including billing)
  5. Assistance with changing demands including installing and managing new sites and meters
/
  1. Monitor and manage energy consumption
  2. Regular contract review meetings with PBO to examine performance including pricing
  3. Regular review meeting with PBO support team specifically regarding customer service
  4. Managing and resolving internal risks and issues
  5. Awareness of external energy developments

Although, the above list is by no means exhaustive, it does provide a flavour of key activities and where the boundaries lie when utilising a framework contract.

Why do frameworks deliver on the above ‘good characteristics’?

The Office of Government Commerce (OGC)gives the following advice:

“Using pre-existing contracts and frameworks can deliver significant efficiency savings for your organisation. By aggregating your demand with that of other public sector organisations, you can achieve extremely competitive prices. And because all the contracts… have already been competitively tendered and are open to other public sector organisations, you can make further savings on procurement tendering time and costs.”

By matching the ‘good characteristics’ with the benefits of framework contracts we have the following:

-Fully compliant legal arrangement for core services and commodities which means a cost saving from not running a full procurement exercise

-Aggregation of demand means better value for money for the customers

-Aggregation also means that there may be more suppliers on the framework

-Access to specialist knowledge which you may not have internally

Wider Public Sector – Where are the opportunities for efficiency gains?

Recent Cabinet Office statistics indicate that although some wider public sector bodies are utilising the Professional Buying Organisations (PBOs) to manage their energy portfolio, there are still a large number of organisations that could make significant cashable and longer term efficiency gains by working with a knowledgeable PBO and switching to a flexible energy procurement model.

Figure 1

Figure 1 gives a breakdown of where the opportunities for savings are within Local Government, Police, Health and Fire. Taking the ‘Characteristics of good energy procurement’ and matching this with what OGC would consider recommended solutions for the wider public sector, the number of bodies that could make significant savings are:

Local Government / 62
Police / 5
Fire / 39
Health / 136

The total potential cashable saving for those bodies that are not currently using a recommended contract is estimated to be around £560million.

Figure 2

The snapshot case studies above demonstrate that there are many benefits to ensuring you have the

Local Government Focus

Local authorities understand that energy markets are incredibly volatile with price fluctuations a fairly regular occurrence. Few will have the in-house resource or expertise to understand or manage existing contracts to guarantee value for money in the medium and long term. Furthermore, this is a perfect example of the benefits of aggregation with lower prices assured if you use one of the Professional Buying Organisations (PBO). For further details on this please see the case studies in the previous section.

A clear local authority future energy strategy highlighting absolute necessary requirements including: transparent pricing structures, excellent governance arrangements, and measures in place to manage all risks would be essential when procuring energy. Active contract management will ensure that there remains a firm balance between performance and risk. This will allow local authority energy strategy to remain competitive and all energy risks to be carefully mitigated or managed.

The snapshot case studies above demonstrate that there are many benefits to ensuring you have the right energy management strategy in place – not just the significant savings that can be made. Figure 2 quantifies the savings potential if all those local authorities that are currently not using a flexible, risk managed arrangement were to switch. For Tier 1 (County Councils) authorities this figure is in excess of £75m. Improvement and Efficiency West Midlands conducted a nationwide energy survey of local authorities and identified those that were not using a compliant framework hence the £75m savings opportunity is directly relevant to these local authorities. Many other local authorities across the country have already taken up these opportunities.

Stimulating public sector renewable energy production

‘’At a time when some local government budgets are being cut by nearly 9% a year, renewable energy provides a rare source of new funding – and one that appears to come with Eric Pickles's blessing. Local authorities are starting to talk about solar panels on the roofs of car parks and maybe even wind farms in the midst of council estates.’’ (The Guardian, 16th February 2011)

The article continues with references to Birmingham City Council, Wrexham, Devon and other councils describing their approach to green energy production which stimulates the local economy by creating ‘eco-friendly jobs’. Whilst we have discussed savings opportunities for councils which have flexible framework arrangements in place, recent developments indicate that there is potential for councils to recoup some costs of new technology development and installation by generating and exporting low carbon electricity. Full details of the ‘Feed In Tariffs’ can be found on this site:

If you would like more details on this report or would like to talk through your options with iESE then please contact: Momtaz on