The future of energy

procurement

Magnus Walker MEI

Procurement for Housing

Head of Energy Services

PfH Energy: Presentation

What makes up an energy bill?

Where are prices now?

What drives energy wholesale commodity prices?

What will the energy markets look like going forward?

How can you manage your energy costs?

What parts of your energy bill can be influenced?

Non-

commodity

costs

Commodity

costs

Supplier costs

Total Electricity costs to rise…regardless

Cheapest energy is the energy you don’t use

2011 2013 2015 2017 2019

non-commodity % 35 40 48 52 55

commodity % 65 60 52 48 45

0

10

20

30

40

50

60

70

80

90

100

ELECTRICITY INVOICE SPLIT

• Share of commodity cost as part of overall bill diminishing

• Falling energy prices overwhelmed by costs of government decarbonisation

initiatives

• Likely to be double digit growth in non-commodity costs for next few years

• Increases need for customers to utilise professional buyers, monitor

markets and time purchases

• Also look at overall consumption through efficiency programmes- will

become increasingly cost effective

Wholesale electricity prices

Current levels annual electricity: £43.00/MWh (or 4.30p/KWh)

**Final bills will include shaping +non-commodity costs

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

56.00

58.00

60.00

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

£/M

Wh

Electricity Baseload Annual price

Oct-13 Oct-14 Oct-15

Wholesale gas prices

Current levels annual gas: 42.80p/Th (or 1.461p/KWh)

**Final bills will include shaping +non-commodity costs

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15

p/Th

Gas: Wholesale Annual prices

Oct-13 Oct-14 Oct-15

Commodity Market Drivers

Markets trading Gas: 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

Energy

Delivery

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)

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

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)

• Vs. cheaper gas, coal for fossil fuel legislation

2023

Political • International agreements on

long term Climate Change

measures

• Tough UK targets for Carbon

reductions from energy

sector

2015

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 risk

More volatile short term

prices> opportunities

NGC UK forecast

TWh

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

delivery

01/10/14-

30/09/15

Purchase window: 1 day

12 month range:

High 67.60

Low 53.45

Average 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 basket

Multiple 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

delivery

01/10/14-

30/09/15

No energy

purchased

12 month range:

High 67.60

Low 53.45

Average 61.53

61.12p/Th

The Future for GB electricity markets ?

2023

Possibly:

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

Energy

service

Understanding changing customer

needs

Framework, contractual

improvements

Energy markets, smarter

purchasing

Data interrogation

Portfolio development,

minimised costs

Increased savings, reduced demand

PfH Energy support for the social housing sector 1. Offer professional guidance when contracting

2. Ongoing customer engagement from procurement and throughout the contract

3. Service desk with experienced professional energy individuals from energy procurement and

energy trading backgrounds

4. Development of offering through understanding of other buying models and competition

5. Working with customer panel to develop next energy solution

6. Demystifying energy areas through education and transparency

7. Exploring removal of barriers to smarter buying e.g. Section 20

8. 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 analysis

10. 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 data

analysis is the

future

Contact details

Procurement Manager-Energy

adickaty@procurementforhousing.co.uk

Tel: 01925 286 379

Mob: 07834 529 792

Magnus Walker

Head of Energy Services

mwalker@procurementforhousing.co.uk

Tel: 01925 286 368

Mob: 07943 807 415

procurementforhousing.co.uk

Andrea Dickaty

Team: energy@procurementforhousing.co.uk