the future of energy procurement - magnus walker at pfh live 2015
TRANSCRIPT
The future of energy procurement
Magnus WalkerHead of Energy Services
PfH Energy: Presentation
What makes up an energy bill? How do large organisations buy and why? What drives the energy market wholesale prices? What will the energy markets look like going
forward? How are PfH developing their next framework? How are PfH supporting customers?
Questions
What parts of your energy bill can be influenced?
Non-commodity costs
Commodity costs
Supplier costs
What is difference in energy approach between smaller and larger buyers ….& why
Energy policy: Co-ordinated long term energy policy
with accountable individuals, targets, action plans
Seeking to reduce overall energy consumption
Board support for energy programmes and procurement strategy
Energy awareness: Dedicated procurement
team with some energy knowledge
Recognition that multiple purchases reduces risk
Appreciation that market prices do not have supplier risk premiums built in
Financial motivation: Drive to make savings is important Undertake investment in systems,
people to produce repeatable savings, remain competitive
Procurement just one of the areas that is optimised for energy savings
Information Systems: Centrally collect and review energy data for all their
sites supporting decision making, budgeting Actively looking to reduce their aggregate demand
through data analysis
Performance measuring: Can readily benchmark results
against market performance Changes in underlying
assets/volumes incorporated into energy procurement
Procurement : multiple commodity purchases over time, not just one fixed price deal
What is energy risk management? Not about seeking the lowest prices(1:250 chance of getting
lowest price) It is about recognising the risk of buying all volume at one point
in time It is about recognising unknown external factors ….and putting in measures to mitigate these risks
Smaller buyers can reduce risk through collective purchasing basketsGain from transparent market pricesNo forward premiums added by energy companies to cover market risk Access to ALL market participants through wholesale market (not just framework
suppliers)
Risk management takes control away from supplier and back to customer Control over purchasing timing decisions is in hands
of buyer (or via their agent)Long term procurement of energy through
individual actions or collectively in a basket Eliminates need to go to board every year to get
single purchase sign off
Wholesale electricity prices
Current levels annual electricity: £44.80/MWh (or 4.48p/KWh)**Final bills will include shaping +non-commodity costs
Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-1540.00
42.00
44.00
46.00
48.00
50.00
52.00
54.00
56.00
58.00
60.00
Electricity Baseload Annual price
Oct-13 Oct-14 Oct-15
£/M
Wh
Wholesale gas prices
Current levels annual gas: 47.30p/Th (or 1.614p/KWh)**Final bills will include shaping +non-commodity costs
Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/1540.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00 Gas: Wholesale Annual prices
Oct-13 Oct-14 Oct-15
p/Th
All energy purchased on a single day determined by customer. Delivery starts 01/10/14
Price set by market conditions on day of purchase.
No variation to pricing once purchasing completed.
Budget certainty over cost from start of energy delivery.
Immune to short term price spikes during delivery period.
1. Spot (Fixed Price Fixed Term) Single customer purchasing
50.00
52.00
54.00
56.00
58.00
60.00
62.00
64.00
66.00
68.00
70.00
Oct/13 Jan/14 Apr/14 Jul/14 Oct/14
p/Th
Gas: Wholesale Annual prices
Oct 14 Annual price
Gas delivery01/10/14-30/09/15
Purchase window: 1 day
12 month range:High 67.60Low 53.45Average 61.53
21st March 62.28p/Th
Example : 12 month Locked basket
All energy must be purchased before delivery starts 01/10/14
Updates on basket volumes bought through purchase window.
No variation to pricing once purchasing completed.
Budget certainty over cost from start of energy delivery.
Immune to short term price spikes during delivery period.
2. Price risk managed basketMultiple customers purchasing collectively
50.00
52.00
54.00
56.00
58.00
60.00
62.00
64.00
66.00
68.00
70.00
Oct/13 Jan/14 Apr/14 Jul/14 Oct/14
p/Th
Gas: Wholesale Annual prices
Oct 14 Annual price
Purchase window:12months 01/10/13- 30/09/14
Gas delivery01/10/14-30/09/15
No energy purchased
12 month range:High 67.60Low 53.45Average 61.53
61.12p/Th
Electricity market price drivers: Next few years
National Usage
Generation
2010-15
2015+
2020+
External drivers: Regulation, Political, Legislation
Regulation (Ofgem)• Competition in wholesale traded
markets has fallen• Big 6 investigation by
Competition and Markets Authority (June report)
Legislation• DECC: Energy bill 2014• Trilemma: Decarbonisation, Security of supply,
Affordability• Renewables: Contracts for Differences: Wind, Solar• Nuclear 35 year contracts (£92.50/MWh)• DECC forecast ever rising oil price• Capacity auctions for fossil fuel availability• Upgraded network to support renewables• Cost supported through general levy on all energy
users p.a. (2014 £3.5bn, 2020 £8bn, 2021+ £?bn)
2023
Political• International agreements on
long term Climate Change measures
• Tough UK targets for Carbon reductions from energy sector
2015
Commodity Market Drivers
Markets tradingGas: Seasons, Quarters, Months, Weeks, Days
Electricity: Seasons, Quarters, Months, Weeks, Days, 4hr, HH
2015 2016 2017 Jan 2018 March 2018
Oil Weather
European Markets (Elec, Gas, Coal, Emissions)
Fundamental supply and demand
EnergyDelivery April 2018
Cash out
Foreign Exchange rates (£, $,€)
Short term changes to supply and demand
Global markets (Coal, LNG)
Market traders expectations (Regulatory, political, economic, technological)
Forward Market prices
Gas (p/Th)
Electricity(£/MWh)
Market liquidity limited beyond 2 years ahead
Limits ability to see some of the fundamental changes coming down the track
Volatility from solar, wind, plant losses seen in short term not at year or 2 ahead stage
Current electricity generation
Long term electricity generation mix
Fundamental changes to electricity generation
Scenario shows impact of generation switch from fossil fuels to intermittent renewables
Forward prices may not be driven by predictable links to coal, gas or oil
Increased premiums to cover riskNGC UK forecast
TWh
LNG in the future
Will it reduce prices in the UK?
The Future for GB electricity markets ?
2023Possibly: Internet of things- everything connected and controllable? Energy consumers paying market tracking prices, invoiced
near real time from dynamic data ? Household battery systems storing day time solar output
and discharging at night becoming common? Greater use of electricity for heating as relative costs
drop?
Almost certain:• No longer solely a fossil fuel driven market price• Short term price volatility- even negative market
prices on some summer days• Much higher non-commodity costs (60% ?) of
electricity bill• Higher relative cost of off peak periods because
uneconomic to run fossil fuel plants
Energy: continuous cycle of improvement
Energyservice
Understanding changing customer
needs
Framework, contractual
improvements
Energy markets, smarter
purchasing
Data interrogation
Portfolio development,
minimised costs
Increased savings, reduced demand
Framework Review Panel: Customer members
Central & Cecil
Notting Hill
Southern Hyde
Peabody
Your Housing
Midland Heart
Equity Housing
Panel members contributing on behalf of sector:
PfH Energy support for the social housing sector1. Offer professional guidance when contracting2. Ongoing customer engagement from procurement and throughout your contract3. Service desk with experienced professional energy individuals from energy
procurement and energy trading backgrounds4. Development of offering through understanding of other buying models and
competition5. Working with customer panel to develop next framework for good of whole sector6. Demystifying energy areas7. Exploring removal of barriers to smarter buying e.g. Section 208. Building smarter collaborative buying options for social housing organisations to
manage risk 9. Investment in systems to aid customers manage their energy usage through data
analysis10. Evaluating purchasing performance against independent market data
PfH: Managing suppliers, providing procurement advice, supporting customers
Energy suppliers: Market cross section providing competitive fixed prices
What are the conclusions?
Commodity prices are low at the moment
Non-Commodity costs are going to keep going up
The market will become more unpredictable and volatile
PfH Energy offer professional guidance and help throughout the journey
Reducing energy usage through analysis is the future
Contact details
Team: [email protected]
Andrea DickatyProcurement [email protected]
Tel: 01925 286 379Mob: 07834 529 792
Magnus WalkerHead of Energy [email protected]
Tel: 01925 286 368Mob: 07943 807 415
procurementforhousing.co.uk
Questions