Agenda item

The purpose of the report is to seek approval to enter into a contract for the supply of electricity for Council operated assets.

Purpose of report

To seek approval to enter into a contract for the supply of electricity for Council operated assets.

Decision

That Cabinet approves up to a four-year contract to Total Energies Gas and Power Ltd incorporating a fixed 12 month tariff utilising the ESPO Framework for the supply of electricity commencing on 30th September 2024.

Alternative options considered and rejected

The report confirmed that alternative frameworks had been considered but none offered the Council the most economically advantageous solution that met the Council’s requirements. Council could have chosen not to enter into a 12 month contract but this would have left the Council financially exposed to price uncertainty during the period.

Reasons for decision

The Framework consisted of a single supplier (Total Energies) with a proven and successful track record of delivering electricity, for various public sector organisations including South Kesteven District Council (SKDC).

As well as the supply of electricity, this framework provided a number of key features including:

• Automated Meter Reading (AMR);

• New meter connection, changes to existing connections/disconnections and upgrades; and;

• A dedicated account manager for ESPO Customers.

Additionally, ESPO also provided comprehensive support encompassing:

• Account management;

• Supply point administration;

• Portfolio management

• Price validation

• General queries and advice related to the contract and supply and market intelligence.

The framework was based on fully transparent pricing, with the supplier margin fixed for the full duration of the framework. Individual customer rates would however change based on changes to ‘Regulated Charges’ and the ‘Wholesale commodity price’, typically on an annual basis from 1 October. Customers were notified in advance of any price changes.

As the price of energy was extremely volatile, ESPO had adopted a flexible, aggregated risk management approach to energy procurement. The two ‘Price Risk Strategies’ currently used by ESPO under the flexible procurement option were:

·       Pricing in Advance (PIA) – in which 100% of the total forecast volume requirement was purchased before commencement of the supply period for electricity (October to the following September).

·       Pricing within Period (PWP) – in which an agreed portion of the total forecast volume requirement for the supply period (April to March) was purchased before the commencement of the supply period, with the balance purchased closer to the point of consumption, but before it was required.

These strategies allowed the price risk to be spread over an extended period of time, rather than purchasing 100% of the volume on a single day.

The principle behind the two options was that with PIA the price was known before the supply period commenced, whilst the PWP price was only partially fixed before supply period and was not completely known until the supply period ended.

The PWP option therefore represented a higher risk as a proportion of the cost was subject to fluctuation, depending on market price movement during the supply period, with reward partly based on the premise that the risk premium inherent in market prices reduces as the point of purchase and consumption becomes closer.

Flexible contracts of this kind required large volumes to access the pricing mechanism used for an effective Risk Strategy. By combining all ESPO customer volumes into a single supply with Total Energies, an economy of scale was achieved which reduced the supplier’s margin. Additional benefits are also seen via the elimination of risk premiums applied by suppliers to fixed price contracts, where prices were held on the day, compared to real time wholesale market purchasing.

The emphasis on flexible energy purchasing was to manage risk and spread it over a period of time, which evens out annual cost avoiding price fluctuations and causing budgeting uncertainty. Purchasing via this strategy provided increased budgetary certainty and provided earlier information on future costs.

ESPO would liaise closely with and fully support SKDC through the process of deciding on the appropriate risk option, both on joining the framework for the first time and for periodic intervals thereafter.

Total Energies understood that being one of the world's largest energy suppliers brought with it enormous environmental, social and cultural responsibilities. They take their obligations very seriously, and invest considerable time, energy and resources implementing action plans and assessing SKDC’s performance to give continuous improvement. Industrial safety, supporting local development, securing the future of energy, environmental stewardship, and combatting climate change were all critical challenges that Total Energies was committed to meeting.

The following points were highlighted during debate:

·       South Kesteven District Council (SKDC) sourced its existing gas and electricity via the ESPO framework, therefore in a sense this was a continuation of that supply network.

·       LeisureSK Limited were not part of this energy contract because they were external to the Council’s corporate assets. However the company could access the framework directly.

·       There was an ongoing programme to improve energy efficiency of the Council’s property portfolio; energy usage would be reduced where it was practical and afordable to do so.

·       ‘Half hourly’ charging would remain part of the contract. Prior to the start of the contract a 12-month fixed tariff would be purchased, and this would be honoured whether the Council used more, or less energy than the volume stipulated in the fixed term contract.

·       Data from previous contracts would be available and used to compare against the upcoming energy contract. This would enable the analysis of consumption and cost of energy use. This was particularly relevant in the area for street lighting.

·       At the previous Environment Overview and Scrutiny Committee held on 19 March 2024 there was a strong steer to replenish the Climate Change Reserve.

The Deputy Chief Executive agreed to supply a breakdown of the budget figure against the costs of the contract, and it would be appended to the minutes.