Plugging the gap, by Susie Owen

30 Jul 09
SUSIE OWEN: The Office of Government Commerce has launched best practice guides to help public bodies keep their energy costs down

The Office of Government Commerce has launched best practice guides to help public bodies keep their energy costs down

Energy is a significant cost for the public sector, amounting to an estimated £3.8bn a year. As the market can be extremely volatile, prices can vary significantly on a daily basis, making it difficult to manage budgets and control costs. However, there are real opportunities for savings.

Last month, the Government’s Operational Efficiency Programme announced possible annual savings of £320m by 2012. This was through the adoption of recommendations made by the Pan-Government Energy Project, sponsored and chaired by the Ministry of Defence. Last financial year, around £115m was saved by the public sector on energy spend as a result of collaborative procurement measures.

A great deal of work has been done in determining best practice for buying energy to mitigate the risks. Last month, the Office of Government Commerce launched two new energy buying guides through the project – Energy buying: the effective way to manage risk, and Energy buying: working together for better results.

The Pan-Government Energy Project focuses on five work-streams: aggregation; buying and risk management; liquid fuels; supply chain development and sustainability.
The project is also investigating creating power purchase agreements, as set out in the recently published Renewable Energy Strategy, part of the UK low carbon transition plan white paper. These agreements would be made directly with generators for a percentage of the electricity volumes consumed by the public sector.

The best practice criteria developed by the project ensures that all recommended solutions will include access to future options, such as buying directly from generators. This could reduce long-term price risk and increase security of supply, including the use of new renewable sources of energy. Furthermore, individual agreements will involve different bases. For example, some offer 10% of electricity to be supplied from renewable sources, while others offer a certain amount of good quality combined heat and power.

To help reduce energy costs through collaboration, public sector buyers can find aggregated, flexible and risk- managed contracts through a range of central purchasing bodies. CPBs typically combine the requirements of many customers to create aggregated portfolios. These are large enough to allow specialist resources to be dedicated to buying energy. The CPBs can access contract options that would be unavailable to individual organisations through the aggregation of volumes.

As a result, there are more attractive portfolios for suppliers, better prices are achieved and process times are reduced.This allows energy and procurement professionals within organisations to focus on other issues, such as energy management.

Public sector bodies can make savings by aggregating their volumes into larger portfolios, such as those managed by CPBs. Furthermore, purchasing flexibly on the wholesale market allows the removal of certain costs.

Finally, by using a CPB that adopts a robust risk management strategy, local authorities can avoid fixing prices at the highest points in the market. Between 2005 and 2008, public sector organisations that were operating flexible frameworks produced an average of 5% cost reductions against the average wholesale market price.

There are also further benefits in using this type of framework through a CPB. For example, CPBs have teams with skills that enable them to operate in complex energy markets. They also have resources dedicated to energy, allowing them to develop knowledge of industry procedures and contacts.

Another benefit is that CPB frameworks work with large volumes, which mean a variety of risk management options can be offered to customers. CPBs also actively lobby energy regulators and consumers.

Through aggregating volumes, they have a greater degree of leverage with suppliers. They can also involve other services, including market intelligence, bill validation, site surveys and energy management.

Susie Owen is category manager for energy, at the Office of Government Commerce

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