Hampshire County Council

Executive Member for Policy and Resources Item

14 September 2006

Contracts for the supply of electricity

Report by the Director of Property, Business and Regulatory Services

How the conclusion in this report fits with the Corporate Strategy

This report relates principally to the County Council's use of financial resources and will impact on the delivery of the following Corporate Aims:

Aim 2 - stewardship of the environment: contribution to the County Council's

sustainability agenda

Aim 5 - improving services: effective procurement of the County Council's

requirements for energy

1

Introduction

1.1

Tenders have recently been invited for the supply of electricity to the County Council's medium and large sites. These contracts were previously identified as part of the work programme of County Supplies and the purpose of this report is to provide a summary of the results and to seek formal approval for the actions taken to appoint the supplier that made the lowest overall offer in each of the two categories.

2

Background

2.1

The County Council has around 100 medium sites (defined as sites with a maximum demand of 100 kilowatt hours). These sites have been supplied by E.ON UK for the last two years on a fixed price basis and expenditure has been in the region of £800,000 pa. A new contract is required to be in place on 1^st October 2006 and a minimum notice period of 30 days would have to be allowed to effect the transfer of the sites in the event that a new supplier is appointed. The electricity supplied by E.ON to the majority of these sites has been generated by relatively sustainable means and this has been exempt from the Climate Change Levy (CCL) throughout the existing contract. The remaining sites are themselves exempt from the CCL and are supplied with `brown' electricity as the lowest cost option.

2.2

The Council's large sites (around 60) are served by two suppliers - London Electricity (Electricite de France) and Scottish and Southern - and the fixed-price agreements with these companies end on 31^st October 2006. For sites with London Electricity, the price has been fixed only for the last 12 months, while those sites with Scottish and Southern have enjoyed fixed prices for two years. Current expenditure with London Electricity is approximately £1.4 million p.a. and the energy supplied has been `brown' electricity from less environmentally friendly sources. The energy supplied by Scottish and Southern has been from the most sustainable sources and fully meets the definition of `green' electricity. Expenditure with Scottish and Southern has been around £0.8 million p.a.

2.3

Around one-third of the Maximum Demand sites are schools. Schools also account for approximately two-thirds of the electricity supplied to the Council's large sites (and 80% of the supply points involved).

2.4

Market prices for electricity have risen sharply over the last two years and a very substantial increase in prices was anticipated. Total expenditure under the new agreements will also be determined by the mildness or severity of the winter weather and by any energy conservation measures undertaken by local building managers.

2.5

A large number of external customers (e.g. colleges, district Councils and the police and fire headquarters) also participate in these contracts. The current annual value of this participation is some £2.6 million.

2.6

In what has become a volatile market with sometimes limited supplies of green or CCL exempt electricity, tenders are frequently subject to short validity periods and it is now normal practice to complete the analysis of tenders very quickly.

3

Outcome of tender exercise

3.1

A good level of competition was achieved with a range of bids being received in each category from five suppliers.

Maximum Demand Sites

3.2

Out of a total of 34 individual offers, the lowest overall bid was submitted by E.ON UK, the existing supplier. This is for CCL-exempt electricity for those sites that are able to benefit financially from the exemption with the fixed-price period lasting for two years. The average increase in price is 45% and, other things being equal, the additional cost over the next twelve months would be some £361,000.

Large Sites

3.3

A total of 20 individual offers were received. The most competitive overall offers were submitted by Scottish and Southern in each category (12,18 and 24 months). The overall increase in cost is equivalent to some 23% (or around £515,000 in a full year). The lowest bids were for the supply of brown electricity, but the company has subsequently indicated that it will supply the more sustainable `green' electricity at no extra cost to the County Council. This will result in a substantial increase in the proportion of electricity that is supplied to the County Council from green or CCL exempt sources.

3.4

Thirty-seven sites currently with London Electricity will experience an average increase of around 5.5% (reflecting the fact that their current price was set one year ago in an already high market), but the average increase for sites with Scottish and Southern will be some 53%.

4

Conclusion

4.1

New contracts for the supply of electricity are to be awarded to the two companies making the lowest overall bid for each group of sites.

4.2

The prices submitted to the County Council reflect the prevailing market conditions and the largest increases will fall on those sites that have been on fixed price contracts for the last two years.

4.3

As a result of this tender exercise, the County Council will be able to increase the proportion of electricity supplied from `green' and CCL exempt sources to around 66% of the total at no extra cost. (Note this figure excludes energy supplied for street lighting.)

4.4

External bodies participating in these contracts are expected to add a further £3.5million to the value of business won by the successful suppliers. The average increase for these customers being approximately 37%.

Recommendation(s)

That:

approval be given to:

1

The award of a contract to E.ON UK for the supply of electricity to the `Maximum Demand' sites with effect from 1 October 2006.

2

The award of a contract to Scottish and Southern for the supply of electricity to large sites with effect from 1 November 2006.