Energy procurement

Report: 13
Date: 22 April 2004
By: Commissioner

Summary

This report sets out the proposal to enter into a contract with gas and electricity suppliers to forward purchase energy directly from the market on behalf of the MPA with consequent tender strategy.

A. Recommendation

Members are asked to approve:

1. The tendering for a forward energy purchasing contract for the supply of gas and electricity across the MPA estate, commencing 1 January 2005 with an effective date of 1 October 2005. Contract to be for a 5 year duration with option to extend for a further 2 years by mutual agreement.
2. The tendering of interim 12 month contracts for the supply of electricity and gas.
3. To award the electricity contracts on the basis of renewable energy supply, subject only to it being available and affordable within the anticipated budget.
4. The continued delegation of committal authority to the Clerk to the MPA.
5. Inclusion of streamlined invoice processing and payment procedures by adopting an automated upload of billing information and direct debit payment procedures, subject only to the completion of a successful trial.

B. Supporting information

Background

1. The current MPA gas and electricity supply contracts were awarded for a two-year contract period, with an option of a 12 month extension, commencing 1 October 2001. The gas contract was let to Elf Business Energy. There were two electricity contracts, the first for renewable (Green) energy (3% of our total consumption) and the second for conventionally generated (Brown) electricity. Both were awarded to London Energy.

2. All three contracts were extended by 12 months with a common termination date of the 30 September 2004. The extension to the electricity contracts provided for all buildings being supplied from renewable energy sources.

3. The Mayor’s Energy Strategy requests that the MPA seeks to power all its Head Office Buildings from renewable energy by 2003 and all satellite buildings by 2005. This was achieved, and indeed exceeded, within the current contract. The continuation of the renewable energy supply is, however, dependent on the premium cost associated with renewable electricity and its availability.

4. The award procedures for energy contracts need to adapt to reflect the extreme volatility of the market and the resources necessary to evaluate and recommend acceptance within a very short period (often hours). To achieve best market rates there must be an ability to accept offers at time of best value rather than at contract termination.

5. Conventional tendering arrangements via OJEU open procedures do not allow for this with the result that the award of tender is based on the spot market prices only a few days before the tender period ends - we are then tied to these for the duration of the contract.

6. The proposal is to develop a long-term partnership with both a gas and electricity supplier to purchase energy directly from the market on behalf of the MPA. The suggested term is 5 years with the option to extend for a further two years by mutual consent.

7. Each supplier would be required to demonstrate they have the appropriate supply license, track record and ability to provide the required level of service in their field. Their role would be to provide an Energy Purchasing Service that would include:

1. advising on the best time to purchase
2. a forward trading / purchasing facility
3. provision of an invoicing service

8. Gas and electricity is traded on forward markets. The MPA would purchase in advance (typically between 3 and 12 months) to cover future requirements for periods up to one year, dependent on trends in the market.

9. The retained independent consultants would be advising throughout the decision making process.

10. The provision of the Energy Purchasing Service would be based on a fixed supplier margin, tendered through OJEU. Tenders would only be sought for the services that the supplier provides e.g. invoicing and energy procurement, representing the competitive element, not for the cost of gas and electricity which would be purchased at market rates.

11. This method of purchasing provides a procurement window that is open for the duration of the contract and means that the MPA can be proactive in minimizing the effects of forecast price increases or maximizing financial savings.

12. The proposal for the Energy Purchasing Service cannot be implemented by 1 Oct 2004, due to the tendering period and the time needed for forward purchasing.

13. It is suggested therefore that interim gas and electricity contracts be tendered, using the standard procurement method, for a 12-month interim contract period 1 Oct 2004 to 30 Sept 2005.

14. The Energy Purchasing Service would be tendered in parallel with the objective being for it to be in place by 1 Jan 2005 to enable the forward purchase of energy from 1 Oct 2005.

C. Race and Equality impact

There are no equality or diversity implications.

D. Financial implications

The estimated annual contract values for the 2004/5 tenders are approximately £2.5m and approximately £8.3m for gas and electricity respectively.

E. Background papers

• MPA Utility Procurement Strategy 2003-04

F. Contact details

Report author: Alan Croney, Director of Property Services  MPS.

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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