The Changing Energy Landscape - What the new Energy landscape means to education facilities
As the energy landscape has just undergone seismic changes, universities and colleges must adopt clear strategies for energy management and procurement to avoid falling into a financial abyss.
All the indicators are that energy prices are set to rise well above the rate of inflation over the next five to ten years, creating several challenges for higher education establishments, and not just increased energy bills.
While energy markets are volatile, the price we pay is not just dependent on wholesale energy prices but also on costs added by the Government. In the UK, a long-term energy strategy was delivered in the form of the Energy Bill (2013) which came into force earlier this year and features a raft of new costs that look certain to increase our bills for some time to come.
The Energy Bill
The Government’s challenge was to keep the UK’s energy prices competitive with the rest of the world but it also had to consider other vital issues including energy security, climate change and existing obligations though EU legislation and global agreements. The resultant plan will meet our energy requirements and responsibilities over the next 20 years or more but its impact will be “short-term pain for long-term gain”.
The main thrust of the Energy Bill was the Electricity Market Reform (EMR). It was needed because while our demand for electricity continues to increase, our generating capacity continues to decrease as older power plants close, often to meet the EU’s Large Combustion Plant Directive which aims to close highly polluting power plants. But the UK has also committed to generate 15% of its energy from renewable sources by 2020 and reduce greenhouse emissions by 80% in 2050, which virtually rules out reliance on fossil fuel power generation.
Consequently, we need a new energy infrastructure. It will cost £110 billion by 2020 and be paid for by taxpayers through the Energy Bill.
Energy price predictions
Several mechanisms within the Bill will raise money for the Government but only one is directly targeted at business consumers. The Carbon Price Floor (CPF) or “carbon tax” aims to encourage businesses to cut carbon emissions. Initial estimates were that it would increase the wholesale electricity price by £4 per MWh in 2014/2015 rising to £9 per MWh by 2017/2018 but it could be higher if coal-powered generation is further marginalised.
Other elements of the Bill are aimed at electricity generators but any levy they face will be passed on to consumers. These include:
· Contracts for Difference (CfD) - encouraging investment in new low-carbon electricity generation. The cost impact is still being assessed, although it is widely agreed that charges will continue to rise.
· The Capacity Market (CM) - to provide a secure electricity supply through stored energy. It will add £2 per MWh per year from 2018.
· The Emissions Performance Standard(EPS) - limits the amount of CO2 new fossil fuel-using power stations can emit. This will put pressure on wholesale prices, leading to increases.
Of course, to estimate the full energy price increases businesses face we must also include wholesale market predictions. The Major Energy User Council’s (MEUC) recently concluded that UK faces long-term wholesale gas price rises and electricity prices, which have tracked gas prices for some time, will continue to do so.
Putting Government levies and wholesale energy prices rises together, it is estimated that universities and colleges face a further rise of 17% in their energy bills between 2015 and 2020. This represents almost a doubling of prices since 2007.
For a typical college, such as one of UES Energy’s clients which employs 800 staff and supports more than 16,000 learners, this represents an increase of around £65,000 to its energy bills. But spiralling costs are not the only energy related problem they face.
Case studies
Recent energy price rises have prompted many educational establishments to employ specialists or independent consultancies to deal with increasingly complex energy management and procurement. But others have joined consortiums which manage this centrally and communally and it is these establishments which face the biggest challenges.
The principle of joining together to reduce admin costs and maximise bargaining power is beneficial in theory but in practice it rarely works. The underlying problem is that “one size does not fit all”. Each institution has its own specific requirements but using the consortium approach comprises this, often to the point where contracts are highly unfavourable. In addition, consortiums - which are often non-profit making – are under pressure to keep administration costs down but this can result in poor service and poor management.
Two colleges which recently appointed UES Energy as their energy consultants both left consortiums after such problems. Among their complaints, each cited a lack of budget certainty and an inability to forecast costs. They had no control over the timing or outcome of energy procurement. And each felt their energy contract portfolio could have been much better managed.
One had recently undergone a merger but consortium managers made no attempt to consolidate suppliers which led to increased admin time and a very fragmented supply portfolio. In the ensuing chaos, contract end dates were missed leaving the college on a default contract with a much higher tariff.
When they appointed UES Energy, we found one supply had been out of contract for two years. We immediately renegotiated this for them and saved them £10,000 a year on this supply alone. We provided a detailed comparison of the costs of their most recent contracts so that they could see the issues. Then we managed the whole energy procurement tender process to coincide with favourable market conditions and quickly resolved all outstanding supplier disputes to save them considerable administration time. Now they have a well-managed portfolio, a clear energy procurement strategy, budget certainty and can forecast up to 12 months in advance.
For the other, we arranged an independent energy procurement tender and reduced number of suppliers to just three with a common end date for all contracts, all at very favorable market prices. We carried out a comprehensive data cleansing operation to give them meaningful and reliable data to work on and we sorted out all outstanding queries, again drastically reducing their admin time. They now have the budget certainty they craved, with accurate forecasting for two years.
But such problems will be magnified by the new energy procurement regime. Contracts, in which the devil lies in the detail, will now have more detail. There will be more admin for those who aren’t familiar with the new landscape. Default tariffs will be higher still. And timing of energy procurement will be more crucial than ever in keeping costs down.
What can be done?
The EMR has fundamentally changed energy procurement and management for educational establishments which must take decisive action to reduce costs and establish budget certainty.
Our advice is:
· Establish the likely cost impact of EMR
· Stay on top of new information or changes to EMR
· Review your energy supply contracts to see how they deal with third party costs
· Make sure you have a detailed energy procurement strategy balancing budget certainty with the level of risk you are prepared to take
· Consider whether you need to amend your existing strategy
· Take advice from expert consultants if you need further help
· Make sure those consultants are truly independent and don’t get tied into exclusive contracts with them.
