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A united force

Saturday August 22nd, 2009

By Morven MacNeil, GO Features Editor

With the Government spending an estimated £3.8 billion a year on energy, GO looks at how energy is currently being purchased and the new collaborative initiatives aimed and streamlining the process.

The procurement landscape in the UK consists of around 44,000 public sector buying organisations, including approximately 20,000 schools, 388 English local authorities, 43 police forces and around 500 NHS trusts, besides central government departments, agencies and non-departmental public bodies (NDPBs).

A review conducted by the Government’s Operational Efficiency Programme (OEP) found that this landscape is somewhat fragmented, with at least 45 professional buying organisations that have evolved in an unplanned manner over time, with varying business models, no clear common vision and no clear governance. Currently, approximately £12 billion of the £89 billion spent in the categories of goods and services commonly bought across government is channelled through professional buying organisations (PBOs).

Energy purchasing

The energy market is extremely volatile; prices can vary significantly on a daily basis with dramatic rises and falls over a 12-month period. Fluctuations of plus or minus 20 per cent in a single month are not unknown.

There is no overall governance to coordinate the activities of PBOs, which can result in duplication of effort and contracts offering varying degrees of value for money. For example, individual energy contracts with energy companies are part of the reason why there is over a 50 per cent cost variation in energy prices across the public sector. There can also be a lack of cooperation; some PBOs compete with each other over similar geographies or service offerings.

Government currently spends an estimated £3.8 billion a year on energy, and this year the OEP announced possible annual savings of £320 million by 2012 through the adoption of aggregated, flexible and risk managed energy procurement.

The collaborative effect

Sir Peter Gershon in his 2004 Review of Public Sector Efficiency identified collaborative procurement as a major potential contributor to greater efficiency in government. Subsequently, the 2004 Spending Review (SR04) programme enabled annual delivery of £650 million of efficiency gains from collaborative procurement.

The OEP has estimated that government can achieve around £6.1 billion of annual value for money savings from improved collaborative procurement by 2013-14, plus £1.6 billion from improved collaborative procurement of IT.

The current programme of collaborative procurement seeks to achieve increased value for money from six categories of common goods and services: professional services, ICT, energy, fleet, travel, and office solutions. These six categories collectively cover £49.8 billion of the £89 billion annual spend in categories commonly bought across government.

Collaborative procurement in energy will deliver £115 million value for money savings in 2008-09 and aims to deliver £300 million by the end of the current Spending Review period (CSR07).

Mike Acheson, Head of Procurement Policy and Contracts Division, Department for Transport, said: “Energy procurement is perhaps the most obvious area for collaboration, where there is a dynamic market and the need for skilled buyers. It makes sense to have many collaborating so that there is scope for a skilled resource in the middle, operating on behalf of all. While this is generally true for any area of business, as far as energy is concerned, there is no scope for demanding a slightly different answer, as frequently can happen when buying other goods or services, to meet a particular, non-standard requirement.”

Current problems

The OEP review found some issues with the current procurement landscape which are limiting the scope for the achievement of greater value for money savings through collaborative procurement.

The OEP recommends that Government should target uptake levels of 80 per cent in central government and approximately 50 per cent across the wider public sector. However, the review found that in some categories of common spend, current uptake levels are very low relative to these target levels, although in the case of more mature fleet and energy categories, uptake of the collaborative procurement value for money strategies developed over the past two years has already risen to between 80 and 90 per cent for central government.

Uptake of value for money collaborative strategies in the wider public sector has proven harder to achieve. In energy (the furthest advanced of the six categories currently under way), despite high uptake levels in central government, uptake levels remain below 50 per cent overall because of low uptake in the wider public sector. Promoting collaborative strategies in those areas of government with high levels of local autonomy is a key challenge in achieving the full potential benefits available from collaborative procurement.

For example, the Office of Government Commerce (OGC) is working with the Department for Children, Schools and Families and schools to identify ways of reducing energy costs by aggregating demand through local government PBOs to realise efficiencies of scale. Some schools already purchase through PBOs, but many still have individual contracts with energy suppliers, which contributes to over 50 per cent variation in the rates paid for 1KwH of electricity across the public sector.

The OEP review notes that in some of the more mature categories, additional savings are available if a more radical approach is taken to collaborative procurement. In the energy category this will include buying energy directly from generators on behalf of the public sector as a whole. In the fleet and energy categories, further savings of approximately £200 million in the next Spending Review may be available if such radical approaches are undertaken. The review strongly supports such radical approaches being taken in order to achieve greater value for money for the public sector through collaborative procurement.

Transforming Government Procurement report

As a result of the Treasury’s Transforming Government Procurement initiative in 2007, a series of recommendations for energy procurement in the public sector have been developed. These recommendations form the basis for delivering a managed approach to procurement to provide better value for money for both central government and the wider public sector.

In order to deliver these recommendations a set of criteria have been developed that define the agreed best practice. These enable assessment of arrangements put in place by public sector organisations.

Recommended best practice principles for energy

Public sector departments and organisations need to be compliant with the Transforming Government Procurement initiative if they are to meet Energy Strategy Team (EST) procurement recommendations, as endorsed by the Collaborative Category Board (CCB), and meet EST sustainability recommendations, as endorsed by CCB.

Organisations will be assessed against whether they use a contract/framework agreement with the ability to deliver wholesale energy sourced independently from the supply agreement, including – where appropriate – Renewable Obligation Certificates (ROCs) and Levy Exempt Certificates (LECs – electricity only).

They will also be assessed on whether they use a contract/framework agreement or contracting authority with transparent pricing mechanisms; that is, those which allow visibility of raw energy prices, all regulated charges, suppliers’ margins, administration charges, and other supplier charges such as renewable energy premiums and ROC prices.

The Pan-Government Energy Project

In response to the recommendations contained in Transforming Government Procurement, the OGC launched the Pan-Government Energy Project, sponsored by the Ministry of Defence (MOD).

The aims of the project are to review public sector energy usage and procurement; to delivere increased value for money through cost and carbon savings; and to encourage a managed approach to energy procurement, thereby contributing towards the commitments of CSR07 and improved corporate social responsibility.

The Pan-Government Energy Project team, which represents around 70 per cent of the UK public sector, is developing new solutions for risk management and pushing the boundaries for innovation in order to deliver better outcomes for the customer. The project has developed best practice advice for energy procurement to maximise value for money and minimise risk, in consultation with the industry, customers and public sector central buying organisations. Approximately 45 per cent of public sector electricity and gas volumes are currently being bought through Pan Government Energy Project approved solutions. Adoption or use of these routes is not mandatory, and encouragement towards further take-up will be based on the attractiveness of their merits in delivering value for money.

The Pan-Government Energy Project team has recently launched a major campaign to improve the way the public sector buys its energy. Two guides have been published, Energy buying – Working together for better results and Energy buying – The effective way to manage risk, aimed at promoting best practice management of energy procurement. These will be supported by a series of regional roadshows to further communicate best practice solutions across the wider public sector.

Nigel Smith, OGC Chief Executive, commented: “The energy market can be extremely volatile, with prices varying significantly on a daily basis. This can make it very difficult to manage budgets and control costs. A great deal of work has been done in determining best practice solutions for buying energy, which is often considered to be quite a specialist activity. We are here to support public sector organisations, and provide a pathway to assist them in delivering value for money for the taxpayer. I thoroughly recommend all public sector organisations engage with this initiative.”

Speaking about the energy buying guides, MOD sponsor of the Pan-Government Energy Project Tom Logan said: “Publication of the guides represents a further important development in the work of the Pan-Government Energy Project, which is bringing proven improvements in the procurement of energy to the public sector.  This is a good reflection of the work of the team, and an example of what can be achieved when central and local government work together.”

The buying guides explain best practice in energy procurement and offer guidance on how to make effective decisions in energy procurement. They provide a route map of how public sector buyers can access aggregated, flexible and risk managed contracts through a range of Central Purchasing Bodies (CPBs). The guides highlight the key services available through CPBs as well as the geographical areas they cover and the sectors within which they operate.

The initiative also supports the Government’s key sustainability agenda. The Government is committed to improving the sustainability of its operations and public sector organisations have been set various targets to improve their sustainability. Central government departments are required to meet Sustainable Operations on the Government Estate (SOGE) targets, which cover carbon emissions and energy efficiency, and the OGC is helping departments achieve these through the work of the Centre of Expertise in Sustainable Procurement.

Commenting on the Pan-Government Energy Project initiatives, Principal Consultant and Procurement and Outsourcing Product Manager at Socitm Consulting Terry Street said: “Collaborative procurement is very much flavour of the month, and it is right that energy is included. The Pan-Government Energy Project claims that just under half of UK public sector energy procurement comes from approved sources (as of April 2009) with a value of over £5 billion, and the project is recommending that the whole of the public sector adopts ‘aggregated, flexible and risk managed energy procurement’. The aggregation is clearly the big attraction, especially given the pressure on public spending, and access to the wholesale market provides direct savings, but the risk managed element is important too.

“One consideration on risk management is procurement direct from energy producers – it is hoped that this could help reduce long-term price risk, increase security of supply, and potentially stimulate additional sources of renewable energy. These options will require Power Purchase Agreements being put in place, and again it is only through collaboration and mass aggregation that this becomes viable.

“It might be argued that a potential downside is if the approach excludes individual organisations from adopting innovative local solutions to energy supply; however, the overall case for collaboration seems robust.”

Current collaborative procurement initiatives

Framework agreements – Some existing framework agreements are being improved, and new arrangements are being put in place to drive better value for money based on increased market knowledge or leverage.

The Energy Collaborative Category Team have worked with organisations across the public sector to improve existing deals by bring them into line with best practice, flexible energy buying. By April 2009, around 80 per cent of central government energy had been brought into line with best practice.

New ways of buying and approaching the market Government constitutes between 7 and 14 per cent of major common markets. Leveraging this spend in innovative ways can drive significant efficiency. Having brought large volumes of existing energy procurement into line with best practice, the Energy Collaborative Category Team are considering innovative approaches to the market that apply the maximum leverage that government can exert, while balancing the risk of long- and short-term energy procurement, including long-term purchase agreements, directly with generators.

Demand management – Significant efficiency savings can also be realised through demand management on a collaborative basis. This means buying less of something without incurring a negative impact to outcome service delivery, normally by spreading best in class practices and technologies across government, and using the scale of government volumes to eliminate inefficiency and reduce demand

The ICT category includes strategies to reduce the energy consumption of government IT. These include a cross-government software procurement that will enable government to switch off automatically any unused computers overnight. The Energy Collaborative Category Team are driving a pan-government deal for automated reading of energy meters that cut down on inaccurate bills and enable much closer management of energy consumption.

Case study: An example of collaborative procurement initiatives

Improving existing framework agreements: The first stage of the work performed by the Collaborative Procurement Energy Team was to understand how energy was bought right across the public sector – from local authorities to major centralised departments such as the Ministry of Defence. There was a wide variety in the pricing achieved by different buying methods – often more than 50 per cent – and also in the associated risk profile associated with the volatile commodity market.

Through extensive research and benchmarking the team was able to demonstrate that taking a flexible approach to energy procurement was the best way to balance risk with attaining best value for money. They began to work with major public sector buying organisations to incorporate a flexible approach into their buying practices in a collaborative manner, saving them money.

Bringing new volumes into existing best practice: Once major organisations were buying in the most effective way, the Energy Team focused on bringing together buyers of energy into the improved agreements – from schools and hospitals to the MOD and PBOs – to allow them to share the benefits of using the better deals, and at the same time increasing government’s leverage in the supply market.

New ways of approaching the market: By bringing in new volumes to existing best practice deals, the Energy Team are now able to access a large percentage of government’s volumes – 82 per cent in central government. This has enabled the team to think of radically new approaches for the future that maximise value for money achieved with the public purse – such as the setting-up of long-term contractual arrangements with generators, or ‘power purchase agreements’.

Further information

For further information, please visit: www.ogc.gov.uk and www.hm-treasury.gov.uk

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