SHEFFIELD TEACHING HOSPITALS NHS FOUNDATION TRUST

EXECUTIVE SUMMARY: REPORT TO THE BOARD OF DIRECTORS

JULY 2011

Subject: / Electricity Contract-April 2012 to March 2016/18
Supporting Director: / Kirsten Major
Author: / Phil Brennan
Status (see footnote): / A*

PURPOSE OF THE REPORT:

To seek approval to accept Npower’s offer.
To outline contract variants relating to low/zero carbon technologies.
To seek approval to appoint EMS (Energy Management Services) to support and act on Sheffield Teaching Hospitals’behalf in respect of the contract with Npower for the duration of the contract.

KEY POINTS:

The current electricity contract with Npower expires in March 2012.
The total value of the proposed contract with Npower is likely to be in excess of £25M (over 4 years) and £40M (over 6 years), subject to market forces.
Energy contracts over £4M require Board approval as per the Scheme of Delegation.

IMPLICATIONS:

Money: / £25M-£40M.
Access:
Quality:

RECOMMENDATION(S):

Accept the offer from Npower.
Approve electricity is purchased from renewable sources (subject to availability).
Provide authority for EMS to act on behalf of STH for the duration of the contract with Npower.

APPROVAL PROCESS:

Meeting / Presented / Approved / Date
TEG / Via email / Yes / 8 July 2011.
BoD 20 July 2011 / KM/PGB
Status: / A = Approval
A* = Approval & Requiring Board Approval
D = Debate
N = Note

SHEFFIELD TEACHING HOSPITALS NHS FOUNDATION TRUST

BOARD OF DIRECTORS – 20 JULY 2011

ELECTRICITY SUPPLY CONTRACT - APRIL 2012 to MARCH 2016

(With an option to extend to March 2018)

1.INTRODUCTION

1.1The current electricity contract for the half hourly metered supplies (for the Northern General, Royal Hallamshire, Jessop Wing and WestonParkHospitals) with Npower, expires on 31 March 2012.

1.2The Trust spend on electricity in 11/12 will be in the region of £5.6M.

1.3The total value of the proposed electricity supply contract over a four year term is likely to be in excess of £25M and over the full six year term in excess of £40M, subject to market forces.

1.4Energy contracts above £4M require Board approval.

1.5This paper summarises the key issues and provides recommendations on which approval is sought.

2. KEY ISSUES

2.1 Currently energy procurement is done via Energy Management Services (EMS). EMS is part of the North West Ambulance Service NHS Trust. STH have used the services of EMS sincemerger. EMS has a current business portfolio over £100M(Gas and Electricity contracts). Their client list is appended (Appendix 1).

2.2 EMS has carried out a tender exercise to identify a new supplier for the period of April 2012 to March 2016with an option to extend to March 2018. A tender evaluation report is appended (Appendix 2). The salient issues have been extracted and are as follows:

Eight suppliers responded to the OJEU advert or by direct invitation from EMS. Following a process of pre tender, tender and tender appraisal the offer from Npower has been recommended by EMS as they are deemed to offer the most flexible product and best value for money.

The contract allows electricity to be purchased and re-sold (fixed/unfixed) through a variety of purchasing mechanisms for forward months, quarters and seasons as far forward as the termination date. The Trust already benefits from this with existing energy contracts. The arrangement provides greater protection to the upside making the budget forecasts for future years far more robust. The feature allows the cost of energy to be fixed going forward (providing budget certainty), however if the market turns and presents an opportunity for reduction the unfix facility will enable the Trust to take some advantage of the downturn. The unfix is virtually a free cap. The process is explained in further detail in appendix 1 of the tender evaluation report.

The contract is for an initial term of four years with an option to extend for a further two years, subject to STH approval.

2.3The cost of electricity, which includes regulated industry charges, represents circa 78-83% of the contract value and is determined by the fixes/unfixes made by EMS using the purchasing mechanisms included in the contract.The “pass through” costs, which include regulated industry charges as well as the regulated Distribution Use of System (DUOS) and the Transmission Use of System (TUOS) charges, represent circa 15-20% of the contract value. Consequently, only contract management (administration and margin) and balancing risk are determined by the supplier through tender and these represent circa 2-3% of the total contract value.

2.4The offer from Npower provides an option to purchase electricity (subject to availability) from either:

Good quality combined heat and power (GQCHP) or

Renewable sources (green energyproduced by hydro, wind and solar).

However, both options incur additional costs pressures as follows:

GQCHP: £2K pa

Renewable sources (green energy): £11.5K pa (incurs an additional cost pressure of 0.2%).

Opting to purchase electricity from renewable sources provides an excellent opportunity for the Trust to demonstrate its commitment to sustainability and corporate citizenship at minimal cost. This option providesfinancial support for the development of green and sustainable energy technologies. Estates would not require a budget uplift to cover the additional cost should the Board approve this option.

2.5Energy procurement and contract monitoring is complex and requires specialist support. The proposed contract with Npower will require such support (to liaise and instruct traders to purchase/sell electricity on the open market on behalf of STH) to ensure best value is achieved. STH is required to provide formal and delegated authority to EMS to act for STH. This authority would run in parallel with and be for the duration of the contract with Npower (which could be up to six years). EMS has offered to provide this support which will be charged as a unitary management charge. The annual cost for this support will be: £18.5Kpa (includes VAT which is recoverable).

2.6The Trust is not obliged to accept this contract or the support offered by EMS.

3.RECOMMENDATIONS

3.1Acceptthe offer from Npower.

3.2Approve electricity is purchased from renewable sources.

3.3Provide authority to EMS to act on the Trust’s behalf in supporting the contract between Npower and STH.

Phil Brennan

Estates Director

12 July 2011


ENERGY MANAGEMENT SERVICES (EMS) CLIENT LIST

Organisation

Airedale NHS Trust

Alder Hey Children's NHS Foundation Trust

Blackpool Primary Care NHS Trust

Blackpool Teaching Hospitals NHS Foundation Trust

Bolton Primary Care NHS Trust

Bury Primary Care NHS Trust

Calderdale and Huddersfield NHS Foundation Trust

Calderstones Partnership Foundation NHS Trust

Central Lancashire Primary Care NHS Trust

Cumbria Partnership NHS Foundation Trust

Cumbria Teaching Primary Care NHS Trust

East Lancashire Hospitals NHS Trust

East Lancashire Teaching Primary Care NHS Trust

Five Boroughs Partnership NHS Trust

Greater Manchester West Mental Health NHS Foundation Trust

Hull & East Yorkshire Hospitals NHS Trust

Hull Teaching Primary Care NHS Trust

Humber NHS Foundation Trust

Kirklees Primary Care NHS Trust

Lancashire Care NHS Foundation Trust

Lancashire Teaching Hospitals NHS Foundation Trust

Liverpool Women's NHS Foundation Trust

Manchester Primary Care NHS Trust

North Lancashire Teaching Primary Care NHS Trust

North West Ambulance Service NHS Trust

North Yorkshire & York Primary Care NHS Trust

Oldham Primary Care NHS Trust

Pennine Acute Hospitals NHS Trust

Pennine Care NHS Foundation Trust

RoyalBoltonHospital NHS Foundation Trust

Salford Royal NHS Foundation Trust

Scarborough & North East Yorkshire Healthcare NHS Trust

Sefton Primary Care NHS Trust

Sheffield Teaching Hospitals NHS Foundation Trust

Shrewsbury and Telford Hospitals NHS Trust

Southport and Ormskirk Hospitals NHS Trust

Stockport NHS Foundation Trust

TamesideHospital NHS Foundation Trust

Trafford Healthcare NHS Trust

University Hospital of South Manchester NHS Foundation Trust

University Hospitals of MorecambeBay NHS Trust

WirralUniversity Teaching Hospital NHS Foundation Trust

Wrightington, Wigan and Leigh NHS Foundation Trust

Alpha Hospitals

Blackpool Football Club

BridgewaterHospital (Manchester) Limited

Broadstone Mill Factory Outlet Limited

Chadderton Total Care Unit Limited

City Literary Institute

Dalkia Utility Services

EdenValley Hospice

Eric Wright Group Facilities Management Limited

Exopack Advanced Coatings Limited

Falcon Trunking Systems Limited

Government Communications HQ (GCHQ)

Houghton Parkhouse Limited

Inventive Leisure

John Laing Integrated Services Limited

Joseph Holt Limited

KingGeorgeVCollege

Merseyside Passenger Transport Executive

Todmorden Group Practice

University Of Manchester

University Of Sheffield


Tender Evaluation Report

FOR

The Supply of Electricity to Half Hourly Electricity Supply Points For the period April 2012 to March 2016


Introduction

The current electricity supply contracts for sites managed by Energy Management Services, with supply points regulated in the Half Hourly (HH) metered electricity market (i.e. supply points with Maximum Demands exceeding 100 KW), expire on the 31st March 2012.

Energy Management Services has, following the placement of an OJEU (Official Journal of the European Union) advertisement (to comply with all European procurement requirements), concluded a tender exercise for a “framework” agreement for the supply of electricity to HH supply points for the period 1st April 2012 to 31st March 2016 with an option to extend for a further one or two years by mutual agreement of both parties. Additional volume can be added oneither a fixed or flexible price basis during the life of the Agreement.

Eight suppliers responded to either the OJEU advertisement or direct invitations from Energy Management Services, declaring their initial interest in the business (approximately 255 supply points with an overall annual consumption of circa 650 GWh i.e.650 Million kWh) and requesting copies of the electricity data pack (site names, consumption information, meter point administration numbers etc, of all sites currently included in the portfolio).

Pre-tender meetings were arranged with all eight suppliers, giving additional information of the pre-tender/tender process, eventual contract management procedures and current and future purchasing requirements, etc.

The eight potential suppliers who expressed an initial interest in the business were:-

  • N.Power Ltd (N.Power) ~ Current Supplier
  • Electricity De France Ltd (EdF)
  • Haven Electricity Ltd (Haven)
  • Gaz de France Ltd (GdF)
  • Gazprom Marketing and Trading Ltd (Gprom)
  • Scottish and Southern energy Ltd
  • Smartest Energy Ltd
  • Total Gas and power Ltd (Total)

Following submission of the Pre-tenders, suppliers were contacted to discuss any queries relating to their submissions and six suppliers were invited to submit a final tender offer. The submissions of both Smartest Energy Ltd and Scottish and Southern Energy Ltd did not meet the Pre-tender/Tender requirements and they were not invited to participate in the final tender.

The principle features of the tender requirements included the following:-

  • To show clearly all components of cost.
  • To fix the Supplier management charge for the full contract term.
  • To fix Supplier Balancing Charges (SBC) for the first year of supply only and, in addition, to fix SBC for the full Contract Term. (SBC are traditionally reviewed annually but represent an opportunity for the supplier to increase revenue by inflating the Charges at a time when competitiveness cannot be measured. Consequently, EMS sought an alternative offer of fixed SBC for the full Contract Term)
  • To accept payment terms of 30 days following the month of consumption by BACS/cheque.
  • To identify the overall weighted average combined unit rate for electricity (at Grid Supply Point) for the portfolio for the first year of the Contract term with the SBC fixed for the first year of supply and with the SBC fixed for the Contract Term.
  • The ability to purchase electricity using flexible purchasing mechanisms including, but not limited to, the use of the following:-
  1. The ability to buy electricity using either live prices or index prices for full or part months in the future.
  1. As above but for quarters, seasons and yearly prices.
  1. The ability to procure electricity on a daily index basis.
  1. The ability to unfix/fix electricity purchases. This is a very important feature of the Flexible electricity mechanism, see appendix 1.
  • To identify the default trading day.
  • To identify any limitation on forward purchasing.
  • To identify the monthly contractual tolerance volume.
  • To identify any limitation on the number of unfixes/refixes permitted and any unfix/refix charges.
  • To identify the volume available and any additional cost of supplying electricity from Good Quality Combined Heat and Power (GQCHP) and from renewable sources.

A major requirement of a flexible contract is the accessibility to market intelligence and the trading desks of the supplier and suppliers were required to include in their submission the market intelligence they would provide and the availability and method of contacting their trading desk.

Tender analysis

From the tender analysis it was found that:-

  • N.Power (current supplier) submitted the lowest overall combined average unit rates (at GSP) for both SBC fixed for 1 year and fixed for the Contract Term (4 years).
  • GdF submitted the second cheapest offer (combined average unit rate at GSP) for SBC fixed for 1 year, but did not provide an offer for SBC fixed for the Contract Term.
  • Gprom, submitted the highest offer (combined average unit rate at GSP) for SBC fixed for 1 year, but did not provide an offer for SBC fixed for the Contract Term.
  • Total, submitted the third cheapest offer (combined average unit rate at GSP) SBC fixed for 1 year, but did not provide an offer for SBC fixed for the Contract Term. Total’s offer included a number of additional imposable charges should consumption and demand levels vary from stringent default levels.
  • Haven submitted the fourth cheapest offer (combined average unit rate at GSP) for SBC fixed for 1 year and the second cheapest offer for SBC fixed for the Contract Term.
  • EdF submitted the fifth cheapest offer (combined average unit rate at GSP) for SBC fixed for 1 year and third cheapest offer for SBC fixed for the Contract Term.
  • N.Power, EdF and GdF will accept invoice payment 30 days after the month of consumption. However GdF has stated that there may be instances in which an invoice might be sent as late as the 15th of the month in which it is to be paid. Haven will accept invoice payment on the last working day of the month, following the month of consumption.
  • Total and Gazprom require payment within 10 days and 20 days of the date of invoice, respectively, which do not comply with the tender requirements stipulated.
  • N.Power, GdF and Haven offered the more sophisticated/appropriate ‘Flexible’ procurement mechanisms to enable purchases covering the full four year term of the contract whereas, EDF introduced significant limitations on the ability to purchase more than 2.5 years forward.

Importance of purchasing mechanisms

It is essential when trying to evaluate and quantify the differences in purchasing mechanisms offered by electricity suppliers to understand how the electricity market operates.

The wholesale electricity market is extremely volatile and is subject to variations in price as a consequence of both current and forecasted long term supply and demand levels, world oil prices, scheduled and unscheduled gas platform, nuclear power station and coal power station maintenance programmes, weather, currency markets and market sentiment etc.

At any given time the current (ie live) price of electricity for today, next month, next summer/winter etc is constantly shifting and in order to lock-in (purchase) a quantity of electricity for all or part of a month, quarter, season either this year or in 2, 3 or 4 years into the future it is essential to have the tools (purchasing mechanisms) available to exploit market price changes to the best advantage.

N.Power will allow purchases to be made up to and including the last but one trading day of the month, but GdF and Haven will require purchases to be made at least two days earlier.

The unfix/refix proposals offered by these three suppliers, whilst slightly different in number and cost, are all considered similar and adequate for the successful management of a flexible energy procurement product.

In order to give greater protection against the upside movement of future prices, the availability of fix/unfix for the whole contract term is extremely valuable.

Conclusion

Of the three suppliers who offered the more sophisticated/appropriate ‘Flexible’ procurement mechanisms, GdF did not provide an offer based on SBC fixed for the full Contract Term and offered extremely tight monthly contractual volume tolerances with reconciliation. The tight volume tolerance would result in regular monthly volume tolerance reconciliations which would be a significant additional administrative burden.

Haven submitted offers based on SBC fixed for 1 year and SBC fixed for the Contract Term and their offers produced the fourth cheapest combined average unit rate (at GSP) for SBC fixed for 1 year and the second cheapest offer for SBC fixed for the Contract Term, some 1.2% higher than Npower. Haven is a smaller company than Npower and has only just introduced a flexible supply product to the half hourly market.

N.Power (current supplier) submitted offers based on SBC fixed for 1 year and SBC fixed for the Contract Term and their offers produced the lowest overall combined average unit rate (at GSP) for both SBC fixed for 1 year and SBC fixed for the Contract Term(based on the closing wholesale market price for electricity on 11th August 2010, the basis on which all prices were submitted). Npower has a proven track record in the operation and management of a flexible supply contract and their market intelligence and access to trading through their optimisation desk is exemplary.