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Gary Ward Senior Member Relationship Executive The Energy Consortium (TEC). Flexible energy buying in support of the impact of Energy Market Reform. The Energy Challenge – The four cornerstones of an effective strategy .
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Gary WardSenior Member Relationship ExecutiveThe Energy Consortium (TEC).Flexible energy buying in support of the impact of Energy Market Reform
The Energy Challenge – The four cornerstones of an effective strategy. • Buy at the right price, in the right way and through an appropriate intermediary. • Only pay for what you use – check your bills. • Only use what you have to – this includes consideration of investment which will improve energy efficiency. Cheapest unit is 0p/kWh – the one you don’t use. • Report, report, report. Controlling spiralling energy costs and managing energy demand is as much down to changing behaviour but those who consume the energy need to know how much their activity influences overall cost.
But at the right price. Easy? • Over 70% of volume purchased in the industrial and commercial markets is on other than fixed price/fixed term contracts. • Energy is a very volatile commodity, so would why buy it on a “1 in 250” day? • Fixed term prices are also no longer genuinely fixed, unless you are prepared to pay a significant premium. • With the right strategy, and a controlled “corridor of certainty”, maximum costs can be set and managed with the aim to secure a better price through multiple purchases than a single transaction. • Being an active and flexible buyer gives the opportunity to pay what you want to, rather than what the seller demands. • It’s all about the strategy, but the aim is defence of budget. • Consider a mixed strategy – some very short term, some medium and perhaps some log term (day-ahead to 30 years?). • Don’t be afraid of the “R” word. RISK
Across a longer period – Summer 14 Power. £45 low to £56 High
Across a longer period.Winter 14 Gas. 74p/th high to 57 p/th low
Who’d have predicted this – but it’s good to have a strategy that allows you to benefit.
Flexible Procurement Potential benefits • A longer period to optimise purchasing. • Gives access to short term markets potentially removing any forward market premiums. • An opportunity to benefit from price falls in period once delivery commences, with lower supplier balancing fees if some is left to day-ahead. • No “take or pay” or volume risk fees as requirement can be adjusted as strategy and demand develops. • Potential to provide lower prices than if purchased for whole year in advance. Issues and risks • The final cost is not known – No absolute budget certainty, but is there on so called “fixed price” contracts? • The final price might not be set until days before the consumption period and might lead to different prices each month which creates a an extra administrative burden. • Non-commodity costs are applied on a pass-through basis, so no supplier premium needed to fix these charges.
Who to source through in a complex market. • So you think you need help? How wide ranging a service do you need? • TEC and other PBOs operate a transparent charging policy, which also covers the cost of procurement then management of the strategy and reporting. • Private sector Third Part Intermediaries (TPIs) do not, so there are concerns around “hidden charges”, and rightly so. • Responses to Cornwall Energy survey of businesses using energy TPIs showed that 32% thought the service was free while another 47% did not know what they were paying for the services delivered. • Understand what you want and get full clarity on how you’ll pay for it. • Levels of concern and distrust have increased to the extent that a whisper for regulation has become a roar. • OFGEM Consultation leading to code of practice – TEC and other PBOs participating in this process.
A typical TPI Communication In accordance with your procurement procedure, please find a summary of our services and an outline (via attachment) of our Company. Our services come at no direct cost to you as a customer due to the tender process. If you chose to accept our recommendations, the winning supplier pays us an acquisition or renewal fee as payment for securing your business. Our core company values are trust & transparency, with this in mind we will always recommend the supplier that offers the best value to our clients, we will remain completely impartial of the supply market and we will also offer full disclosure of our fees on any contracts that we arrange.
Having sorted out how to buy the commodity, what about the rest of the bill? • Presently, approximately 35-40% of your institutions bill is made up of regulated charges for the provision of distribution, transmission and metering and service costs, plus a whole lot more in the form of levies and taxes. • These are set according to a 7 year regulated formula, but can change significantly in their application from year to year. • Fixed term prices are also no longer genuinely fixed, unless you are prepared to pay a significant premium as the suppliers themselves don’t know how the costs will pan out from one year (commencing April) to the next. • If the worst doesn’t happen the supplier just pockets the extra margin. • So what are the risks around these charges? • To add to this, there are new levies being introduced up to 2020 which will change the mix to (possibly) 60% non-commodity, 40% commodity.
Generation margins set to tighten rapidly as coal and nuclear plant retired. The UK is fast approaching a supply slump by the middle of the decade, which is set to get worse beyond 2020 as nuclear closes. The Government hopes that energy efficiency measures will reduce the impact Source: National Grid, DECC, Neta Reports – analysis Utilyx Research
Electricity – it’s a domestic thing Electricity remains UK-centric, but what are the drivers? Maintaining the mix versus low carbon. LCPD closing as hours run out (Didcot) due to cheap coal and low carbon prices. Margins are getting tighter. Is there a race to keep the lights on? Gas as the marginal fuel – but for how long? What to do when the wind doesn’t blow – Capacity from gas. Nuclear fleet is ageing but seeming never closes down. But coal and gas remain the main fuels so as with gas, Geo-political events (Black Swans) have an impact too. Levy support for new renewables is getting ever larger (£2.46 Bn to £7.6 Bn), and EMR takes it to a whole new level.
Shaping Agendas in HE The sector is well aware of the challenges on carbon. UK has targeted to achieve 80% carbon reduction by 2050. The question is, can HE deliver a growing estate against these demanding carbon targets in an environment where delivered energy prices are set to double by 2020? Can institutes tackle this alone or will aggregation and leverage of the sector allow greater opportunity to deliver against demanding cost and carbon targets?
The need for change: Electricity Market Reform The carbon price floor aims to underpin and top up the price of carbon in the EU emissions trading scheme making low carbon investments more attractive To remunerate capacity providers, based on their availability, allowing for investment in flexible plant Long term feed-in tariff Contract for Difference (CfD) to provide stable financial incentives to invest in all forms of low carbon generation FOUR CENTRAL POLICY INSTRUMENTS PROPOSED IN DECEMEBER 2010 WILL TRANSFORM THE UK ELECTRICITY MARKET FROM AUTUMN 2013. A regulated limit on CO2 emissions allowed from new (or life extended) power stations. 1 1 1 1
A Reminder of the start and end – but “The Journey” means an additional £10 million of cost £10 million additional cost
So commodity remains volatile – but it’s about mitigating the growing part of the bill. What can we do about rising non-commodity charges driven by new levies and regulation? Simply use less. Self generate – all regulated charges are avoided if you do not import from (or export to) the grid. Protect budget on a longer term basis – buy long term for a proportion of usage (30%) as part of a strategy. Think about managing when you use as well as how much – DUoS charges are time related, but this requires behavioural change as well as some self generation. Choose renewable – this could make you recipient of levy support rather than a payer. Domestic will pay as well – estimates of impact vary from an increase of £95 per year (DECC) to an additional £640 (Which).
TEC Solution 1 - Power Purchase Agreements (PPAs) AN ALTERNATIVE WAY TO BUY ELECTRICITY • It is a contract between an electricity generator and a buyer (or group). • The buyer agrees to purchase the electricity generated at an agreed price • They are longer term arrangements – 7-25 years • The electricity could be generated anywhere in the UK, rather than at a buyer’s site. • It sits alongside the buyer’s existing energy supply contract (TEC Flexible is already enabled to receive PPA power). BENEFITS TO THE BUYER • It provides longer term electricity price certainty which supports budgets. • The price may be at a discount or small premium to expected future wholesale prices, which could still rise further. • It forms one part of a buyer’s energy procurement strategy and fits with other hedging strategies – target may be to source c25% of portfolio. • It demonstrates significant support for new small scale, low carbon generation in the UK. • Aggregation is key as there needs to be a match between purchased volume and shape.
TEC Solution 2 - Energy Performance Contracts (EPC) Answering the conundrum: • Investment in new built estate versus replace ageing energy infrastructure. • Expensive consultancy studies which often end up never being implemented. • Access to investment in energy plant to drive efficiency and reduce carbon. • Investment grade finance reflecting the attraction of the sector. • Recovering investment through savings in a managed and measurable way. • The silver lining in price increase – investment paybacks are quicker. A solution from TEC: • No up front feasibility study costs. Only pay if project happens, and then from investment “pot” with fees capped at maximum 4% of project value. • Full OJEU enabled competition for projects from a wide range of providers. • Full technical capability to evaluate best bids to determine who wins. • Access to funding channels, either complete or part, for projects from £50k to £10 million. • Management of projects for funding lifetime to achieve maximum leverage. • On-going measurement by industry experts to ensure investment recouped and full saving to end user at the earliest possible date.
