london procurement strategy board september 2013

The London Energy Project is a public sector shared service, which enables its 35 Participating Authorities to achieve

efficiencies through smarter energy buying, improved process and carbon reduction.

London Procurement Strategy Board

September 2013

Amanda de Swarte

Head of Improvement and Efficiency

T: 020 8489 1102

E: [email protected]

Smarter buying. Less carbon. A better deal.

Energy and Carbon Management Context

Energy remains a significant non-discretionary expenditure for authorities

c. £350m p.a. for London

40% of cost is regulated by government. The Big 6 energy suppliers retain strong control over

supply costs and unlocking efficiencies. CPBs have vested interests

Carbon reporting and regulatory compliance remains an issue, irrespective of CRC Phase 2

participation

Normal procurement and supply management tactics still don’t apply for energy!

AND significant energy market changes are expected

Challenge now: continually review the effectiveness of past decisions, current strategy and

tactics and assess further opportunities for efficiency and value for money up and down the

supply chain

supply contracts, technologies, buying strategies, management systems or business

processes

understand the authority’s risk exposure and implement optimum strategies for energy

procurement, back-office management and compliance


Value for Money: energy supplies

Annual Achieved Prices Benchmark – Laser/GPS

First independent benchmark assessment of authority

energy supply contract performance, specifically

commodity price: Laser and GPS

Procurement strategy validation - aggregated,

flexible, risk managed energy contracts (Flex

contracts) deliver

Evidence that VFM was delivered consistently over a

period of time, a 3 year rolling review period [savings

are prices lower than market average]

visibility of each contract year

Robust indicator – competitive pricing, efficacy of risk

management strategies, quality of the buying

organisation’s purchasing performance, and, to a

certain extent, its future performance

October 2012

Available to LEP Participating Authorities



New Assessment – Quantifying Risk

Risk Exposure - New LEP

energy commodity assessment

quantifies probability and

additional cost associated with

spot buying, i.e. prices that are

higher than those typically

expected with a risk managed

approach

The rolling assessment offers a

prudential approach to financial

planning and moves away from

previous description of risk – a

best/worst case scenario, a 1 in

250 (trading days) chance of

buying on the best/worst day.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Electricity Consumption per annum

Supplier cost andmargin

Cost regulated bygovernment

Commodity (rawenergy) cost

Small Electricity Supplies

Impact of controllable and uncontrollable costs

Electricity Consumption

per annum 100kWh 1000kWh 10000kWh 25000kWh 40000kWh 100000kWh

Commodity (raw energy) cost £6 £62 £657 £1,641 £2,628 £6,556

Cost regulated by government £24 £59 £378 £911 £1,439 £3,583

Supplier cost and margin £75 £75 £75 £75 £75 £75

Total Annual Supply Cost £105 £196 £1,110 £2,627 £4,142 £10,214


LEP Benchmarks and Controllable Costs

Shaping procurement decisions

Electricity volume used kWh 100 1,000 10,000 25,000 40,000 100,000

Total Annual Supply Cost

£105 £196 £1,110 £2,627 £4,142 £10,214

Potential Benefit of Flex Procurement -£0.21 -£2.09 -£20.90 -£52.25 -£83.60 -£209.00

Potential Risk of Fixed Price Contracts

£0.42 £4.19 £41.90 £104.75 £167.60 £419.00

Findings

3. For sites that consume less than 10,000kWh and to some extent, supply points that consume less than 1,000kWh

the most appropriate contract is a point somewhere in between a Fully Flexible contract and a Fixed term Fixed

Price contract. This is because at the 10,000 kWh threshold the risk associated with FTFP contracts is significant.

For sites that consume more than 25,000kWh and, to some extent, supply points that consume more than

10,000kWh the most appropriate contract is a Flexible contract. This is because at the 10,000 kWh threshold the risk

associated with FTFP contracts is significant and at the 25,000 kWh threshold the potential benefit of Flex contracts is

considerable.


Energy Used per

Supply Point kWh

Annual Invoice

Value (£)

Supplier Debt

Premium p.a. 0.6%

(£)

Benefit of Quarterly

Invoicing(£)

Annual Account

Payment Saving (£)

100 105 0.63 80 79.37

1,000 196 1.18 80 78.82

10,000 1,110 6.66 80 73.34

25,000 2,627 15.76 80 64.24

40,000 4,142 24.85 80 55.15

100,000 10,214 61.28 80 18.72

Findings

2. The cost of invoice administration and payment is an important aspect in terms of achieving

overall value for money. Where supplies use less than 40,000kWh or ~£4,000 p.a., a savings

opportunity exists for processing invoices quarterly rather than on a monthly basis.

Back Office Costs – contract considerations


LB Somewhere – (No social housing sites)

Annual

Metered

Consumption

(kWh)

Contract

Type

Number of

Non Half

Hourly

meters

Total Annual

Consumption

kWh

Annual Total

Delivered Contract

Price p.a. (excl

buying

organisation fee)

Flex Benefits

Realised (+)

Missed (-)

Consumption*.209

100

Avoided Risk (+)

Risk Exposure (-

)

Consumption*.419

100

Combined

Flex-Risk

Benefit

Realised (+)

Missed (-)

Combined

Flex-Risk

Benefit

Realised (+)

Missed (-)

Buying

Organisation

Fee £/meter

p.a.

Total Buying

Organisation

Fee per

contract p.a.

(=L*E)

Total Buying

Organisation

Fee p.a.

Relative Cost of

Buying

Organisation

Total

Contract

Benefit

Realised (+)

Missed (-)

Sub 10,000 FTFP 1,343 2,737,000 719,649.00£ 5,720-£ 11,468-£ 17,188-£ 12.00£ 16,116£

Over 10,000Flex

PIA/Locked257 6,771,000 367,626.00£ 14,151£ 28,370£ 42,522£ 24.00£ 6,168£

All metersAll Flex

PIA/Locked1,600 9,508,000 1,087,275.00£ 19,872£ 39,839£ 59,710£ 59,710£ 24.00£ 38,400£ 38,400£ 19,200£ 40,510£

Contract Option

All meters are on a

Fixed Term Fixed Price

contract

All meters All FTFP 1,600 9,508,000 1,087,275.00£ 19,200£ -£ 59,710-£

Meters consuming less

than 10,000kWh are on

a FTFP contract. Meters

consuming more than

10,000kWh are on

Flexible PIA/Locked

contract

25,334£ 22,284£ 3,084£ 22,250£

19,872-£ 39,839-£ 59,710-£ 59,710-£ 12.00£ 19,200£

All meters are on a

Flexible PIA/Locked

contract



Summary traffic light recommendations

Represent significant proportion

of supply points, particularly for

authorities with social housing

responsibilities

c. 45,000 small electricity supply

points in London with a value of

circa £40m p.a.

a contentious issue/source of

challenge from tenants and

leaseholders

Have not been prioritised by

authorities within improvement

and energy efficiency plans – Too

difficult. Too costly! Summarised as a traffic light assessment – the contractual

arrangements that represent good value for money and meet

authority business requirements


Value for Money: work in progress

Strategic supplier management

Now preparing the annual update on the Laser/GPS Annual Achieved Prices assessment and

market risk assessment – due November 2013 to inform authority business planning cycle

Developing new contract and market segment analysis to aid further value-for-money and

performance measurement

Next segment of energy portfolio under assessment: Unmetered supplies (street lighting),

large single contract expenditure, limited oversight and controls

Ongoing supplier management programme, customer surveys, improvement workshops

and strategic review meetings with directors in supply businesses

Savings and cost avoidance through the lifetime of a supply contract, e.g. change to a supplier’s

invoicing process delivered 20% saving

Energy management software/bureau services improvement project: authority-led

initiative to get fit-for-purpose back-office software/services to enable authorities to

implement efficient operations

Provides a clear steer and therefore achieves greater supplier focus by consolidating

authority business requirements


Protecting Authority Interests

Cyclo controls

Ofgem consultation and call for evidence

Made authorities aware of the risk of proceeding according to supplier view...

Holding supplier to account

Third Party Intermediary Consultation

Impact on authorities (current approaches to schools, misleading claims, etc.)

Potential impact on cost for industry “code of practice”

Impacts from Energy Market Reform and decarbonisation of generation

CRC costs and administrative burdens – seeking fairness in reduction to LA settlements

from DFE and DCLG, to compensate Treasury for loss of revenue


Carbon Compliance: joint procurement

CRC internal audit service and assurance 2012 & 2013

CRC EES: complex regulatory framework to drive UK energy efficiency

Technical /legal interpretation and efficient operations required to comply with regulations and conduct

correct carbon allowance purchasing (c. £500k)

Achieving VFM:

April 2012 LEP-managed procurement /delivery of technical specialist regulatory compliance services for

35 Public Authorities in London and the Regions – 2(+) yr single supplier framework

Joint procurement - better quality audits delivered at less than half the price individual authorities paid,

shared IPR arrangement, single client with guaranteed call-off from framework an attractive proposition

Contract management and audit scope – managed once on behalf of all, a strategic approach delivered

by technical experts delivering a better outcome

2012 and 2013 Audit programme successfully completed

Preparations to extend contract and 2014 CRC Phase 1 final audit – focus to minimise risks of

purchasing too many allowances (an unrecoverable cost)


Carbon compliance – Joint procurement

CRC internal audit service and assurance 2012 & 2013

2012 Audit overview and evaluation (2013 evaluation in progress)

Only 2 authorities found to be at high risk of non-compliance; remedial actions recommended in time to

purchase the correct number of allowances

CRC Regs amended after LEP’s challenge to DECC

Avoids significant allowance purchase costs for street lighting & social housing shared supplies ~ £12m

over 3 years

Additional efficiencies identified via the audit:

a greater proportion of off-contract energy supplies moved to corporate contracts

over-charging for energy supplies identified

over-reporting carbon and overspend on carbon allowances avoided

9/10 overall satisfaction score with the CRC audit service (31 authorities responded)

The LEP CRC service incl. tools & workshops rated extremely useful (75%) and useful (25%)

90% authorities using audit findings and recommendations as the basis for CRC compliance and

self-verification


Hillingdon

Harrow

Ealing

Brent

Hounslow

Barnet

Enfield

Haringey Waltham Forest

Richmond

Kingston

Wandsworth

Merton

Sutton Croydon

Bromley

Lewisham

Greenwich

Bexley

Redbridge

Havering

Barking & Dagenham Newham

Tower Hamlets

Camden

City

Contributing Authorities

London Energy Project 1st May 2013

LFB

Metropolitan Police

London-wide organisations

Regional Authorities

Worcestershire CC

Oxfordshire CC

Cardiff Council

Southampton City Council

Surrey County Council


LEP Continued Participation -2014-2016

35 authorities entered into a 2 year commitment in April 2012 to access services and support

from LEP on a cost-recovery only basis under collective governance

Seeking extension of that agreement for the financial years 2014/15 and 2015/16

requires a contribution of £7,750 for each of the financial years 2014/15 and 2015/16,

OR £7,750 (2014/15) and £4,950 (2015/16) if your authority is not a Phase 2 CRC participant

20% reduction in contributions

Please recommend continued participation to HoP, SLT, LEDNET colleagues

Contribution enables continued access to services and support (equivalent external

consultancy £45k p.a.) in three prioritised areas of energy and carbon management

Saving energy and controlling its cost

Efficient carbon compliance and energy management operations

Energy category management support and leadership

Covers strategic energy procurement, supplier relationship management, joint procurements,

value for money assessments, back office efficiency initiatives, annual CRC audits and

compliance activities


LEP Services and Support 2014-2016

Saving energy and controlling its cost – value for money, cost control, best practice procurement

1. Assess and enhance Pan-London energy

category strategy

Analyse and evaluate current, emerging and alternative procurement and contract arrangements (such as PPA,

energy/income generation, the development of a London specific portfolio,) recommend improvements

2. Statement of Requirements for Energy

Procurement Services providers

An independent evaluation process against a comprehensive procurement specification to provide authorities with

evidence that their energy buying organisation has the capability, experience and capacity to deliver effective price

risk management and value for money energy supply contracts consistently over a period of time

3. Strategic supplier management and

improvement programme

Coordinate and manage on behalf of authorities, a supplier management process that shapes markets to deliver

authority focused, quality services at reduced cost - buying organisations, utility suppliers and other providers

4. Small Electricity Supplies and other supplies

contract structures

To assess various contracting options and administration practice enabling authorities to reduce service provider

costs, avoid risk and deliver VFM.

5. Annual Achieved Price & Risk Assessment Conduct independent analysis, which enables authorities to establish whether their procurement approach and

their buying organisation delivers VFM energy prices against agreed benchmarks

6. Street Lighting VfM Guidance and inventory

administration/verification

To reduce the overall cost of street lighting supplies, through improved contracting and inventory

administration/invoice payment practice

7. Develop additional Value for Money

assessments for energy supplies

To analyse specific elements of energy expenditure (including regulated costs) and make recommendations which

enable authorities to exploit opportunities for cost savings and avoid risk

8. Template to enable authorities to

demonstrate Flex and other savings

Provide authorities with simple tools they can use to demonstrate the cost of energy price risk and the value of

benefits/savings of flexible contracts and other efficiencies, using LEP assessments at an individual authority level

9. Schools Energy Procurement VFM Guidance To explain in simple terms the benefits of using flexible procurement through local authority supply contracts

10. Energy budget forecasting tools To enable authorities to more accurately forecast required energy budgets, e.g. energy commodity and regulated

and other pass-through costs, which is increasingly important due to the financial impacts of decarbonisation


LEP Services and Support 2014-2016

Efficient Compliance and Energy Management operations – regulatory reporting, software and business improvements, invoice payment,

1. CRC Audit Service Deliver CRC specialist audit in 2014, focused to reduce financial risk from non-recoverable allowance expenditure

and to Phase 2 participants in 2015, to ensure ongoing compliance and efficient operations

2. CRC Phase 2- tools and guidance Develop common tools and templates and technical/legal interpretation for all authorities, to ensure compliance,

increase business efficiency and avoid cost.

3. Specify/tender and contract manage CRC

Audit and Support Service

Conduct joint procurement required to deliver specialist CRC audit and Phase 2 implementation support services.

4. Measurement and Verification Protocol Develop simple tool that authorities can use to validate supplier savings claims and assess whether planned or

implemented energy reduction measures deliver cost savings and represent value for money

5. Energy Management software- business

function improvements

Reduce back-office costs, by working with providers and customers towards authority focused and fit for purpose

software that enables more efficient handling and management of energy consumption, invoice payment and

expenditure

6. Bill validation standard To develop a standard that enables authorities (or their service providers) to process and pay energy invoices,

ensuring cost recoveries are maximised and processing costs are minimised

Energy category management support and leadership –maintaining capability, Increasing influence , reducing cost and administration burdens

7. Develop collaborative and shared solutions

to common authority issues

Support the development of simple to implement solutions, or where complex solutions are required, work towards

a single solution that enables all authorities to achieve greater benefits, more quickly and with reduced risk.

Facilitate joint procurement where this achieves a better quality, authority-focused service at lower cost.

8. Events/Workshops/Training Regular programme of CPD and authority focused training/development/best practice/guidance notes and tools

9. Regular updates on important regulatory and

market changes

Advance notification of energy and carbon issues that affect authorities so they are able to swiftly respond to

threats and opportunities and seek legal and technical expertise on behalf of all when appropriate

10. Influence and respond to central government

policy and supplier interpretation

Respond to key government policy/legislation and its interpretation by suppliers and operators, by representing

authorities’ interests at executive levels to reduce administrative burdens and nationally regulated costs.

11. Raise queries with regulators and policy

makers and act as an escalation point with

suppliers and service providers

Acting as an independent category expert, use combined spending power to improve supplier performance at a

lower cost and continue to act as an escalation point for dispute resolution. Continue to manage ‘sector-wide’

queries with senior officials to reduce need for legal interpretation and technical advice


Continued access to LEP services and support (equivalent external consultancy £45k p.a.)

Annual Achieved Price and Risk Assessment (Independent LEP benchmarking of buying

organisation performance, covering the contract periods 2011-14 and 2012-15)

Energy Procurement Service Provider Assessment, early 2015 – Comprehensive specification

to ensure buying organisations have the capability, experience and capacity to deliver value

for money energy supply contracts consistently over a period of time

Final CRC Phase 1 annual audit 2014 (covering compliance year 2013/14)

Phase 2 CRC Support and annual audit 2015 – common tools, templates and technical and

legal interpretation, to ensure compliance, increase business efficiency and avoid cost

Energy Management software business function improvements & bill validation standard -

Work with providers and customers towards authority focused and fit for purpose software

that enables efficient management of energy consumption, invoice payment and expenditure

Up to 2 free places at LEP authority focused workshops and events training, development

and best practice programme (minimum 3 events per year)

Fact-sheets, email bulletins and best practice guidance - Advance notification of energy and

carbon issues that affect authorities and what they should do about them


Timetable for momentum

LEP supplements authority in-house capacity with specialist technical knowledge and expertise,

delivering work programmes that for individual authorities would be unaffordable or difficult to

achieve

Maintains our key strength - our ability to act and work together, using London authorities’

combined buying power, leverage and influence against a dominant supply market and

changing government policy.

2013 LEP Prospectus and contribution request now available

Commit / authorise your continued participation in the LEP authority community

Earmark the contribution in your 2014/15 & 15/16 budgets

Price reduced by 20% to £7,750 p.a. or £4,950 in year 2 (for Non Phase 2 CRC participants)

Firm commitment by 4th November 2013

A Memorandum of Agreement be signed by all authorities prior to April 14

Same MOA and governance arrangements as before


business-critical energy and carbon

management issues?

common energy category strategy?

LEP’s momentum?

london procurement strategy board september 2013

Documents