How To Get Value For Money From 2016 To 2020
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- Cornelius Carson
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1 Paper 4 Oxfordshire County Council Schools Forum 3 December 2014 Energy Procurement Settings Sector Academies Foundation Stage Maintained Schools Primary PVI Nurseries Secondary Special Schools Special Local Authority 16+ Schools Forum High Needs 1. Item for Consultation 1.1 A paper was submitted to the Services and Contracts Committee on 13 November 2014 detailing the county s progress on energy purchasing arrangements for The Committee raised no comment on the procurement strategy the county was taking for corporate buildings and maintained schools. Some further information was requested around why academies are not included in the county s purchasing decision and options available to academies through LASER. This information is detailed in section 6.2 below. 1.2 There is no exemption from publication for this paper. 2. Purpose of Report 2.1 This report informs Schools Forum of the County Council s work to assess best value for energy purchasing arrangements from Oxfordshire County Council currently procures its electricity and gas through LASER (Kent County Council s buying organisation) in a contract ending October The Council has been reviewing options for energy contracts after October Officers have recommended that the Council remains with LASER for the period. Owing to the long lead times in energy procurement for an estate of this size, Cabinet were asked to ratify the decision to remain with LASER at their meeting on 25 November In line with present arrangements, it is proposed that maintained schools will automatically be included in the Council s new contract. 2.5 Academies cannot be included under the umbrella of the Council s contract with LASER, but can enter into an independent contract directly with LASER. LASER is currently working up the precise details of their offer to academies and will circulate in January. Page 1 of 9
2 3. Recommendations/Actions/Decisions for Schools Forum 3.1 Schools Forum is asked to note the arrangements being made for energy purchasing for the corporate and maintained schools estate. 3.2 Schools Forum is asked to note that academies will need to enter into an independent energy contract from October An independent option will exist with LASER. 4. Options for Since the deregulation of the energy industry, the Council is required to establish competitive supply contracts for energy. It also needs to review the contracts at regular intervals to ensure that they still deliver value for money. 4.2 Risk-managed energy procurement helps to get the best price for energy by spreading market price risks and avoiding buying during periods of peak market pricing. Gas and electricity market prices are highly volatile. Market price movements of more than 10% in a week are not unprecedented. The Pan Government Energy Project recommended that all public sector organisations adopt aggregated, flexible and risk-managed energy procurement. 4.3 Since 2009, the Council has procured electricity and gas (totalling just over 10.5 million per annum) through LASER, a non-profit Professional Buying Organisation (PBO) established by Kent County Council. LASER provides energy procurement and contract management services on behalf of its members. LASER currently procures energy for over 160 public organisations, including 115 local authorities, representing over 350 million of energy purchasing every year. 4.4 The current agreement with LASER runs until the end of September Under the agreement, Npower supplies the electricity and Total the gas. 4.5 In order to obtain best value, LASER purchases energy up to two years in advance. The Council will need to decide by the end of December whether it wishes to continue to procure its future energy requirements for the period via LASER. 4.6 The options available to Oxfordshire County Council post October 2016 are: 1. Do nothing 2. Procure our own energy by direct tender 3. Procure via a PBO These options are compared in more detail in Appendix A Page 2 of 9
3 4.7 Officers have concluded that the preferred option is to continue using the energy framework contract established by LASER: This acts like a buying club, whereby Oxfordshire joins neighbouring authorities in the south east and beyond. Negotiation of prices with energy suppliers takes place based on energy supplies worth 350million, rather than with just the Council s 10million. Legally, Kent County Council is the contracting authority for the energy supply contracts and will continue to be for the new ones awarded this year. It is a Central Purchasing Body, as defined in the Public Contracts Regulations, which means that Oxfordshire Council can legitimately and compliantly access the energy framework contract without needing to run its own tender process. LASER provides the aggregated, flexible, and risk-managed approach recommended to the public sector, and expertise in energy-buying for local authorities. LASER is independently benchmarked, whereas independent information is often not available for other public buying organisations. The latest independent Value for Money Assessment by the London Energy Partnership confirms LASER s past purchasing performance to be effective (section 5). 5. Benchmarking Information 5.1 The London Energy Partnership provides independent benchmarking of Laser. Its latest report evaluated average market price with achieved purchase price, and rated LASER s performance as very good,, for three of its purchasing options, and effective,, for the fourth. Page 3 of 9
4 5.2 The report 1 makes the following recommendation: Participating Authorities may continue using aggregated, flexible, risk managed energy contracts as provided by LASER, a division of Kent County Council Commercial Services i.e. to engage a strategic risk managed approach that delivers overall best performance, as a means of achieving value for money as part of their wider energy strategy. 5.3 With the caveat that past performance is no guide to future performance, over the four years from October 2009, LASER estimate their achieved prices for wholesale energy equate to avoided costs to the Council of 3,157k per annum had we been paying maximum market prices, 222k per annum had we been paying average market prices. Together with other costs that make up energy prices such as supplier management fees, LASER estimate total avoided costs to the Council of 803k per annum Based on a snapshot of current consumption, the supplier management fees for the Council will reduce under the new framework by about 48k (39%) per annum, or 195k over the duration of the 4- year framework, compared to the previous framework. 6. Financial and Staff Implications - centrally and for schools 6.1 Implications for Maintained Schools Maintained schools do not need to take any action. They will be automatically included in the new contract There are a number of purchasing options within the LASER framework principally Purchase in Advance and Purchase within Period. LASER only offer schools the Purchase in Advance option, which gives them advance certainty of energy costs in six month windows. This is thought to give schools the optimum balance between managing volatility and best value. This is the option presently used across the whole Oxfordshire County Council (OCC) portfolio. 6.2 Implications for Academies The contract OCC enters into with LASER contains a number of obligations on OCC, including underwriting any debt incurred at sites using its contract. The inclusion of academies within any new contract would, therefore, require individual subagreements between each academy and OCC to mitigate this risk. This would be time consuming and costly for both parties 1 London Energy Project Energy Contracts. Value for Money Assessment Achieved Prices Benchmark & Risk Assessment Report. Page 4 of 9
5 and, given that academies are able to access the LASER contract directly, has not been pursued Academies will, therefore, have the flexibility to enter into a direct contract with LASER (continuing to benefit from their overall buying power) or to establish alternative arrangements if preferred LASER has proposed offering academies a two year rolling contract on a Purchase in Advance basis. This will be offered on a fully managed rather than purchase only, basis, under which academies will benefit from support from LASER with verifying consumption and resolving queries around billing. For maintained schools, the Council currently has a Bureau function that provides this service, but this is not available to academies and, therefore, the provision of this by LASER would be beneficial Laser anticipates having a large number of independent contracts with academies across its local authority portfolio. It is currently in the process of developing the precise detail of the offer and sign up process. LASER will be contacting all academies on the independent contract early in 2015 to discuss its offer for Within the current contract, once a school has transferred to academy status, it is asked to move from the OCC LASER contract onto the LASER independent contract Despite communication, the majority of academies have not yet taken action on this. It is important that academies do so, as once they are on the independent contract, they can enter in discussions about energy arrangements post LASER has suggested that they would be happy to attend a separate meeting for academies so they can understand energy buying and the offer to academies. 7. Equal Opportunities Implications and Impact on Equality Groups There are no equal opportunities implications. 8. Conclusions 8.1 Oxfordshire County Council is making arrangements to achieve best value for energy supplies across the corporate and schools estate from Academies have the flexibility to decide how they procure their energy post 2016 and must enter into an independent contract. They will be Page 5 of 9
6 able to benefit from the buying power provided by the LASER arrangement. 9. Future Review by Forum in: Schools Forum is asked to advise. 10. Contact Details of Author If you have any queries or comments in advance of the Schools Forum meeting about this report, please contact: Name: Sarah Gilbert, Energy Strategy Officer Telephone Number: Address: 11. Officers/Staff attending to present the Paper Name: Tom Flanagan, Service Manager Localities, Policy and Programmes Telephone Number: Address: Name: Victoria Fletcher, Environment and Resource Efficiency Manager Telephone Number: Address: Page 6 of 9
7 Appendix A 1. The options are: COMPARISON OF PROCUREMENT OPTIONS 1 Do nothing 2 Procure our own energy by direct tender 3 Procure via a PBO Do nothing 2. Once out of its current agreement with LASER, the Council is likely to find itself paying higher off-contract prices for the energy for its buildings and street-lighting after October 2016, whilst also being exposed to the risk of energy price fluctuations. The Council would also be in default of the EU procurement regulations. Whilst always an option, therefore, it is neither commercially sound nor is it legally compliant, and it fails to provide an acceptable level of risk mitigation against energy price volatility. Historic Energy Market Price Volatility Source: LASER Flexible Energy Frameworks Information Pack. Oxfordshire County Council Direct tender 3. This option would involve the Council undertaking a standalone OJEU tender for the provision of its own energy independent of a PBO or any other intermediary, and contracting directly with the selected energy provider(s). Whilst on the one hand this gives the Council a degree of control over the procurement process and its outcome, the downside includes: Higher energy prices through the loss of aggregated volume. Greater risk of exposure to energy price fluctuations. Loss of access to skilled energy traders and energy category expertise. Contract management falls to the Council, with staff resourcing implications. 4. This approach is also not recommended by the London Energy Partnership 2, especially a fixed term fixed price contract, or spot purchasing - a high risk strategy that is unlikely to be effective in controlling commodity costs. Page 7 of 9
8 5. Analysis for the period 1 October 2011 to 30 September 2013 indicates that the risk of spot purchased gas and electricity contracts was significant. For 45% of trading days in this period, spot purchased (FTFP) contracts were priced higher than the Average Market Price and for 24% of trading days were in the top third of commodity prices. For gas, 55% of trading days spot purchased (FTFP) contracts were priced higher than the Average Market price and for 41% of trading days were in the top third of commodity prices. Procure via a PBO 6. There are a number of PBOs in existence. PBOs offer a fully managed, flexible and risk managed approach to energy procurement and employ staff who possess the relevant category expertise and energy trading skills. The principal PBOs offering access to energy contracts are: Yorkshire Purchasing Organisation (YPO) West Mercia Energy (WME) Eastern Shires Purchasing Organisation (ESPO) Crown Commercial Services (CCS formerly the Government Procurement Service) London and South East Region (LASER) 7. Most of these are groupings of adjacent public authorities which have pooled their buying power to secure better value for money. Frequently, an authority joins the nearest appropriate group. The Council is a member of LASER, which is owned and operated by Kent Commercial Services, a trading arm of Kent County Council (KCC). KCC is itself a member of the Central Buying Consortium (CBC), a PBO in its own right largely comprising authorities from across the south east region and of which the Council is a full member. 8. All PBOs are not-for-profit organisations that recover their costs through a management fee. 9. Table 1 is a summary comparison of LASER with the other PBOs. Detailed benchmarking information not available publicly for other PBOs, so it is difficult to compare them financially. Changing contracts between suppliers is likely to involve a cost. There is no compelling case to change PBO. Table 1 Summary Comparison Prices Service LASER Others The actual purchase price is not known at the start of the contract. It depends on the behaviour of the market and the purchasing strategy of the buyer. Once a contract has been set up, our contract is direct with the energy companies. Therefore, for a procurement-only contract, service is not a deciding criterion. Page 8 of 9
9 Switch-over cost Evidence of best value Management fees LASER There will be no switchover cost. Through our membership of the London Energy Partnership 3, we have a number of reports demonstrating that LASER is good value for money (see main report). Laser recovers its costs through an annual charge per meter, which varies with the fuel and type of meter. For the last full year, the total was 0.57% of the total bill at 58k. Others Because the start dates relating to the supply contracts of other PBOs are not the same as LASER, it is likely that there will be a cost to stopping and starting a contract. Little information available publicly. Not known, but any savings would probably be outweighed by the cost of transfer. 3 A Partnership consisting of a consortium of businesses, government and public bodies that acts as an independent body in promoting sustainable energy solutions. Page 9 of 9
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