Electricity Buying for Dummies

8/13/2019 Electricity Buying for Dummies

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It's easier when you know how

ElectricityBuying

WiththecomplimentsofEDFEnergy

EDFEnergyLimitedEdition


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Making a world of difference

Choosing the right energy contract can make a world of difference

to your business. On the other hand, so can cutting your energy

use. To really make a difference, you need the best of both worlds.

Providing a wide range of energy supply contracts for our customershas helped us grow to supply more power to British business than

any other energy company*. As youll see in this guide, wholesale

electricity costs are highly volatile which makes the support we

provide our business customers all the more important. One

example is our Market Insight service providing daily reports

and analysis of current wholesale energy costs to help our

customers make more informed purchasing decisions. Log on atedfenergy.com/marketinsight.Perhaps thats one reason why EDF

Energy is also rated number one for customer satisfaction by UK

businesses**.

Of course getting a good deal for your energy is only half the story.

We also provide a great range of energy saving options that deliver

long term cost savings and carbon emissions reductions.

See how we can help your business save today to save tomorrow.

www.edfenergy.com/largebusiness

*source: Datamonitor B2B market share data: 2006-2009

** source: Datamonitor Major Energy User Customer Satisfaction Survey: 2009


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By EDF Energy

A John Wiley and Sons, Ltd, Publication

FOR

DUMmIES


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Electricity Buying For Dummies

Published byJohn Wiley & Sons, LtdThe AtriumSouthern GateChichesterWest SussexPO19 8SQEngland

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Introduction

You may be new to electricity buying, or you mayhave been in the business for decades. Either way,you are likely to find the task to be a challenging onethese days.

Energy prices are more volatile than ever. Just whenyou think youve seen everything, the market takes adizzying new turn. How can you be sure youre gettingthe best deal for your company? How can you prepareyour company for the markets wild fluctuations,making informed decisions so youre less likely to paytoo much?

About This BookElectricity Buying For Dummiesis a handbook for thosenavigating these daunting waters. Well take a look athow the business has changed, and why. Well explorewhats behind the pricing volatility that has caused

untold indigestion among energy buyers in recentyears. Well outline some of the strategies for master-ing the new reality. And well take a look at how carbonreduction schemes will impact energy buying.

Foolish AssumptionsIn writing this book, weve made some assumptionsabout you. We assume that:


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You are an energy buyer, by choice or by default perhaps new to the role, maybe a veteran pining

for the simpler days of yore (or not all that longago).

Youre in need of some new strategies for makingsure your company gets the best electricity deals,both today and tomorrow.

You want to be sure your company is ready for

the new challenges carbon trading will bring toenergy buying.

How This Book Is OrganisedElectricity Buying For Dummiesis organised into sevendistinct sections:

Part I: Electricity Buying in Todays Market.Wesummarise how the energy business in the U.K.has changed in the past two decades, and exam-ine how energy buying has been affected.

Part II: A Menu of Electricity Contracts.We takea look at some of the contract options available toenergy buyers.

Part III: Risky Business.We detail the volatilitycommon in todays energy market, and exploreways to reduce your companys risks.

Part IV: Best Foot Forward.We discuss how to bethe most attractive customer when youre seekingbids, and how to form a strong partnership with

your supplier.

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Part V: Counting Your Carbon.We look at thecarbon emissions content of your power and dis-

cuss how carbon reduction targets and legislationwill impact energy buying.

Part VI: Ten Ways to Prosper in the New Worldof Electricity Buying.We share the secrets to suc-ceeding in todays volatile environment.

Part VII: Glossary.For those not completely

fluent in the terminology of energy buying, weoffer a helpful list of definitions.

Icons Used in This BookTo make navigating to particular information eveneasier, youll find these handy icons highlighting

key text: Make a special note of these sentences,

because theyre particularly important (evenif you skip some of the other paragraphs).

This is a piece of advice that will help youunderstand the topic better and achieve moresuccess in energy buying.

You dont really haveto understand thesedetails, but they just might be of interestto you.

Heres a caveat that might save you or yourcompany some trouble or some money.


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Where to Go from HereThis is a short book, and you ought to be able to makeyour way through in no time. But we wont be offendedif you dont. Feel free to skip around and find the partsthat interest you the most, and use the headings tohelp you find what you need.


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Part I

Electricity Buying inTodays Market

In This Chapter Understanding the evolution of electricity buying

Learning the ropes as a buyer

Negotiating the business of buying

Linking up the electricity supply chain

If youve had a long career in the energy buyingbusiness, youve witnessed a tremendous evolutionin the way that power is bought and sold in the UnitedKingdom.

It was only about two decades ago that the energymarket was government-owned and highly regulated.Today, electricity is a commodity, traded in a mannernot all that different from gold or oil.

All home and business customers can choose theirelectricity supplier. U.K. companies may pick from

seven major suppliers and a few smaller ones. Thereare some 170 power stations that are part of the whole-sale market, and 43 medium-to-large power generators,


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all plugged into a national grid that matches supplywith demand.

What Has Happened tothe Electricity Industry?The market began its move toward todays structurearound 1990. Before then, the government owned most

of the countrys generation plants, and governmentmonopolies oversaw distribution as well. Customerscould not negotiate the price of their electricity supplybecause they had no choice in providers. The pricewas relatively stable more so than today but thegovernment felt it was too high and that efficienciescould be made in the market to benefit consumers.

The road to privatisationPrivatisation and transformation to a competitivemarket was seen as the answer. For the first decade, awholesale market called The Pool facilitated the com-petition. Generators sold power into The Pool, compet-ing on wholesale price, and suppliers purchased thepower out of The Pool on behalf of their customers.Prices gradually declined through this competitivescheme.

More restructuring came in 2001, drivingprices even lower through the creation ofgreater competition among generators. Theone-price-for-all system maintained by The

Pool was replaced with a commodity marketunder the New Electricity Trading Arrangement.Not only did the change result in generatorsand buyers negotiating prices more directly, it

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also brought new buyers into the market,including speculative traders who were not in

the business of producing or supplyingelectricity.

Volatility on the riseThough the 2001 restructuring was followed by morereductions in the wholesale price in power, the trendreversed only a few years later. Wholesale prices began

to rise dramatically as supply-and-demand pressuresbrought new volatility and the price of electricity roseto reflect the increasing price of the gas often used togenerate it. Between 2003 and 2006, wholesale gasprices rose by more than 250 per cent, and wholesaleelectricity prices jumped nearly as much, according tothe research firm Heren Energy. In 2008, prices rose

and fell by 80 per cent. These volatile market pricescan be seen in Figure 1-1.

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70

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90

100

Jan

2005

Jul

2005

Jan

2006

Jul

2006

Jan

2007

Jul

2007

Jan

2008

Jul

2008

Jan

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Jul

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/MW

h

GasElectricity

Figure 1-1: UK wholesale electricity and gas prices


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This volatility has driven the need for a morestrategic approach to energy buying for busi-

ness and making the roles of the energy buyerand energy manager all the more important.Nobody wants a price shock at the end of acontract!

The Evolving Role of

the Energy BuyerOh, for the simpler days! The original focus of theenergy buyer was price, which made it relatively

The Governments Role in the Energy MarketThe energy business in the U.K. is regulated by Ofgem, theOffice of the Gas and Electricity Markets. The office is allabout protecting consumers by promoting competition, butalso providing appropriate regulation of the monopoly com-panies that operate the countrys electricity and gasnetworks.

Other governmental entities with a hand in the energy busi-ness include:

The Department of Business, Innovation and Skills

The Department of Environment, Food & Rural Affairs, theofficial protector of the environment.

The Department of Energy & Climate Change, formed in

2008 to consolidate the energy responsibilities of the twopreviously listed departments.


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simple to discern the best deal. And as prices becameever-more competitive, with reductions across the

market, price-focused energy buyers were overjoyed.These days, of course, price fluctuations are constantand sometimes dramatic, and the cost of electricity isdetermined by a combination of factors. It is more diffi-cult than ever to predict the best time to go to market.Another new challenge for energy buyers, especially oflarge energy users, is ensuring that their companys

energy consumption is not far off the amount of energythat was forecast they would use when they signedtheir supply contract. Those that stray significantlyfrom their original forecast may incur additionalcharges as energy suppliers seek to recoup the costs ofmanaging these variances in the wholesale markets.

Tools of the trade The job may be more difficult than ever, buttodays energy buyers have many tools attheir disposal that enable cost-effective energyprocurement. Different types of sites in theirportfolios are metered differently. Larger siteshave half-hourly metering(also known as HH)

or if theyre smaller users (normally less than100 kilovolt-amps or kVA) they may stick withnon-half-hourly metering(thats NHH for short),whichever seems the most appropriate for theparticular situation. HH meters are read elec-tronically every half hour.Conventional NHHmeters are read manually only once a month

or once a quarter. However, these are beingphased out to be replaced by AutomatedMeter Readers (AMR) that can function muchlike half hourly meters.


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With energy now more of a commodity, buyerscan examine more precisely the various com-

ponents that make up their electricity bill, andtake charge of those components. About threequarters of that final bill is typically the actualcost of the energy, while the remainder coverselements such as the cost of transporting theenergy from the source to the point of useacross both the national grid and local distribu-

tion network systems. Figure 1-2 illustrates this.

Energy 75%

Margin 2%

Shape & Volume

Risk 1%

Hydro Levy 1%Elexon 1%

Renewable Obligation 5%BSUOS 2%

Transmission

Losses 1%Distribution

Losses 3%

Distribution

Charges 4%

Transmission

Charges 5%

Figure 1-2:Electricity Costs

A roadmap toward a new energy contractIn this more complicated market, here are some of thefirst steps that you as an energy buyer must take topursue a new contract:


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Collate a full record of all sites that will becovered.

Divide those sites into two groups: HH and NHHsites. Your current supplier should be able to helpidentify your HH sites and provide annual HH datafor all applicable sites.

Total-up the consumption and cost for eachgroup.

Expect your supplier to talk about your creditworthiness and how this affects the paymentterms you may be offered.

Ask your current supplier for any materials thatmight help in understanding energy andprocurement.

Determine a realistic view of what you hope toachieve with regard to energy reduction andcontrol.

Check with your supplier to learn about otherproducts that might help manage and reduceenergy consumption.

Look at the terms and conditions, service levels,

and customer satisfaction price is not the onlyconsideration.

Determine your energy supplier options and con-sider approaching other suppliers.

Learn more about the suppliers youre consider-ing, including their commitment toward energy

usage reduction and the ways they can assist.


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Energetic Energy Supply ChainElectricity is something most people just take forgranted you switch on a light and the bulb glows, youplug in a television and The X Factor fills the screen.Few people think about how that energy travels fromits birthplace to the place where its used.

Fortunately for modern society, thousands upon thou-sands of people do think about the electricity supplychain 24 hours a day, every day of the year. What goeson behind the power socket is complicated.

Start to finishThe supply chain begins at the point of generation,power plants that typically are powered by nuclear,gas, coal, water or even wind. There are around 170power stations across the U.K, though a large share ofthe generation takes place in the north, where most ofthe coal once came from. Power station operators areof course affected by the international commodity mar-kets for their feed stocks, such as coal and gas.

From the power plant the electricity moves

onto the national grid. The national grid is across-country transmission network consist-ing of nearly 24,000 kilometres of transmissioncables. From the national grid the powermakes its way onto local distribution networksowned by DNOs, short for distribution networkoperators. The 14 DNOs are owned by sevencompanies, which maintain more than 665,000kilometres of distribution cables. You will beconnected to one of these cables.


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At the end of this cable will be your meter. This meterhas a unique registration number called an MPAN,

(shown inf Figure 1-3) which identifies it among all theother meters in the U.K. To ensure that your meterdoes its job accurately you must appoint a meter opera-tor(known as the MOP) to maintain and service yourmeter regularly.

00884500

4510023000112SProfile Class Meter Time Switch Code Line Loss Factor

Host Rec Check DigitMPAN Core

Figure 1-3:Meter Point Administration Number

Also playing a role in managing your metering data isthe data collector(the DC), which uses a telephonemodem to read your meter every day and downloadyour HH data thats 48 half-hourly readings. This

information is then sent to the data aggregator(the DA),which makes sure the data is complete with no gaps orerrors before passing it along to the supplier, fromwhich you get your monthly bill.

Even though you get just one bill from the supplier, theenergy supply chain works with the help of a numberof settlement processes that take care of all usage,including all regulated charges. These charges includethe cost for using the national grid (you may see thiscalled TUOS, short for the transmission use of system


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charge) and the distribution system (the acronym hereis DUOS, or distribution use of system). Your HH data

works its way through the settlement system, and thesupplier pays the NGC and DNO for the use of theirsystems.

The supplier also has to pay for the energy it buys foryou, so ultimately, the power stations get paid as well.And then, of course there are taxes, such as VAT andthe Climate Change Levy.

Meanwhile, metering costs are paid by you to theappropriate MOP (thats a meter operator, not a floorcleaning device).

Whats left? Not a whole lot, really. Its the suppliersmargin, which tends to be quite low.

The Business of BuyingIf energy buying were as simple as purchasing food atthe market, there would be no need for a guide likethis. Buying energy is more like buying other commodi-ties, which seems simple enough how much is pro-cured depends upon how much you need, when youre

going to use it and for how long. In reality, even thoughenergy is traded like a commodity, buying power canbe a lot more complicated because electrical energycannot be stored like other commodities.

Whats in your energy bill? That price displayed on the electric bill actu-

ally is the sum of many components. The greatthing is, you can negotiate the price of some ofthose elements.


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Lets go back to the market for a minute and imagine acan of beans on the grocery shelf. A large part of the

price covers the beans themselves, but you also arepaying for the preparation and packaging of the beans,the delivery of the can to the store, and the shopkeep-ers overhead and profit. You pay one price to thecashier, and all of the players get their cut. The suppli-ers margin is essentially the label.

With electricity, you pay the electric supplier that

sends you an invoice, and that payment gets divided asit works its way backward through the supply chain.

Delivery of that electricity makes up a significant partof the total charge. Youre paying something to use andmaintain the national grid as well as the local distribu-tion network and the industrys shared systems. Theprice for all of this is regulated and fixed, and is thusnon-negotiable.

Though its fixed, it does vary by area and location. Forexample, national grid costs may be higher if youre inthe southwest, because most of the generation hap-pens up north and thus the energy must be trans-ported across a greater distance.

Meanwhile, your supplier gets a cut of the bill, too,though its relatively small as little as one or two percent, depending on the size of the contract. Some mayalso go to pay your energy broker or consultant if youuse one. The rest covers the commodity cost of theelectricity youre buying. This is not only the majorityof the bill its also the most volatile component, caus-

ing the most potential trouble when it comes to tryingto stay within budget.


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High volume, low margin, high risk

The delivered price of your energy is sup-ported by having the suppliers lock in for-ward contracts that protect them againstvolatile market conditions. Such contracts areneeded because energy is a featureless com-modity, traded in large volumes but with highrisks and low margins.

If youre buying for a large site or multiple sites, youllbenefit from portfolio contracts with your suppliers.Youll need to engage with the suppliers to review youroptions, but the real key in getting the most appropri-ate price is your certainty in the level of consumptionyoull have in the future. The less certain you are, themore risk there will be for the supplier, and that means

a higher price. Youll be well-served by a good set ofenergy consumption forecasts.

One thing youll notice if youre buying for a variety ofsites is that there are different price options and for-mats for each market and location. For example, theremay be a different price for each HH site unless the HHsite contracts are bundled.

If you buy your energy through a flexible contract, youcan negotiate with your supplier on management fees,calculate what the fixed costs will be, then devote yourattention to managing the commodity cost of the elec-tricity. This takes a solid understanding of the variousfactors that drive the commodity price of electricity, aswell as how your contract is written.


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Be ready to act quickly

As you can see, there are a lot of pieces to the puzzle,and many of them come with fixed, non negotiableprices. The biggest chunk, though, is also the most vol-atile: the wholesale energy prices. Those are liable tochange daily, and its common for them to change peri-odically during the day, too.

The wholesale price on the market can change

on a daily basis, so theres no hanging around.To get the price you want, you must be readyto accept an offer quickly, in some cases,within a few hours.


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Part II

A Menu of Electricity Contracts

In This Chapter Fixing the price

Choosing flexibility

Making choices

Seeking expert assistance

Dining out wouldnt be much fun if you couldntchoose a meal thats right for you. You want amenu thats broad enough to satisfy everyone in yourparty.

Likewise, when youre buying energy you wouldnt bewell-served by a one-size-fits-all approach. You need amenu with options that fit your budget as well as yourappetite in this case for risk. Fortunately, you havechoices, plenty of them. You can decide to fix yourprice for the duration of the contract some peoplesleep better at night with that kind of predictability. Oryou can choose any of a number of flexible contractoptions.

Given the wealth of choices, there is plenty oftemptation to move your portfolio when itscontract time. Just be sure to consider the


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costs of moving. Check your incumbent sup-plier provides you with correct data, and that

your new supplier can register you on time.

Ordering Prix FixeA little surprise now and then can make life interesting,but when it comes to money matters, surprise is notalways welcome. And lets face it owners of small to

mid-size businesses have enough to worry about with-out having to think about their power rates spiking.

Smaller energy dietsFixed price contractsare for these kinds of customers.Theyre exactly what the name implies: contracts thatallow customers to fix the price for electricity and then

stick with it for a predetermined period of time, typi-cally anywhere from six to 42 months.

These kinds of contracts are especially suitedfor (but are in no way limited to) customerswho dont use large volumes of electricity generally less than 10 gigawatt-hours (GWh) ayear. How much power is that? Well, a small

supermarket will use roughly 1 GWh a year,while a large department store on LondonsOxford Street could consume around 5 GWhannually.

Fixed price contracts are geared for buyers who have alow appetite for risk, companies that want to fix theirbudgets and costs. This also includes many very large

energy users, such as water utilities and trainoperators.


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Energy suppliers are willing to enter into these dealsensuring a good price for a longer term because it

helps them plan too. They know youll be a customerfor that period of time, and can forecast the amount ofelectricity youll need (normally based on how muchyou used last year), so they can line up sources foryour energy well in advance. They receive benefits fordoing so, and they can pass those benefits on to you,the customer.

Your business is probably used to using asmuch or as little electricity as it so desires withlittle consequence. In future using a signifi-cantly different amount of energy to what wasoriginally forecast in your energy supply con-tract could prove expensive. Thats becausemanaging these unplanned swings in energy

consumption can be costly for energy suppliersand many are now beginning to recoup theseunforeseen costs from those customers.

Dont neglect the details When youre considering a fixed price con-

tract be sure to check whats included in the

price so you wont be surprised. Also, read thefine print to understand the terms and condi-tions, including the details about when theprices can be changed. And make certain youunderstand the termination obligations, aswell as how the contract can be renewed ifyou so choose.

Comprehending all of these details is important notonly for your long-term satisfaction as a customer, butalso is critical when youre evaluating bids from a


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number of suppliers. If one supplier has prices thatseem quite a bit lower than others, there may be some

exclusions that account for the difference.One important thing to consider that almost goes with-out saying: Youll be happiest with your fixed pricecontract if the price you fix is a good one. Do what youcan to sign on when the market is low and fix the priceat the low rate.

The Flexible ApproachWeve already discussed how volatile energy costshave become in recent years and that for companiesthat count energy as a big part of overhead, the volatil-ity can be a significant risk. You can think of it like thestock market, but in fact the stock market tends to be

more stable than the wholesale price of electricity.One study found that an organisation consuming 240GWh of electricity in 2005 might have paid anywherefrom 4.5m to 10.2m, depending upon the timing oftheir purchases. Clearly, that can make quite a differ-ence in a companys financial situation.

Flexible (aka floating) contractscan spreadelectricity purchases according to a price riskmanagement strategy. This helps managemarket volatility risk and keep energy buyingin line with budgets. However, flexible con-tracts do not guarantee savings and specula-tive energy buying should be avoided!Basically, flexible contracts provide you theability to make your own decisions regardingwhen to buy your electricity, and how much,depending on the prevailing market price.


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It sounds simple but it isnt, really. It takes a lot ofexperience and technical expertise to manage these

kinds of contracts well, which makes it important to dobusiness with a provider that can offer such expertiseand explain the contracts in a way that helps you pre-pare for this kind of energy purchasing. You need tohave access to market data and the right information atthe right time and be prepared to make decisionsquickly so you can react accordingly to changes in the

market.There are a couple of primary purchasingstrategies designed to make the most of a flexi-ble contract and keep your energy costs to aminimum. One is to make your purchasesaccording to a pre-defined schedule, and theother is to base your decisions on certain

market triggers.For example, you may choose to make purchases on amonthly basis, buying your electricity as a purchasingdeadline approaches each month. This is known as therolling monthly lock-in, and its an alternative to simplybuying all of your energy at the beginning of the con-tract year for the price thats available then.

A variation on this strategy is aprogressively hedgedrolling monthly lock-in, where your monthly purchasesare made in several blocks to hedge the price of eachblock against future price rises.

Strategies tied to market triggers include astop-loss plan, where your company sets an

upper limit on the price. If the price hits thatlimit you lock the price for the remainder of


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the month or season to protect against evenhigher rates. Companies with more appetite

for risk may try a strategy known as lock/unlock per block, which aims to benefit frommarket volatility. At its best, this conceptallows you to lock-in blocks of electricity whenrates are low, unlock and sell the blocks backto the market when rates are high, and thenbuy them back when the market drops again

one hopes below the original price of theblocks.However, theres always the risk youmay lock-in too high and then the rate drops.

More Choices to MakeBoth fixed-price customers and those lining up flexible

contracts may choose deals that are fully inclusive,with a set price that builds in all of the costs that gointo getting electricity to your meter. Or there may bevariations, such as an energy-only contract that fixesthe cost of the energy which is the bulk of what youpay but passes through the distribution and transmis-sion costs.

Depending upon the type of meters you have and theamount of energy you use, you might arrange a con-tract with a single fixed rate, or it might establish tworates that are in effect at different times, such as dayand night. Your contract may include seasonal time ofday rates- known as STOD, which have high winterpeak rates. If you are able to cut your usage during

these winter peak times, you may save yourself somemoney.Any of these options are possible providedyour company uses half-hourly metering.


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You have other options for NHH sites. Youll be offeredrates that are appropriate for the number of registers

on your meter, and can enjoy the simple life with sim-plified rates.

And just as you have to choose the colour of the shirtyoure buying, youll find that energy contracts come indifferent shades of colours from green to brown. Youalso may choose a CHP contract thats short for com-bined heat and power.

Calling the SpecialistCertainly every customer is unique but when it comesto energy buying, some are more unique than others.Your needs may be quite different from the averagebusiness.

For example, what if youre operating not only in theUK but also across Europe? Youll find that the electric-ity markets are as different as the languages!

You may be up to the complicated task ofbuying energy in different markets from differ-ent players following different rules. Or you

may choose to seek a supplier that operates inmultiple markets and can strike a deal thatsimplifies your purchasing.

Alternatively, perhaps your organisation operates inthe public sector closer to home, maybe, but with itsown set of complicated purchasing guidelines alongwith budgets that get tighter every year. Youll find that

electricity is one of the most complicated things yourorganisation will buy.


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It doesnt have to be that way. Your powerprovider may be able to connect you with a

specialist buying groupgeared specificallytoward public sector situations. Such a pur-chasing arrangement should be geared towardgetting your organisation the best possiblerates through the wholesale market. It shouldoffer access to renewable energy in order tomeet environmental targets, and handle

administrative aspects in order to save yourorganisation time and money.

Specialist customer contracts also cover energy fromrenewable sources, which helps meet government tar-gets on energy procurement. For example, levy-exemptenergy contractsdeliver energy from accredited genera-tion technologies in order to qualify under the Climate

Change Levy exemption scheme. Choices include greenenergy contracts that deliver power created throughwind or hydro generation as well as biomass. Anotherpossibility is a low-carbon energy contract that usesthe highly efficient combined heat and power generat-ing technology. Nuclear power is yet another source oflow carbon energy.

Time to Sign? If you tend to procrastinate, youre in good

company. Plenty of energy buyers bide theirtime and wait until the last minute before sign-ing a contract. After all, why put your name on

the dotted line any earlier than necessary?Youre keeping your options open, right?


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Maybe, but youre also at risk of ending up on thewrong end of the law of supply and demand. If youre

dealing at a time when a lot of other buyers also arewrapping up their own deals, you might find thatyoure in a sellers market. August through to Octobertend to be the busiest time for suppliers, which canmean fewer deals and less service.

Start speaking with your energy supplier wellin advance. This will give everyone time to

assess your requirements and agree on themost appropriate terms.

And dont forget the market is volatile, so if the priceseems right, get it in writing and sign up quickly. Hotprices can be withdrawn at any time, so watch themarket carefully.


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Part III

Risky Business

In This Chapter Watching out for volatility

Managing your risk

Like any other commodity wheat, sugar, corn theprice of electricity is governed by the laws of

supply and demand. But its not as simple as it sounds,because were not talking about the supply and demandfor just power, but also for gas, coal, and oil. And weretalking about the weather, politics and wars, in placesnear and far. Its enough to make your head spin.

Its Volatile Out ThereTruth is, it makes sense that the wholesale price ofpower is heavily influenced by how much it costs toproduce the electricity. The biggest factor controllingthe cost is the price of the raw fuels used in generation,such as coal and gas.

As the price of coal or gas goes up, so doesthe cost of electricity (as shown in Figure 3-1).But the price of oil has a major impact onelectricity too, because the price of oil has a


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strong influence on the price of gas. And we allknow how volatile oil prices have been in

recent years.

-

10

20

30

40

50

60

70

80

90

100

Jan2005

Jul2005

Jan2006

Jul2006

Jan2007

Jul2007

Jan2008

Jul2008

Jan2009

Jul2009

Jan2010

/MW

h

GasElectricity

Figure 3-1:Gas and electricity prices

The prices of these raw materials are driven by allkinds of factors that dont always seem logical topeople not involved in the business. Factors such as

fear the fear that traders have that supply wont meetdemand.

Weather can impact that fear, as can regional conflictsand other geopolitical factors. Thus, a spike in oildemand in China can drive up the cost of electricity inthe U.K. So can a hurricane in the United States, orstrife in Nigeria.

Complicating matters even further is the involvementin the commodities markets of investors who actuallyhave nothing to do with the power business, or the oil

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29

industry, or the business of sugar or wheat, for thatmatter. Such outside investors have an influence on

commodity prices and that influence may be informedby how these investors are faring on other fronts, suchas the stock market.

It all translates into dramatic ups and downsin power costs. Its not uncommon to see thewholesale price of electricity rise or fallbetween two and five per cent per day, and

shifts of 10 or 15 per cent are not unheard of.

Uncertainty x Exposure = RiskUnlike such commodities as wheat, coal, sugar, andgas, electricity cant be stored on a large scale. Thesupply must be instantaneous to meet the demand,

which means the amount of electricity being generatedat any given time needs to remain in balance with theamount that homes and businesses need to use.

In order to maintain the balance, the industry must beable to accurately forecast needs. Thats why those inthe business value customers with accurate consump-tion data and precise forecast information. This kind of

information allows energy providers to estimate theups and downs of every customers needs, and plan forthe peaks and valleys in the load they need.

Such precision forecasting helps the industry avoidsuch uncertainties as surprise peaks or valleys indemand, which makes their business a lot less risky.And the less risky their business is, the more willingthey are to cut a good deal for electricity.


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30

That good deal, in turn, reduces the risk facing yourcompany. Youll need a certain quantity of energy over

a given time period, and youve got a certain amount ofmoney budgeted to pay for that energy. The risk is youwont have enough money in the budget to pay for thatenergy.

Think about risk as being the product ofuncertainty and exposure. The uncertainty isthe price volatility and the chance that the

price will get too high for your budget. Theexposure is the portion of your energy needfor which you have not locked in a good price.

You might not buy all of your power in one big chunk,but rather in smaller contracts here and there. Perhapsyouve signed attractive contracts covering about 85per cent of your anticipated power consumption. Thatmeans youve eliminated the uncertainty regarding 85per cent of your needs, and thus eliminated a big por-tion of your risk. The other 15 per cent of your powerneeds is still at the mercy of the whims of the market its your remaining exposure to pricing uncertainties.That 15 per cent is still at risk. Buy cleverly, get thatexposure down to zero and youll sleep more easily.


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Part IV

Best Foot Forward

In This Chapter Understanding the viewpoint of the seller

Establishing a cooperative relationship

You may be one of those people who really enjoysbuying a car. For you, its a game of cat and

mouse, trying to outwit the dealer and take home thebest car at the lowest price. You see the dealer as theadversary to be conquered, and the automobile as thespoils for the victor.

It may be tempting to think of your energy purchase inthe same way its you versus the energy provider, abattle to see who can win the most at the othersexpense. Try not to give in to that temptation, though.Youll be happier if you work toward a partnership thatbenefits all parties involved.

With this line of thinking, you understand the sellerspoint of view and know what you must do to be themost attractive buyer. And the seller gets to know you

and your business in order to provide you with a dealthat ensures your companys long-term prosperity.


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Pretend Youre the SellerStep back for a moment and think about what life mustbe like for companies in the business of generating andselling power. Customers all count on being able toswitch on their lights and machinery and appliancesand gadgets whenever they need them there needs tobe enough power to meet the demand, whatever thatdemand might be.

Gearing up to meet that demand would be a nightmareif there wasnt some predictability to power usage. If allbuyers consumed power whimsically and wildly, pro-viders might need to expand their generating capacitybeyond reasonable expectations just in case.

So, what kind of customer will seem the most

appealing to a power company? One that has agood handle on its own energy consumption,with predictable usage and a healthy stack ofusage data to back up that picture ofpredictability.

That means gathering and carefully studyinghalf-hourly load data. The more you know

about your own companys energy use, themore you can help a potential supplier under-stand your needs. And the more comfortablethat supplier is about the demand youll beplacing on the system, the greater yourchances at landing the best possible deal.

Of course, that information is valuable to your own

operations, too. If youre keeping a watchful eye onyour half-hourly data, youll be the first to notice wastethat you just might be able to eliminate. Thats greatfor the bottom line.

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33

Working Hand-in-HandNow switch your hat back youre the energy buyeragain. What is this, you wonder, a police interroga-tion? Why do I have to answer so many questions?

Yes, there are a lot of questions, but itsimportant to keep them in perspective. Thisshouldnt be an antagonistic relationship itsimportant to view the supplier as a partner inyour companys success, because thatsexactly what a good energy provider can be.Those questions are needed to establish thatclose working relationship and get a goodsense of your companys needs andpreferences.

Beyond the obligatory whats the name of your com-pany? query, here are some of the questions youshould be prepared to answer:

What kind of meter and pricing profile does yourcompany have? Half-hourly or non-half-hourly?Youll be able to share the most useful informa-tion if youre on half-hourly metering.

Do you have supply numbers or MPANs (MeterPoint Administration Numbers) for all of themeters serving the premises for which youreseeking quotes? These are numbers, unique toeach property, are typically found on your electricbills (but theyre not the customer number).

Can you provide good consumption data? Themore you can provide, the more likely it is toobtain the most accurate pricing.


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34

Do you have the half-hourly data, if applicable?Your current supplier can provide this data.

Again, providing the best consumption data youcan ensures the most accurate price, and if it hap-pens to be a years worth of HH data, youll havethe benefit of being a lower-risk customer.

Can you provide any additional forecast data? Ifyour forecasts are different from what your con-sumption has been in the past, your supplier will

want to know.

How long a contract are you seeking? Do youprefer the comfort of a longer-term contract, orthe flexibility of a shorter-term deal? Typicalchoices include one-, two-, or three-yearcontracts.

Do you prefer a fully fixed, all-inclusive price, orwould you want certain variable costs incurred bythe supplier simply passed through to you? Theformer is more predictable from your perspective,but may require the supplier to raise the price alittle to cover the uncertainty.

How soon do you need a quote? Dont expect it an

hour from now it might take several days to pullthe information together. Try setting a target datefor receiving all competing quotes.

Any idea what tariff structure will suit your busi-ness needs the best? A day/night tariff perhaps, ormaybe a STOD (seasonal time of day)? Dont beput off by the more complex tariff structures,

because depending on your usage, they mightprovide the best value.


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How do you wish to pay? If youre willing to signup for direct debit payments, you may be able to

secure better terms. Whats your companys credit rating? This infor-

mation will also play a role in determining yourpayment arrangements and terms of supply.

What are your billing requirements? Do you wantto combine all sites onto one bill, and would you

like that delivered electronically? Have you notified your current supplier that you

wish to terminate the contract? Check the fineprintthat may be required, even if in the endyou decide to stick with your current supplier.


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Part V

Counting Your Carbon

In This Chapter Committing to reduce carbon

Understanding the bottom line benefits

Complicating energy buying

Theres one more elephant in the room regarding

energy buying, and its an issue that wont be goingaway. Its that little matter of climate change, and theefforts that are being made to reduce the impacthuman activities are having on the environment.

Climate change, of course, is often referred to as globalwarming, because its all about a gradual increase in theearths average temperature. Most scientists agree that

the increase is largely the result of the things we humansdo in our industrialised world, particularly the burningof fossil fuels. This creates greenhouse gases that warmthe atmosphere, the best known being carbon dioxide.

Many power plants (hydro, nuclear, wind farms beingamongst the exceptions), unfortunately, generatecarbon. Because they do, their operations are subjectto the impact of national and international efforts toreduce carbon emissions. And your company is quitepossibly subject to these efforts as well, in ways thataffect your energy buying as well as other operations.


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37

Making a Commitment

to Carbon ReductionThe Carbon Reduction Commitment Energy EfficiencyScheme (CRC) is a regulatory scheme that requiresorganisations from businesses to schools to report theiremissions that are linked to energy use, with penaltiesand rewards issued according to how they perform.

You may have heard of the European Union EmissionsTrading Scheme the CRC is a lot like it but on anational scale and with different rules. It is estimated tosave up to up to 11.6 million tonnes of carbon dioxideemissions (MtCO2) per year by 2020.

The commitment is basically an emissionstrading scheme requiring companies to pur-chase at the beginning of a financial yearallowances covering the equivalent amount ofCO

2that they produce for that year.

Organisations which have at least one HH electricitymeter settled on the HH market and a HH metered elec-tricity consumption of at least 6,000 MWh in 2008 are

impacted by this scheme.What does it mean? If youre covered, youll have toforecast your annual carbon emissions for a financialyear and purchase allowances equivalent to theseemissions at a fixed price of 12 per ton of carbondioxide for the three first years. After that, you pay themarket rate. But note that the number of allowances

available on the market will be capped. The price pertonne of carbon is therefore likely to increase encour-aging organisations to reduce their carbon emissionsyear on year.


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Whats more, youll have to report on yourcarbon emissions and maintain evidence back-

ing up your carbon reporting in case yourcompany is audited.

The whole idea is to give you extra incentive to reduceyour energy consumption. Do that, and not only willyour electric bill go down, but you also may be able tosell off the allowances you dont need. The best per-formers essentially gain at the expense of the worst.

Being a better performer also is helpful to your reputa-tion. The relative performance of participating compa-nies will be publically available when a league table ispublished each year. Its one key to a healthier bottomline. And the main idea is that the planet benefits as thecap on allowances drops over time.

Green Future: In the Redor In the Black?

Do nothing about carbon before the taxes andrestrictive regulations kick in and you mightfind carbon having a troublesome impact on

your bottom line. You could wind up strug-gling to buy carbon emissions rather thanmaking a profit by selling your extras. Youcould see your customer count dwindle.

Immediate action is needed, not only for the future butalso to take advantage of this new way of doing busi-ness from now on.

Pay now or pay laterThe truth is, the cost of carbon emission allowanceshave been factored into electricity generation costs for


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39

a few years now. Those European power plants thatburn fossil fuels must own sufficient carbon allowances

to cover their operations and resulting emissions.The impact comes if a generator runs out of carbonallowances if the emissions exceed whats allowed.That generator must then acquire more allowancesfrom other companies that may have some to spare, orit must pay a fine.

The cost of those extra allowances follows youguessed it the laws of supply and demand. Whetherallowances are purchased or a fine is paid, the endresult is that the cost of power from that generator isimpacted by carbon trading.

Improving your reputation

This all sounds like a hassle, but its actually an oppor-tunity. There are tangible benefits that come fromhaving an image as a low carbon company.

Customers increasingly are interested in buying moresustainable products. According to the Carbon Trust,six out of ten shoppers are more likely to buy a prod-uct if they know the manufacturer has taken steps to

reduce the products carbon footprint.

Youll save money, too Your energy bill is probably one of the more

significant areas of your budget. When youpay attention to your carbon footprint and goabout reducing carbon, youre probably cut-

ting your energy consumption. Needless tosay, that cuts your electric bill, so saving theplanet ends up saving you money.


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40

Clearing the Air But Muddying

the WaterIt all seemed so easy, back in those days when yourmain concern was minimising the bottom line. Carbontrading is a significant new complication in the processof energy buying.

Consider that whole supply-and-demand thing one

more time. Peak rates those rates charged for energyduring particularly high-usage times are understanda-bly higher than off-peak rates, because the whole defi-nition of an energy usage peak is that its when thedemand is the highest.

Now factor in how peak electricity is gener-ated. Typically, electricity generated to meetpeak demand comes from a plant that can beramped-up quickly. That tends to be a fossilfuel-burning plant, rather than something likea nuclear power plant. A coal plant, for exam-ple, requires less than 15 minutes to ramp up.Problem is, a coal plant is a bigger carbon gen-erator, and carbon reduction schemes will add

to the price of its power down the road. Thus,buying electricity at peak hours could turn outto be even more costly.

Plus if you, as the buyer, have a finite number ofcarbon allocations, where you get your peak electricitymay have an impact on your own carbon situation. Youmay be able to afford the higher energy prices, but notthe higher carbon rates.


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Part VI

Ten Ways to Prosper in the NewWorld of Electricity Buying

Electricity buying is not what it used to be its awhole lot more complicated. But that doesnt meanits devoid of simple wisdom. Here are some secrets tosuccess.

When seeking quotes for electricity contracts, be

sure they are like-for-like. Youll have a rough timecomparing bids if theyre not.

If a quote seems too good to be true, theres apretty good chance that it is. Go back and checkthe fine print and the details to be sure theres nota mistake.

If you are using consultants, keep a close eye onhow much you are paying them and how theyrebeing paid. And dont forget to compare theircosts with the potential benefits.

When choosing a supplier, be sure to gauge howmuch each candidate is willing and able to assistyou. Cost is important, but service is also critical.


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Youre not just a buyer you need to sell yourcompanys attractiveness to the seller! The more

the seller wants to sell to you, the better the pricewill be.

Be informed, but dont be timid. When an out-standing price comes along, you need to feel con-fident enough to grab it quickly, because it coulddisappear as fast as it appeared.

Study that fine print. Even a simple, fixed-pricecontract contains details that you must under-stand, such as what you need to do to renew thecontract or cancel it.

Get special help for special situations. If you rep-resent a governmental entity, or if you are buyingfor sites across Europe, there may be a special

programme for you. Dont wait until prime contract renewal time to

sign your new contract. Those times when every-one is signing are not likely to have the best rates.

Great rewards come from reducing your compa-nys energy buying risks. Lock in as much of yourconsumption needs at a low rate and your bosswill love you.

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Part VII

Glossary

Carbon Reduction Commitment Energy EfficiencyScheme (CRC):Sets national goals for reduction of

carbon emissions, and has an impact on manycompanies.

DNO:The distribution network operator, which runsthe local distribution network, takes power from thenational grid and brings it to your neighbourhood.

DUOS:This is the charge made by the DNO for using its

distribution network to get your power to you. Itsshort for distribution use of system.

Fixed price contracts:Good for smaller users, thesecontracts set the price now and keep it stable for along time.

Flexible purchasing contracts:These allow the buyerto take charge of when power is purchased, and howmuch.

HH (Half-hourly metering):This is the system used forsites with large energy needs, particularly thosegreater than 100 kilowatts. Half-hourly meters are justwhat they sound like meters that provide a readingeach half hour of the day.

MPAN (Meter Point Administration Numbers):Theseare like the addresses of your meters. Theyre numbersthat are unique to every property.


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NGC:This is the National Grid Company that owns thenational grid transmission system that delivers your

energy a large part of the distance from the powerplant to your location.

NHH (Non-half-hourly metering):This is the oppositeof the half-hourly metering system. Just as the namesuggests, meters do not provide a reading every halfhour. Instead, readings are taken manually everymonth or every quarter. These are for sites with

medium to low energy usage, including homes, withhave NHHq meters (non-half-hourly, read quarterly).

Rolling monthly lock-in:A contract that calls forenergy purchases every month, with a new pricelocked in monthly.

TUOS:This is the charge made by NGC for transporting

your power from the generator to your local distribu-tion network. It stands for transmission use of system

44


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They say with power comes responsibility. So as the UKs largest

electricity generator and electricity supplier to businesses, we

at EDF Energy recognise we have a great responsibility to cut

carbon emissions from the production and use of energy.

In our Climate Commitments, the biggest package of environmental

initiatives of any major UK energy company, youll see we areaddressing this from three main angles:

1) De-carbonising our electricity generation.Were reducing

the intensity of CO2 emissions from our electricity production

by 60% by 2020.

2) Reducing our own carbon footprint.Were taking action tocut CO2 emissions from our offices and depots by 30%and

from our transport by 20%by 2012.

3) Helping our customers. Were reducing the proportion of CO2

arising from our customers energy consumption by 15%by 2020.

Visit our website to see how we're progressing and how we can

help your business cost effectively cut its carbon emissions by

saving energy.

www.edfenergy.com/sustainability


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