3.79 In some projects the Authority purchases energy directly or through a public sector buying organisation. Authorities should always consider the use of the public sector buying organisations, such as Buying Solutions (which assumed the functions of the NHS Purchasing and Supply Agency (PASA) in April 2010). By exception an Authority may wish to consider purchasing its energy via the PFI provider. In these instances, the Authority should ensure that a commercial justification for this has been provided and that full transparency of prices and charging structures is provided in order to benchmark performance and provide options for alternative providers, thereby ensuring smart energy procurement for the life of the PFI contract.
3.80 The drafting related to energy in PFI contracts can be complex and authorities should have a clear understanding of the existing contract before making any changes15.
3.81 The BHR Trust procures its electricity and gas through Buying Solutions. As a result, the Trust's energy contracts are aligned with a large number of other organisations, thus providing Buying Solutions with significant buying power. This approach provides the buyer with considerable bargaining power when tendering and appointing an energy supply company. Energy supply companies pay particular focus to organisations that are purchasing significant volume, particularly in preference to a single organisation who would have minimal negotiating power.
3.82 Importantly, large buyers such as Buying Solutions have access to good quality energy market information and employ specialist energy market analysts in order to identify the opportunities to purchase tranches of energy throughout the contract period.
3.83 According to the Cabinet Office, Buying Solutions is the single biggest buyer of energy in the UK16. As such, their buying power is greater than that of any other procuring body.
3.84 With respect to electricity, ERG independently compared the wholesale prices that Buying Solutions achieved against market prices in the period from April 2009 to February 2011. While monthly performance was variable given market volatility, ERG found that Buying Solutions outperformed the benchmark price from by 18% (for April starts), 3% (for October locked strategy) and 21% (for the variable strategy on average)17.
3.85 With respect to gas, ERG independently compared the wholesale prices that Buying Solutions achieved against market prices in the period from April 2009 to February 2011. While monthly performance was variable given market volatility, ERG found that Buying Solutions outperformed the benchmark price from by 24% (for April), 11% (for October gas under the locked strategy) and 27% (for the purchase within period (PWP) strategy based on a flat consumption profile).
3.86 Risk management strategies for energy differ. In the main, buying groups offer two strategies, namely purchase in advance (locked) and purchase within period (flexible). In the former, buying occurs before the supply start date and an average locked price is calculated yielding a fixed-term, fixed price deal. In the latter, buying occurs both before the supply start date and during the supply period. An indicative reference price is provided at the start of the contract and price true-ups occur at periodic intervals.
3.87 The BHR Trust has entered into a flexible energy purchase contract, where a buying mechanism allows the purchase of tranches of energy throughout the contract period. Flexible energy purchasing mechanisms are regarded as the preferred method for organisations who want to spread the risk of energy purchasing. Flexible energy purchasing is a complex buying process and is typically available to large energy users or buying consortia (such as Buying Solutions).
3.88 Flexible energy purchasing has been developed as a response to the ever increasing volatility of the energy markets, where the buyer is able to make a number of purchases throughout the contract period, when it is deemed that the market conditions are favourable. This type of arrangement being in contrast and preferable to purchasing a fixed volume at a particular point in the market. It is generally acknowledged that a flexible purchasing mechanism allows the buyer to be responsive to changes in the energy market.
3.89 The terms and conditions of the energy supply contract need to be considered in the context of any significant energy savings. For example, the PASA standard terms and conditions of supply contract for large gas supplies includes a minimum consumption clause, stating that prior written consent is required if the actual consumption is to fall below 80% of the nominated consumption in any contract year. This may influence the willingness of parties to embark on ambitious energy efficiency programmes that would save more than 20%, and may require the sponsorship of Trust senior management and/or Project Co to overcome perceived barriers to energy efficiency.
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15 Authorities should have a clear understanding of where the contractual incentives lie for investment in energy efficiency retrofits and/or changes to working practices. Where consumption risk is for the private sector, the contract may need to be amended to reflect the benefit of any energy efficiency investments paid for by the Authority (either funded directly or via financed increased borrowing by the PFI provider).
16 The Buying Solutions supply for central government is 2x bigger than Tesco's and the overall portfolio (incl. health) is 5x bigger.
17 According to ERG, the significant variation between the April and October locked performance is not typical and was a result of the extreme volatility of prices in 2008 which affected prices for April to September 2009.