Agenda item

The Committee considered the undernoted report:

            “1.0   Purpose

1.1     The purpose of this report is to propose a new procurement strategy for gas and electricity to deliver value for money, efficiency savings and support a cost avoidance strategy (minimise future increases in energy costs) on the understanding of accepting a risk-based approach to energy procurement. This proposal is specific to gas and electricity procurement only and does not include oil.

            2.0     Background

2.1     The SP&R reports of June and April 2012 identified delivering further energy savings across the Council as a key priority for the 2014-15 and 2015-16 efficiency programmes. In the financial year 2012-13 the Council spent £3.54m on electricity and gas: £1.96m and £1.58m respectively. Our spend on energy has increased by £600k between 2010/11 and 2012/13 which represents a 21% increase. In terms of the domestic energy market this market is unstable and future costs are likely to fluctuate. For information, our top 15 sites for both electricity and gas consumption are listed in Appendix 1.

2.2     The Council’s energy consumption will be affected by any future acquisition and disposal of assets. A reduction in energy consumption can only be achieved through energy efficiency projects and better in-house management of energy consumption, for example the current roof survey of Council buildings to examine their suitability for solar power. This report focuses on managing the price we pay for energy regardless of any changes to our asset portfolio and energy efficiency.

            3.0     Outline of approach

3.1     Currently the Council procures energy via a fixed price tender through participation in a Northern Ireland Local Authority regional energy framework. Using this approach the tender prices are wholly dependent on the relatively small supplier margin (around 5%).

3.2     Many large organisations are now using energy management companies to manage their energy costs,specifically their wholesale energy costs. Typically this involves agreeing and setting an energy budget for a 1-5 year period which is managed in a flexible way by the company. This means the company would use hedging techniques (i.e. trades to protect against adverse price movements) to ensure that the price we pay is below the market price. By way of example, Ireland’s National Procurement Service uses this approach for 98% of the public estate and saved €21m in 2011-12 (13% of their annual energy cost).

3.3     The potential for savings using this procurement approach, i.e. by influencing the market price, is much higher than our current procurement approach where any savings would be only on the supplier profit margin.

3.4     The price we pay might fluctuate but should not exceed the expenditure level set by us as part of our budget estimating process.  The estimates for 2013/14 have been set and agreed at £3.6m and excluding inflationary increases this price will not be exceeded under this proposed arrangement for 2014/15.  The level we set will be monitored and reported by the company appointed on a daily basis as part of the contract. We can also choose to fix a percentage of our portfolio and have a flexible approach to the remainder.  If this managed service approach is adopted the majority of the expected efficiency savings will be realised from year 2 onwards. A further benefit is that we will definitively know what the projected level of efficiency savings will be for year 2 and 3 almost immediately after commencing the contract in year one allowing us to set more accurate budget expenditure estimates for the subsequent years.

3.5     Other services usually provided by these companies include an ongoing service to validate energy invoices to ensure the accuracy of our future energy bills and also a historic cost audit where they will review previous bills for any errors.

            4.0     Potential efficiency savings 

4.1     Based on 2012-13 volumes and prices, the Council could have saved £379k on its total energy bill (£227k on electricity and £153k on gas). These figures are based on using a fully flexible approach and using market prices provided by a supplier in the course of this research. Depending on the fixed/flexible approach taken the savings will vary. Please see Appendix 2 for graphs illustrating the potential savings.

4.2     There are costs associated with this service. Indicative costs provided to the Council in the course of researching this approach are approximately £70k per annum. It would be expected that costs received by suppliers through a tender or framework process would be lower.

4.3     Based on our costs incurred during 2012/13 if we had already been in the managed service arrangement, the potential savings for the first year could have been between £81k and £309k depending on the approach to risk management we adopted involving either a part-flexible managed service or based on a fully flexible managed service.

4.4     As Members will be aware, our efficiency savings are increasing energy costs which is a trend that is predicted to continue over the coming years. It also highlights the need for us as an organisation to measured by a reduction in our budgets (cash savings). The 2013-14 corporate total for our combined gas, electricity and CHP budget is £3.6m and departments have been advised to allow for an inflationary increase of 5% as indicated in the High Level Rates Guidance Report for 2014-15. The need to adopt a more proactive approach to energy procurement is supported by the recent trend of source more innovative procurement mechanisms to maximise the opportunities to reduce our energy expenditure costs going forward.

4.5     It is envisaged that this approach should also lead to in-year savings which could be earmarked to fund or hedge future Council energy costs to further reduce the budgets of future years.

            5.0     Outline of options

6.1     The Council currently has two procurement options to consider:

         Option 1: Continue with current status quo.

Option 2: Engage an energy management company to provide a managed service solution to energy procurement.

         Option 2  as it is presented above can take two forms:

·         part-flexible/part-fixed approach which allows us to set a fixed cost to a percentage of our portfolio and have a flexible approach to the remainder; or

·         fully flexible portfolio approach.

6.2     The main advantage of using Option 1 is certainty of cost regardless of global and domestic market conditions, while the main advantages of using Option 2 is to benefit from any market fluctuations, both increases and decreases in price.  A summary of the associated advantages and disadvantages of each of these options in set out in Appendix 3.

6.3     A decision on whether to use a part-flexible or fully flexible portfolio management approach does not need to be made until later on in the process when the appointed supplier would advise us by facilitating a risk management workshop with relevant senior officers. The Council can also elect not to proceed with the process at this stage and simply enter a fixed price contract as is the current arrangement.

            7.0     Resource Implications

   7.1     There will be no additional resource human resource implications required as this process can be managed within existing resources and the new procurement approach if approved would reduce the number of energy-related procurement exercise carried out by the Council. Option 2 if approved can also present more scope to realise efficiency savings and cost avoidance. 

            8.0     Equality and Good Relations Implications

8.1     None

            9.0     Recommendations

9.1     The Committee is asked to:

Consider the contents of this report and to give approval to explore Option 2 using the managed service approach further in the context of reviewing the scope for realising efficiencies as part of the rate setting process.

If approval is given to progress Option 2 Committee is asked to give authority to commence a tender process to appoint an energy management supplier and to delegate authority to the Director of Property and Projects to oversee this process and appointment.”

            The Committee adopted the recommendations.