Perhaps a plaintive violin should have accompanied the announcement by npower in January of yet more energy price rises. Blaming rises in wholesale costs over the previous year of 66% for electricity and 60% for gas, business manager Giuseppe di Vita said: “Today’s decision was not an easy one. Sadly, higher energy prices are a fact of life.”
The price hikes followed sharp increases in international oil prices, driven by tensions in the Middle East, reduced stocks in older fields, including the North Sea, and rising demand from developing economies such as India and China.
Rising fuel costs
These rises are of particular concern for large energy consumers like local councils. Research from the Local Government Association shows councils face a combined energy cost of£1.76bn this year, a rise of£313m in three years, during which period gas prices rose by 31%, electricity by 28% and petrol and diesel by 21%. With a tight financial settlement, the last thing councils need is an open-ended hole in their budget caused by fuel costs.
Authorities can respond by using less energy cutting usage or being more energy efficient and make better use of their purchasing power. Which is the most effective solution, and should they be doing both?
Importance of investment
Energy efficiency looks like a win/win situation: saving money while saving the planet. But it often needs upfront investment, which may not be affordable when savings are needed this year. Some officers working at the sharp end therefore see improved procurement as a quicker solution.
Steve Holland was an evangelist for better purchasing as programme director at the Regional Centres of Excellence (RCOE), which he left in March. He complains that the public sector has failed to save millions of pounds because it has not aggregated its energy spending.
Just as one might get a discount for buying onions in bulk from a greengrocer, and save even more by buying when onions are plentiful, so councils could use these simple approaches when buying energy. But, to Mr Holland’s frustration, they do not.
“The energy market across the whole public sector is£3.5bn a year and from a procurement point of view it is a global market dominated by perhaps 12 large organisations,” he says. “You don’t need a degree in economics to work out that if you are buying in that market you need to aggregate demand so that you can be a powerful buyer.”
Six companies supply some 80% of the UK’s gas and electricity, and they sell at cheaper prices to those customers large enough to buy at wholesale rates.
Mr Holland says: “The public sector has opportunities to aggregate and get cheaper prices, but in general it does not.”
This is a combination of tradition and of councils liking to control their own tendering process for supplies. Even worse, councils have usually bought energy by issuing tenders for one or two years and taking the best offer made on whatever day they happened to buy. They could instead work smarter by buying as they need supplies, he says, taking advantage of market fluctuations.
“To smooth out the volatility in the market, where prices change daily, you need to buy at different points so that you are not hit hard by price fluctuations,” Mr Holland points out.
Buying consortiums that procure energy for councils and other bodies are quite common, but they have normally bought for individual customers, not an aggregated demand, and have done so on one day. “If you buy everything on one day you might be lucky, but you might not,” says Mr Holland.
The RCOE publication How to be Successful in Energy Procurement urges councils to use a specialist purchasing consortium rather than try to buy energy themselves.
One of the largest specialised procurement bodies is Kent CC’s Laser, which buys energy worth about£250m a year for 70 public bodies, mostly councils in south England. Energy manager Andy Morgan says it is moving to the approach advocated by Mr Holland. “Clients have the choice of staying with fixed terms or buying flexibly, and in general they are moving to flexible,” he says.
This means Laser will buy on several days through the year, taking advantage of competition between suppliers, which he says can make a 6-7% difference to the market.
Laser customer Ed Parry, energy manager at Hammersmith & Fulham LBC, spends about£5.5m on gas and electricity and is switching to the flexible purchasing method. The council is also attempting to save money through renewables, but measures such as wind turbines do not generate much energy in a densely populated urban area.
“We have introduced some photovoltaics to the town hall and housing is the next step,” Mr Parry says. “This has only just started but they are generating a 15-16kW hourly rate. We’re looking at solar power, but I can’t see renewables will be a major thing. This is a densely populated area and there is a limit to what we can put up.”
There is similar scepticism at Blyth Valley BC. The council publishes an annual report on its energy use, developed to help councillors grasp energy information.
Building services manager Barry Coates says: “We buy through the North East Purchasing Organisation and now use flexible procurement by buying continuously rather than on one day.
“Energy efficiency measures include ‘switch off’ campaigns and using combined heat and power for council buildings, and some solar panels on houses, but otherwise we do not use renewables as we don’t think it would be economic.”
However, councils cannot simply ignore renewables on cost grounds because both the government and the public expect to see progress on these fronts. They also, of course, expect to see it at minimal cost.
Andrew Bainbridge, chief executive of the Major Energy Users Council, notes: “Councils are really suffering the pain and the problem is that the government has decided that this will be the most carbon-efficient economy in the world, but has not provided the resources.”
Mr Bainbridge says that, far from slacking, councils “have always been rather good at energy efficiency, but they are now being pushed even further at a time when money is tight and you have to invest before you see any benefits. They have long ago picked all the low-hanging fruit.”
Fortunately, there is more ‘fruit’ around to be picked. Mr Holland says: “The public sector needs to look at why it uses so much energy. Perhaps half of it could be saved by opening buildings at different times, using energy efficiently and by having one bill rather than hundreds of them for each building and the huge administrative process that goes with that.”
Free energy advice
In tough financial times a freebie is always welcome, and the Carbon Trust will tell councils how to cut their carbon footprint for nothing.
Richard Rugg, head of public sector at the trust, dismisses arguments that investing in reducing energy use is too long term for councils’ budgetary cycles. “I would argue quite strongly that the payback period for technology is quite worthwhile for even the most conservative of budget holders,” he says. “It is the role of carbon reduction teams to make the business case clear to finance departments that good resource management will help to release funds for use elsewhere in the organisation.”
He says many measures are “low or no cost”. These could start with something as simple as campaigns for switching off lighting.
“We are helping local authorities to systematically understand the impact on climate change of their work,” he says. “Some changes needed are technical, some are policy matters, but it’s important you have the right people responsible for carbon and that responsibility for resource management is embedded in job descriptions, appraisals and key performance indicators.”
Street lighting is a perennial problem. Mr Rugg says: “Some councils have started dimming street lights, which has created a stir, but having consulted you need to be brave. Others are relamping or making sure their lights consume only enough power to give the required level of lighting.”
Other councils are developing wider strategies. Mr Rugg says Bristol, Leeds and Manchester city councils are examples of those working on ‘carbon cities’ programmes with the trust.
“Councils have an opportunity to both do the right thing and save money,” he says.
With annual emissions of around 63,000 tonnes of carbon dioxide, Oxfordshire CC joined the Carbon Trust’s local authority carbon management programme in 2007 with a target of cutting carbon emissions by 18% by 2011-12 from their 2005-06 level.
The trust has advised on property, street lighting, fuel for work travel, and landfill waste.
Energy use in property was by far the largest of these categories, accounting for about 33% of emissions and 60% of costs.
It was reduced through simple measures such as real-time energy displays, installing cavity wall insulation where needed and using time switches to turn off equipment such as photocopiers and vending machines. These measures alone yielded a 6% fall in emissions.