UK: Electricity regions plug into the market. (2 of 3)

UK: Electricity regions plug into the market. (2 of 3) - TM is one of several consultancies that have found a lucrative new role in advising companies on their contract negotiations. Managing director Brian Chamberlain asks his clients to negotiate the b

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Last Updated: 31 Aug 2010

TM is one of several consultancies that have found a lucrative new role in advising companies on their contract negotiations. Managing director Brian Chamberlain asks his clients to negotiate the best terms that they can, then "come back to us. We will improve on that for half the gain." In a typical case the supplier originally offered an 18% discount. After TM examined the load pattern and ways in which it could be tailored to suit the supplier's constraints, and after comparisons with similar local deals, the discount was increased to 25%, backdated by three months.

It was too early in the negotiating round at the time of writing to be confident about trends for the coming year, although most expectations for the 1MW to 10MW bracket are that the new deals will merely take account of inflation. Strong competition from the two big generators and from Nuclear Electric, as well as the recession and the continuing low pool price (around which the RECs negotiate for their own supplies), all indicate that the market will remain soft. Chamberlain, however, expresses a widely held view that "some prices will probably go back up", in the longer term if not immediately.

Companies using substantial amounts of power are finding that effective buying demands close and detailed management attention, often backed by significantly more electronic metering and statistical analysis than they have used in the past - in one instance a prospective supplier demanded to see consumption levels taken at half-hour intervals throughout the year. While such data should help to concentrate managers' minds on the need to improve efficiency, the paperwork generated by putting the business out to tender and negotiating on the replies is a significant additional burden.

One company which puts all of its business out to tender is Ranks Hovis McDougall, which spends around £18 million a year on electricity supplies for its 60-plus production sites in the UK. Group energy buyer Neil Tribick explains that around half the volume is consumed by plants requiring more than 1MW, with the rest in the 100KW to 900KW category. For the former he is dealing with 13 lots of discussions (including Scotland), although the contracts for some plants have a further year to run. Negotiation has been well worthwhile, he has found, particularly since many of the food company's plants have a higher demand in the off-peak summer period than in the winter. "Before, the tariffs didn't reflect our demand patterns, and the savings averaged have been up to 20% over what they would have been." At the smaller sites, in contrast, the trend is the reverse: prices have gone up by more than 20%.

Discounts are not the only subject of discussion. One widely discussed topic is liability for power failure. As nationalised suppliers, the electricity boards in the past were able to limit their liability for negligence to a trivial sum, but now Tribick for one wants "them to accept normal commercial negligence clauses in their contracts".

A further matter of dispute is what constitutes a single site for the purposes of the 1MW rule. The suppliers see more of their captive business going out to tender if neighbouring sites are allowed to be aggregated. On a number of cases under both headings, the director general of the Birmingham-based Office of Electricity Regulation, Professor Stephen Littlechild, is being asked to adjudicate. Decisions so far have steered a judicious and generally respected path between the opposite sides - in one case The BOC Group wanted a £5 million limit to possible damage to its equipment by Yorkshire Electricity. Yorkshire thought that £100,000 was quite enough. Littlechild settled on £1 million.

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