1. Reducing Energy Costs Alan Brookes Director of Operations The Energy Consortium

2. Agenda 1.Introduction. 2.Price Build Up. 3.Contract Options for Energy. 4.Performance to Date for Flexible Contracts (SKUG). 5.Budgeting for Energy. 6.Recommendations. 7.David Sanders, Director of Estates, Natural History Museum Carbon & Energy Management

3. The Energy Consortium Public Sector Buying Organisation. –Specialises in Energy Procurement Governed by its membership. –Primarily UK Universities, Colleges, and Museums Management of energy purchases for best value. –Over £225 Million of Gas & Electricity Contracts (4.1 TWh) Delivers OJEU compliant solutions, & OGC ‘Recommended Solutions’ Invited to act as Energy Broker for South Kensington Utilities Group –Natural History Museum, Museum of Science and Industry, Victoria & Albert Museum Contracts for flexible procurement of gas and electricity

4. Price Build Up

5. Gas Price Make Up 100% 3% 1% 70% Metering Margin LDZ Charges NTS Charges Commodity Swing4% 11%

6. Electricity Price Make Up

7. Price Make Up Source: Spectron 21.09.11 Electricity (£/MWh)Gas (p/therm) Day Ahead48.1256.05 Oct-1152.7562.75 Nov-1157.7571.70 Dec-1159.7075.90 Q4-1156.9570.00 Q1-1259.8576.10 Winter-1158.4073.10 Summer-1254.4567.50 Winter-1258.4576.10 Summer-1357.8069.10 Winter-1361.7077.00

8. Contracting Options

9. Fixed Price Fixed Term

10. What’s in the price? Retail supplier buys 100% of your requirement from their trading desk. Adds Transmission, Distribution, and Balancing Costs. Adds retail supplier margin. Adds any brokerage commissions/charges (Disclosed/Un-Disclosed). Averages the result into a fixed rate for the term of the contract.

11. Fixed Price Fixed Term Advantages –Fixed price –Easier invoice processing –Fix & Forget Disadvantages –Suppliers cherry pick –Not transparent –Can have hidden ‘margins’ –Can contain Take or Pay –Fixed and often forgotten –High market premium –1 in 250 chance –Maximum 24 month contract

12. Fully Flexible Procurement

13. Flexible Contracts What’s in the price? Retail supplier does not buy the commodity. Identifies Transmission, Distribution, and Balancing Costs separately. Identifies swing premium (if used). Supplier margin has already been negotiated under OJEU. Identifies any brokerage commissions/charges. (Full disclosure) The commodity is bought against a transparent index.

14. Flexible Contracts Advantages –Transparency –Longer term contracts –Protection from market highs –Budgetary management –Discount on forward price –Access to market falls –Access to PPA’s –Budgets are based on reality Disadvantages –Price variation –Requires Risk Management –Requires aggregation 50GWh – 500GWh

15. Performance to Date

16. The Performance Benchmark Previous Price Paid What if markets have fallen compared to last tender? What if markets have risen compared to last tender? OGC Methodology Based on statistical probability of choosing the right time to trade. Not reported at individual user level. TEC Benchmark There are two contracting choices Fixed or Flex. Benchmark the cost of a Fixed Contract at the same time as entering into Flex Typically FPFT benchmark is equal to a Flexible Maximum Target Cost Benchmark performance against Maximum Target Cost (Budget).

17. Flexible Results (March 2011)

18. Flexible Results

19. Gas (Flex vs FPFT) YearSaving £Saving % 2010 £297,56323% 2011 £111,9148% 2012 £8,0381% Total £417,515

20. Gas (Flex vs MTC (Budget)) YearSaving £Saving % 2010 £228,71818% 2011 £155,82811% 2012 £2,4130% Total £386,959

21. 2012 A bad year for flexible contracts? Very low ‘savings’ compared to benchmarks. But the benchmarks were set at the beginning of the contract. –This is all about managing risk 2012 demonstrates the effectiveness of flexible contracts –Volumes locked out in a rising market –Defending the budget –Locking out at levels equivalent to FPFT. March 2011 SKUG knew what the price will be up to August 2012.

22. Budgeting for Energy

23. Traditional Approach Based on past history and current view. Subject to the Accountants ‘cut’. Can result in contracting decisions based on hope. Results in over expenditure on energy. Reduction in other departmental expenditure. Or worse; you don’t find out until it’s to late. Surprise!

24. What should a budget be? A realistic, defensible position. –Based on your institute’s objectives Based on verifiable facts –Consumption & Price Take account of all cost elements Requires transparency Provide forward visibility –For the time periods you need No Surprises

25. Elements of the Budget Understand Energy Consumption Ensure that you forecast your consumption. Understand the effect of control measures being introduced. Set upper and lower tolerance bands. Measure the accuracy of your forecast, and improve the accuracy.

26. Elements of the Budget Build up the price –Set your timeline objectives –Pass through elements should be transparent. Use a flexible contract –Use Mark to Market for the commodity element. –Flexible contracts can provide rolling 3 year achievable budget price. GOLDEN RULE SET THE BUDGET, DEFEND THE BUDGET

27. Recommendations

28. Measure and Manage usage. –Use less. Generate on site wherever possible. –Transmission costs are a significant part of the bill. –Capital funding can be resolved –Do the groundwork (Guide to Renewable Generation) Understand the price impact on forward budgets. –If funding/revenues do not increase at what price do you close the doors –Or make cuts else where –You cannot escape the market Manage budgets longer term with flexible contracts. –On Fixed contracts you will face the market every 2 years at best. Insist on transparency –Energy Supplier disclosure of cost make up including broker commissions.

29. David Sanders, Director of Estates Carbon & Energy Management at the Natural History Museum

30. Historic performance (~2005/06) Historic buildings South Kensington Wandsworth and Tring Public attraction and research facility Gas fired heating plant Mechanical ventilation Electrical cooling New buildings – DC1 + DC2 DEC rating - - 2008 was an “E” 2006 would have been an “F”

31. Pressure to reduce carbon emissions Carbon targets and taxes Pressure to deliver efficiency savings Cash release Capital Scarcity Competing priorities for public capital Desire for non-debt capital Transfer of risk Delivery risk Operational risk Performance risk Current environment

32. Major initiatives Estate and Energy strategies Energy and Carbon Awareness Campaigns Ad hoc energy retrofits e.g. sub-metering, controls upgrades, lighting Two externally financed ESCO projects 1851 Estate Carbon Reduction Masterplan

33. Waterhouse Building LED External Floodlighting LED’s deliver energy savings –70% more efficient –20 tonnes CO2 reduction per year Enables colour change for customer events

34. South Kensington CHP ESCO Shared service between NHM & V&A Favourable economics in 2009; CHP ran 24hrs per day net reduction of ~1900 tonnes of CO2 –A 17% improvement over 2006 £579k of guaranteed savings at 2005 utility prices

35. Results – NHM CHP ESCO contract performance

36. Results – NHM contract performance CO2 savings

37. Wandsworth & Tring ESCO Private capital; guaranteed energy savings Annual carbon reduction of 800 tonnes per year identified –CHP to replace dated boilers at Wandsworth and Tring –Lighting and electrical upgrades at South Kensington Close to practical completion

38. Current position Significant improvement Most quick wins and routine retrofits exhausted Further gains require radical approaches Transport Procurement and supplies Cooperation with 1851 Estate members to derive further efficiency and economic gains

39. Next steps 1851 Estate Carbon Reduction Masterplan –Joint initiative with other members of the Estate to become a zero net carbon utility user by 2050 –Phased programme Energy and carbon management Demand reduction measures Complete energy re-provision including more CHP, geothermal storage Seeking £33m funding!

40. Questions?