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Electricity buying for dummies by EDF. - Matrix

With the compliments of EDF Energy

Electricity Buying

EDF Energy Limited Edition

It's easier when

you know how


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 customers

has helped us grow to supply more power to British business than

any other energy company*. As you’ll 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 at

edfenergy.com/marketinsight. Perhaps that’s 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


FOR


DUMmIES

By EDF Energy

A John Wiley and Sons, Ltd, Publication


Electricity Buying For Dummies ®

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Introduction

You may be new to electricity buying, or you may

have been in the business for decades. Either way,

you are likely to find the task to be a challenging one

these days.

Energy prices are more volatile than ever. Just when

you think you’ve seen everything, the market takes a

dizzying new turn. How can you be sure you’re getting

the best deal for your company? How can you prepare

your company for the market’s wild fluctuations,

making informed decisions so you’re less likely to pay

too much?

About This Book

Electricity Buying For Dummies is a handbook for those

navigating these daunting waters. We’ll take a look at

how the business has changed, and why. We’ll explore

what’s behind the pricing volatility that has caused

untold indigestion among energy buyers in recent

years. We’ll outline some of the strategies for mastering

the new reality. And we’ll take a look at how carbon

reduction schemes will impact energy buying.

Foolish Assumptions

In writing this book, we’ve made some assumptions

about you. We assume that:


2

✓ 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 long

ago).

✓ You’re in need of some new strategies for making

sure 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 to

energy buying.

How This Book Is Organised

Electricity Buying For Dummies is organised into seven

distinct sections:

✓ Part I: Electricity Buying in Today’s Market. We

summarise how the energy business in the U.K.

has changed in the past two decades, and examine

how energy buying has been affected.

✓ Part II: A Menu of Electricity Contracts. We take

a look at some of the contract options available to

energy buyers.

✓ Part III: Risky Business. We detail the volatility

common in today’s energy market, and explore

ways to reduce your company’s risks.

✓ Part IV: Best Foot Forward. We discuss how to be

the most attractive customer when you’re seeking

bids, and how to form a strong partnership with

your supplier.


✓ Part V: Counting Your Carbon. We look at the

carbon emissions content of your power and discuss

how carbon reduction targets and legislation

will impact energy buying.

✓ Part VI: Ten Ways to Prosper in the New World

of Electricity Buying. We share the secrets to succeeding

in today’s volatile environment.

✓ Part VII: Glossary. For those not completely

fluent in the terminology of energy buying, we

offer a helpful list of definitions.

Icons Used in This Book

To make navigating to particular information even

easier, you’ll find these handy icons highlighting

key text:

3

Make a special note of these sentences,

because they’re particularly important (even

if you skip some of the other paragraphs).

This is a piece of advice that will help you

understand the topic better and achieve more

success in energy buying.

You don’t really have to understand these

details, but they just might be of interest

to you.

Here’s a caveat that might save you or your

company some trouble or some money.


4

Where to Go from Here

This is a short book, and you ought to be able to make

your way through in no time. But we won’t be offended

if you don’t. Feel free to skip around and find the parts

that interest you the most, and use the headings to

help you find what you need.


Part I

Electricity Buying in

Today’s 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 you’ve had a long career in the energy buying

business, you’ve witnessed a tremendous evolution

in the way that power is bought and sold in the United

Kingdom.

It was only about two decades ago that the energy

market was government-owned and highly regulated.

Today, electricity is a commodity, traded in a manner

not all that different from gold or oil.

All home and business customers can choose their

electricity supplier. U.K. companies may pick from

seven major suppliers and a few smaller ones. There

are some 170 power stat ions that are part of the wholesale

market, and 43 medium-to-large power generators,


6

all plugged into a national grid that matches supply

with demand.

What Has Happened to

the Electricity Industry?

The market began its move toward today’s structure

around 1990. Before then, the government owned most

of the country’s generation plants, and government

monopolies oversaw distribution as well. Customers

could not negotiate the price of their electricity supply

because they had no choice in providers. The price

was relatively stable – more so than today – but the

government felt it was too high and that efficiencies

could be made in the market to benefit consumers.

The road to privatisation

Privatisation and transformation to a competitive

market was seen as the answer. For the first decade, a

wholesale market called The Pool facilitated the competition.

Generators sold power into The Pool, competing

on wholesale price, and suppliers purchased the

power out of The Pool on behalf of their customers.

Prices gradually declined through this competitive

scheme.

More restructuring came in 2001, driving

prices even lower through the creation of

greater competition among generators. The

“one-price-for-all” system maintained by The

Pool was replaced with a commodity market

under the New Electricity Trading Arrangement.

Not only did the change result in generators

and buyers negotiating prices more directly, it


7

also brought new buyers into the market,

including speculative traders who were not in

the business of producing or supplying

electricity.

Volatility on the rise

Though the 2001 restructuring was followed by more

reductions in the wholesale price in power, the trend

reversed only a few years later. Wholesale prices began

to rise dramatically as supply-and-demand pressures

brought new volatility and the price of electricity rose

to reflect the increasing price of the gas often used to

generate it. Between 2003 and 2006, wholesale gas

prices rose by more than 250 per cent, and wholesale

electricity prices jumped nearly as much, according to

the research firm Heren Energy. In 2008, prices rose

and fell by 80 per cent. These volatile market prices

can be seen in Figure 1-1.

£/MWh

100

90

80

70

60

50

40

30

20

10

Gas

Electricity


Jan

2005 2005 Jul

2006 Jan

2006 Jul

2007 Jan

2007 Jul

2008 Jan

2008 Jul

2009 Jan

2009 Jul

2010

Jan

Figure 1-1: UK wholesale electricity and gas prices


8

The Government’s Role in the Energy Market

The energy business in the U.K. is regulated by Ofgem, the

Office of the Gas and Electricity Markets. The office is all

about protecting consumers by promoting competition, but

also providing appropriate regulation of the monopoly companies

that operate the country’s electricity and gas

networks.

Other governmental entities with a hand in the energy business

include:

✓ The Department of Business, Innovation and Skills

✓ The Department of Environment, Food & Rural Affairs, the

official protector of the environment.

✓ The Department of Energy & Climate Change, formed in

2008 to consolidate the energy responsibilities of the two

previously listed departments.

This volatility has driven the need for a more

strategic approach to energy buying for business

and making the roles of the energy buyer

and energy manager all the more important.

Nobody wants a price shock at the end of a

contract!

The Evolving Role of

the Energy Buyer

Oh, for the simpler days! The original focus of the

energy buyer was price, which made it relatively


simple to discern the best deal. And as prices became

ever-more competitive, with reductions across the

market, price-focused energy buyers were overjoyed.

These days, of course, price fluctuations are constant

and sometimes dramatic, and the cost of electricity is

determined by a combination of factors. It is more difficult

than ever to predict the best time to “go to market”.

Another new challenge for energy buyers, especially of

large energy users, is ensuring that their company’s

energy consumption is not far off the amount of energy

that was forecast they would use when they signed

their supply contract. Those that stray significantly

from their original forecast may incur additional

charges as energy suppliers seek to recoup the costs of

managing these variances in the wholesale markets.

Tools of the trade

The job may be more difficult than ever, but

today’s energy buyers have many tools at

their disposal that enable cost-effective energy

procurement. Different types of sites in their

portfolios are metered differently. Larger sites

have half-hourly metering (also known as HH)

or if they’re smaller users (normally less than

100 kilovolt-amps or kVA) they may stick with

non-half-hourly metering (that’s NHH for short),

whichever seems the most appropriate for the

particular situation. HH meters are read electronically

every half hour. Conventional NHH

meters are read manually only once a month

or once a quarter. However, these are being

phased out to be replaced by Automated

Meter Readers (AMR) that can function much

like half hourly meters.

9


10

With energy now more of a commodity, buyers

can examine more precisely the various components

that make up their electricity bill, and

take charge of those components. About three

quarters of that final bill is typically the actual

cost of the energy, while the remainder covers

elements such as the cost of transporting the

energy from the source to the point of use

across both the national grid and local distribution

network systems. Figure 1-2 illustrates this.

Energy 75%

Figure 1-2: Electricity Costs

BSUOS 2%

Renewable Obligation 5%

Elexon 1%

Hydro Levy 1%

Shape & Volume

Risk 1%

Margin 2%

Transmission

Losses 1%

Distribution

Losses 3%

Distribution

Charges 4%

Transmission

Charges 5%

A roadmap toward a new energy contract

In this more complicated market, here are some of the

first steps that you as an energy buyer must take to

pursue a new contract:


✓ Collate a full record of all sites that will be

covered.

11

✓ Divide those sites into two groups: HH and NHH

sites. Your current supplier should be able to help

identify your HH sites and provide annual HH data

for all applicable sites.

✓ Total-up the consumption and cost for each

group.

✓ Expect your supplier to talk about your credit

worthiness and how this affects the payment

terms you may be offered.

✓ Ask your current supplier for any materials that

might help in understanding energy and

procurement.

✓ Determine a realistic view of what you hope to

achieve with regard to energy reduction and

control.

✓ Check with your supplier to learn about other

products that might help manage and reduce

energy consumption.

✓ Look at the terms and conditions, service levels,

and customer satisfaction – price is not the only

consideration.

✓ Determine your energy supplier options and consider

approaching other suppliers.

✓ Learn more about the suppliers you’re considering,

including their commitment toward energy

usage reduction and the ways they can assist.


12

Energetic Energy Supply Chain

Electricity is something most people just take for

granted – you switch on a light and the bulb glows, you

plug in a television and “The X Factor” fills the screen.

Few people think about how that energy travels from

its birthplace to the place where it’s used.

Fortunately for modern society, thousands upon thousands

of people do think about the electricity supply

chain 24 hours a day, every day of the year. What goes

on behind the power socket is complicated.

Start to finish

The 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 170

power stations across the U.K, though a large share of

the generation takes place in the north, where most of

the coal once came from. Power station operators are

of course affected by the international commodity markets

for their feed stocks, such as coal and gas.

From the power plant the electricity moves

onto the national grid. The national grid is a

cross-country transmission network consisting

of nearly 24,000 kilometres of transmission

cables. From the national grid the power

makes its way onto local distribution networks

owned by DNOs, short for distribution network

operators. The 14 DNOs are owned by seven

companies, which maintain more than 665,000

kilometres of distribution cables. You will be

connected to one of these cables.


13

At the end of this cable will be your meter. This meter

has a unique registration number called an MPAN,

(shown inf Figure 1-3) which identifies it among all the

other meters in the U.K. To ensure that your meter

does its job accurately you must appoint a meter operator

(known as the MOP) to maintain and service your

meter regularly.

SProfile Class Meter Time Switch Code Line Loss Factor

00 845 008

12 0001 0023 451

Host Rec

MPAN Core

Figure 1-3: Meter Point Administration Number

Check Digit

Also playing a role in managing your metering data is

the data collector (the DC), which uses a telephone

modem to read your meter every day and download

your HH data – that’s 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 or

errors before passing it along to the supplier, from

which you get your monthly bill.

Even though you get just one bill from the supplier, the

energy supply chain works with the help of a number

of settlement processes that take care of all usage,

including all regulated charges. These charges include

the cost for using the national grid (you may see this

called TUOS, short for the transmission use of system


14

charge) and the distribution system (the acronym here

is DUOS, or distribution use of system). Your HH data

works its way through the settlement system, and the

supplier pays the NGC and DNO for the use of their

systems.

The supplier also has to pay for the energy it buys for

you, so ultimately, the power stations get paid as well.

And then, of course there are taxes, such as VAT and

the Climate Change Levy.

Meanwhile, metering costs are paid by you to the

appropriate MOP (that’s a meter operator, not a floor

cleaning device).

What’s left? Not a whole lot, really. It’s the supplier’s

margin, which tends to be quite low.

The Business of Buying

If energy buying were as simple as purchasing food at

the market, there would be no need for a guide like

this. Buying energy is more like buying other commodities,

which seems simple enough – how much is procured

depends upon how much you need, when you’re

going to use it and for how long. In reality, even though

energy is traded like a commodity, buying power can

be a lot more complicated because electrical energy

cannot be stored like other commodities.

What’s in your energy bill?

That price displayed on the electric bill actually

is the sum of many components. The great

thing is, you can negotiate the price of some of

those elements.


15

Let’s go back to the market for a minute and imagine a

can of beans on the grocery shelf. A large part of the

price covers the beans themselves, but you also are

paying for the preparation and packaging of the beans,

the delivery of the can to the store, and the shopkeeper’s

overhead and profit. You pay one price to the

cashier, and all of the players get their cut. The suppliers’

margin is essentially the label.

With electricity, you pay the electric supplier that

sends you an invoice, and that payment gets divided as

it works its way backward through the supply chain.

Delivery of that electricity makes up a significant part

of the total charge. You’re paying something to use and

maintain the national grid as well as the local distribution

network and the industry’s shared systems. The

price for all of this is regulated and fixed, and is thus

non-negotiable.

Though it’s fixed, it does vary by area and location. For

example, national grid costs may be higher if you’re in

the southwest, because most of the generation happens

up north and thus the energy must be transported

across a greater distance.

Meanwhile, your supplier gets a cut of the bill, too,

though it’s relatively small – as little as one or two per

cent, depending on the size of the contract. Some may

also go to pay your energy broker or consultant if you

use one. The rest covers the commodity cost of the

electricity you’re buying. This is not only the majority

of the bill – it’s also the most volatile component, causing

the most potential trouble when it comes to trying

to stay within budget.


16

High volume, low margin, high risk

The delivered price of your energy is supported

by having the suppliers “lock in” forward

contracts that protect them against

volatile market conditions. Such contracts are

needed because energy is a featureless commodity,

traded in large volumes but with high

risks and low margins.

If you’re buying for a large site or multiple sites, you’ll

benefit from portfolio contracts with your suppliers.

You’ll need to engage with the suppliers to review your

options, but the real key in getting the most appropriate

price is your certainty in the level of consumption

you’ll have in the future. The less certain you are, the

more risk there will be for the supplier, and that means

a higher price. You’ll be well-served by a good set of

energy consumption forecasts.

One thing you’ll notice if you’re buying for a variety of

sites is that there are different price options and formats

for each market and location. For example, there

may be a different price for each HH site unless the HH

site contracts are bundled.

If you buy your energy through a flexible contract, you

can negotiate with your supplier on management fees,

calculate what the fixed costs will be, then devote your

attention to managing the commodity cost of the electricity.

This takes a solid understanding of the various

factors that drive the commodity price of electricity, as

well as how your contract is written.


17

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 negotiable

prices. The biggest chunk, though, is also the most volatile:

the wholesale energy prices. Those are liable to

change daily, and it’s common for them to change periodically

during the day, too.

The wholesale price on the market can change

on a daily basis, so there’s no hanging around.

To get the price you want, you must be ready

to accept an offer quickly, in some cases,

within a few hours.


Part II

A Menu of Electricity Contracts

In This Chapter

▶ Fixing the price

▶ Choosing flexibility

▶ Making choices

▶ Seeking expert assistance

Dining out wouldn’t be much fun if you couldn’t

choose a meal that’s right for you. You want a

menu that’s broad enough to satisfy everyone in your

party.

Likewise, when you’re buying energy you wouldn’t be

well-served by a one-size-fits-all approach. You need a

menu with options that fit your budget as well as your

appetite – in this case for risk. Fortunately, you have

choices, plenty of them. You can decide to fix your

price for the duration of the contract – some people

sleep better at night with that kind of predictability. Or

you can choose any of a number of flexible contract

options.

Given the wealth of choices, there is plenty of

temptation to move your portfolio when it’s

contract time. Just be sure to consider the


19

costs of moving. Check your incumbent supplier

provides you with correct data, and that

your new supplier can register you on time.

Ordering Prix Fixe

A little surprise now and then can make life interesting,

but when it comes to money matters, surprise is not

always welcome. And let’s face it – owners of small to

mid-size businesses have enough to worry about without

having to think about their power rates spiking.

Smaller energy diets

Fixed price contracts are for these kinds of customers.

They’re exactly what the name implies: contracts that

allow customers to fix the price for electricity and then

stick with it for a predetermined period of time, typically

anywhere from six to 42 months.

These kinds of contracts are especially suited

for (but are in no way limited to) customers

who don’t use large volumes of electricity –

generally less than 10 gigawatt-hours (GWh) a

year. How much power is that? Well, a small

supermarket will use roughly 1 GWh a year,

while a large department store on London’s

Oxford Street could consume around 5 GWh

annually.

Fixed price contracts are geared for buyers who have a

low appetite for risk, companies that want to fix their

budgets and costs. This also includes many very large

energy users, such as water utilities and train

operators.


20

Energy suppliers are willing to enter into these deals

ensuring a good price for a longer term because it

helps them plan too. They know you’ll be a customer

for that period of time, and can forecast the amount of

electricity you’ll need (normally based on how much

you used last year), so they can line up sources for

your energy well in advance. They receive benefits for

doing so, and they can pass those benefits on to you,

the customer.

Your business is probably used to using as

much or as little electricity as it so desires with

little consequence. In future using a significantly

different amount of energy to what was

originally forecast in your energy supply contract

could prove expensive. That’s because

managing these unplanned swings in energy

consumption can be costly for energy suppliers

and many are now beginning to recoup these

unforeseen costs from those customers.

Don’t neglect the details

When you’re considering a fixed price contract

be sure to check what’s included in the

price so you won’t be surprised. Also, read the

fine print to understand the terms and conditions,

including the details about when the

prices can be changed. And make certain you

understand the termination obligations, as

well as how the contract can be renewed if

you so choose.

Comprehending all of these details is important not

only for your long-term satisfaction as a customer, but

also is critical when you’re evaluating bids from a


21

number of suppliers. If one supplier has prices that

seem quite a bit lower than others, there may be some

exclusions that account for the difference.

One important thing to consider that almost goes without

saying: You’ll be happiest with your fixed price

contract if the price you fix is a good one. Do what you

can to sign on when the market is low and fix the price

at the low rate.

The Flexible Approach

We’ve already discussed how volatile energy costs

have become in recent years and that for companies

that count energy as a big part of overhead, the volatility

can be a significant risk. You can think of it like the

stock 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 240

GWh of electricity in 2005 might have paid anywhere

from £4.5m to £10.2m, depending upon the timing of

their purchases. Clearly, that can make quite a difference

in a company’s financial situation.

Flexible (aka floating) contracts can spread

electricity purchases according to a price risk

management strategy. This helps manage

market volatility risk and keep energy buying

in line with budgets. However, flexible contracts

do not guarantee savings and speculative

energy buying should be avoided!

Basically, flexible contracts provide you the

ability to make your own decisions regarding

when to buy your electricity, and how much,

depending on the prevailing market price.


22

It sounds simple – but it isn’t, really. It takes a lot of

experience and technical expertise to manage these

kinds of contracts well, which makes it important to do

business with a provider that can offer such expertise

and explain the contracts in a way that helps you prepare

for this kind of energy purchasing. You need to

have access to market data and the right information at

the right time – and be prepared to make decisions

quickly so you can react accordingly to changes in the

market.

There are a couple of primary purchasing

strategies designed to make the most of a flexible

contract and keep your energy costs to a

minimum. One is to make your purchases

according to a pre-defined schedule, and the

other is to base your decisions on certain

market triggers.

For example, you may choose to make purchases on a

monthly basis, buying your electricity as a purchasing

deadline approaches each month. This is known as the

rolling monthly lock-in, and it’s an alternative to simply

buying all of your energy at the beginning of the contract

year for the price that’s available then.

A variation on this strategy is a progressively hedged

rolling monthly lock-in, where your monthly purchases

are made in several blocks to hedge the price of each

block against future price rises.

Strategies tied to market triggers include a

stop-loss plan, where your company sets an

upper limit on the price. If the price hits that

limit you lock the price for the remainder of


23

the month or season to protect against even

higher rates. Companies with more appetite

for risk may try a strategy known as lock/

unlock per block, which aims to benefit from

market volatility. At its best, this concept

allows you to lock-in blocks of electricity when

rates are low, unlock and sell the blocks back

to the market when rates are high, and then

buy them back when the market drops again –

one hopes below the original price of the

blocks. However, there’s always the risk you

may lock-in too high and then the rate drops.

More Choices to Make

Both 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 go

into getting electricity to your meter. Or there may be

variations, such as an energy-only contract that fixes

the cost of the energy – which is the bulk of what you

pay – but passes through the distribution and transmission

costs.

Depending upon the type of meters you have and the

amount of energy you use, you might arrange a contract

with a single fixed rate, or it might establish two

rates that are in effect at different times, such as day

and night. Your contract may include seasonal time of

day rates- known as STOD, which have high winter

peak rates. If you are able to cut your usage during

these winter peak times, you may save yourself some

money. Any of these options are possible provided

your company uses half-hourly metering.


24

You have other options for NHH sites. You’ll be offered

rates that are appropriate for the number of registers

on your meter, and can enjoy the simple life with simplified

rates.

And just as you have to choose the colour of the shirt

you’re buying, you’ll find that energy contracts come in

different shades of colours from green to brown. You

also may choose a CHP contract – that’s short for combined

heat and power.

Calling the Specialist

Certainly every customer is unique – but when it comes

to energy buying, some are more unique than others.

Your needs may be quite different from the average

business.

For example, what if you’re operating not only in the

UK but also across Europe? You’ll find that the electricity

markets are as different as the languages!

You may be up to the complicated task of

buying energy in different markets from different

players following different rules. Or you

may choose to seek a supplier that operates in

multiple markets and can strike a deal that

simplifies your purchasing.

Alternatively, perhaps your organisation operates in

the public sector – closer to home, maybe, but with its

own set of complicated purchasing guidelines along

with budgets that get tighter every year. You’ll find that

electricity is one of the most complicated things your

organisation will buy.


25

It doesn’t have to be that way. Your power

provider may be able to connect you with a

specialist buying group geared specifically

toward public sector situations. Such a purchasing

arrangement should be geared toward

getting your organisation the best possible

rates through the wholesale market. It should

offer access to renewable energy in order to

meet environmental targets, and handle

administrative aspects in order to save your

organisation time and money.

Specialist customer contracts also cover energy from

renewable sources, which helps meet government targets

on energy procurement. For example, levy-exempt

energy contracts deliver energy from accredited generation

technologies in order to qualify under the Climate

Change Levy exemption scheme. Choices include green

energy contracts that deliver power created through

wind or hydro generation as well as biomass. Another

possibility is a low-carbon energy contract that uses

the highly efficient combined heat and power generating

technology. Nuclear power is yet another source of

low carbon energy.

Time to Sign?

If you tend to procrastinate, you’re in good

company. Plenty of energy buyers bide their

time and wait until the last minute before signing

a contract. After all, why put your name on

the dotted line any earlier than necessary?

You’re keeping your options open, right?


26

Maybe, but you’re also at risk of ending up on the

wrong end of the law of supply and demand. If you’re

dealing at a time when a lot of other buyers also are

wrapping up their own deals, you might find that

you’re in a seller’s market. August through to October

tend to be the busiest time for suppliers, which can

mean fewer deals and less service.

Start speaking with your energy supplier well

in advance. This will give everyone time to

assess your requirements and agree on the

most appropriate terms.

And don’t forget – the market is volatile, so if the price

seems right, get it in writing and sign up quickly. Hot

prices can be withdrawn at any time, so watch the

market carefully.


Part III

Risky Business

In This Chapter

▶ Watching out for volatility

▶ Managing your risk

Like any other commodity – wheat, sugar, corn – the

price of electricity is governed by the laws of

supply and demand. But it’s not as simple as it sounds,

because we’re not talking about the supply and demand

for just power, but also for gas, coal, and oil. And we’re

talking about the weather, politics and wars, in places

near and far. It’s enough to make your head spin.

It’s Volatile Out There

Truth is, it makes sense that the wholesale price of

power is heavily influenced by how much it costs to

produce the electricity. The biggest factor controlling

the 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 does

the cost of electricity (as shown in Figure 3-1).

But the price of oil has a major impact on

electricity too, because the price of oil has a


28

strong influence on the price of gas. And we all

know how volatile oil prices have been in

recent years.

£/MWh

100

90

80

70

60

50

40

30

20

10

Gas

Electricity

-

Jan

2005 2005 Jul

2006 Jan

2006 Jul

2007 Jan

2007 Jul

2008 Jan

2008 Jul

2009 Jan

2009 Jul

2010

Jan

Figure 3-1: Gas and electricity prices

The prices of these raw materials are driven by all

kinds of factors that don’t always seem logical to

people not involved in the business. Factors such as

fear – the fear that traders have that supply won’t meet

demand.

Weather can impact that fear, as can regional conflicts

and other geopolitical factors. Thus, a spike in oil

demand in China can drive up the cost of electricity in

the U.K. So can a hurricane in the United States, or

strife in Nigeria.

Complicating matters even further is the involvement

in the commodities markets of investors who actually

have nothing to do with the power business, or the oil


29

industry, or the business of sugar or wheat, for that

matter. Such outside investors have an influence on

commodity prices and that influence may be informed

by how these investors are faring on other fronts, such

as the stock market.

It all translates into dramatic ups and downs

in power costs. It’s not uncommon to see the

wholesale price of electricity rise or fall

between two and five per cent per day, and

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

Uncertainty x Exposure = Risk

Unlike such commodities as wheat, coal, sugar, and

gas, electricity can’t be stored on a large scale. The

supply must be instantaneous to meet the demand,

which means the amount of electricity being generated

at any given time needs to remain in balance with the

amount that homes and businesses need to use.

In order to maintain the balance, the industry must be

able to accurately forecast needs. That’s why those in

the business value customers with accurate consumption

data and precise forecast information. This kind of

information allows energy providers to estimate the

ups and downs of every customer’s needs, and plan for

the peaks and valleys in the load they need.

Such precision forecasting helps the industry avoid

such uncertainties as surprise peaks or valleys in

demand, which makes their business a lot less risky.

And the less risky their business is, the more willing

they are to cut a good deal for electricity.


30

That good deal, in turn, reduces the risk facing your

company. You’ll need a certain quantity of energy over

a given time period, and you’ve got a certain amount of

money budgeted to pay for that energy. The risk is you

won’t have enough money in the budget to pay for that

energy.

Think about risk as being the product of

uncertainty and exposure. The uncertainty is

the price volatility and the chance that the

price will get too high for your budget. The

exposure is the portion of your energy need

for 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. Perhaps

you’ve signed attractive contracts covering about 85

per cent of your anticipated power consumption. That

means you’ve eliminated the uncertainty regarding 85

per cent of your needs, and thus eliminated a big portion

of your risk. The other 15 per cent of your power

needs is still at the mercy of the whims of the market –

it’s your remaining exposure to pricing uncertainties.

That 15 per cent is still at risk. Buy cleverly, get that

exposure down to zero and you’ll sleep more easily.


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 enjoys

buying a car. For you, it’s a game of cat and

mouse, trying to outwit the dealer and take home the

best car at the lowest price. You see the dealer as the

adversary to be conquered, and the automobile as the

spoils for the victor.

It may be tempting to think of your energy purchase in

the same way – it’s you versus the energy provider, a

battle to see who can win the most at the other’s

expense. Try not to give in to that temptation, though.

You’ll be happier if you work toward a partnership that

benefits all parties involved.

With this line of thinking, you understand the seller’s

point of view and know what you must do to be the

most attractive buyer. And the seller gets to know you

and your business in order to provide you with a deal

that ensures your company’s long-term prosperity.


32

Pretend You’re the Seller

Step back for a moment and think about what life must

be like for companies in the business of generating and

selling power. Customers all count on being able to

switch on their lights and machinery and appliances

and gadgets whenever they need them – there needs to

be enough power to meet the demand, whatever that

demand might be.

Gearing up to meet that demand would be a nightmare

if there wasn’t some predictability to power usage. If all

buyers consumed power whimsically and wildly, providers

might need to expand their generating capacity

beyond reasonable expectations – just in case.

So, what kind of customer will seem the most

appealing to a power company? One that has a

good handle on its own energy consumption,

with predictable usage and a healthy stack of

usage data to back up that picture of

predictability.

That means gathering and carefully studying

half-hourly load data. The more you know

about your own company’s energy use, the

more you can help a potential supplier understand

your needs. And the more comfortable

that supplier is about the demand you’ll be

placing on the system, the greater your

chances at landing the best possible deal.

Of course, that information is valuable to your own

operations, too. If you’re keeping a watchful eye on

your half-hourly data, you’ll be the first to notice waste

that you just might be able to eliminate. That’s great

for the bottom line.


33

Working Hand-in-Hand

Now switch your hat back – you’re the energy buyer

again. “What is this,” you wonder, “a police interrogation?

Why do I have to answer so many questions?”

Yes, there are a lot of questions, but it’s

important to keep them in perspective. This

shouldn’t be an antagonistic relationship – it’s

important to view the supplier as a partner in

your company’s success, because that’s

exactly what a good energy provider can be.

Those questions are needed to establish that

close working relationship and get a good

sense of your company’s needs and

preferences.

Beyond the obligatory “what’s the name of your company?”

query, here are some of the questions you

should be prepared to answer:

✓ What kind of meter and pricing profile does your

company have? Half-hourly or non-half-hourly?

You’ll be able to share the most useful information

if you’re on half-hourly metering.

✓ Do you have supply numbers or MPANs (Meter

Point Administration Numbers) for all of the

meters serving the premises for which you’re

seeking quotes? These are numbers, unique to

each property, are typically found on your electric

bills (but they’re not the customer number).

✓ Can you provide good consumption data? The

more you can provide, the more likely it is to

obtain the most accurate pricing.


34

✓ Do you have the half-hourly data, if applicable?

Your current supplier can provide this data.

Again, providing the best consumption data you

can ensures the most accurate price, and if it happens

to be a year’s worth of HH data, you’ll have

the benefit of being a lower-risk customer.

✓ Can you provide any additional forecast data? If

your forecasts are different from what your consumption

has been in the past, your supplier will

want to know.

✓ How long a contract are you seeking? Do you

prefer the comfort of a longer-term contract, or

the flexibility of a shorter-term deal? Typical

choices include one-, two-, or three-year

contracts.

✓ Do you prefer a fully fixed, all-inclusive price, or

would you want certain variable costs incurred by

the supplier simply passed through to you? The

former is more predictable from your perspective,

but may require the supplier to raise the price a

little to cover the uncertainty.

✓ How soon do you need a quote? Don’t expect it an

hour from now – it might take several days to pull

the information together. Try setting a target date

for receiving all competing quotes.

✓ Any idea what tariff structure will suit your business

needs the best? A day/night tariff perhaps, or

maybe a STOD (seasonal time of day)? Don’t be

put off by the more complex tariff structures,

because depending on your usage, they might

provide the best value.


35

✓ How do you wish to pay? If you’re willing to sign

up for direct debit payments, you may be able to

secure better terms.

✓ What’s your company’s credit rating? This information

will also play a role in determining your

payment arrangements and terms of supply.

✓ What are your billing requirements? Do you want

to 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 fine

print—that may be required, even if in the end

you decide to stick with your current supplier.


Part V

Counting Your Carbon

In This Chapter

▶ Committing to reduce carbon

▶ Understanding the bottom line benefits

▶ Complicating energy buying

There’s one more elephant in the room regarding

energy buying, and it’s an issue that won’t be going

away. It’s that little matter of climate change, and the

efforts that are being made to reduce the impact

human activities are having on the environment.

Climate change, of course, is often referred to as global

warming, because it’s all about a gradual increase in the

earth’s average temperature. Most scientists agree that

the increase is largely the result of the things we humans

do in our industrialised world, particularly the burning

of fossil fuels. This creates greenhouse gases that warm

the atmosphere, the best known being carbon dioxide.

Many power plants (hydro, nuclear, wind farms being

amongst the exceptions), unfortunately, generate

carbon. Because they do, their operations are subject

to the impact of national and international efforts to

reduce carbon emissions. And your company is quite

possibly subject to these efforts as well, in ways that

affect your energy buying as well as other operations.


37

Making a Commitment

to Carbon Reduction

The Carbon Reduction Commitment Energy Efficiency

Scheme (CRC) is a regulatory scheme that requires

organisations from businesses to schools to report their

emissions that are linked to energy use, with penalties

and rewards issued according to how they perform.

You may have heard of the European Union Emissions

Trading Scheme – the CRC is a lot like it but on a

national scale and with different rules. It is estimated to

save up to up to 11.6 million tonnes of carbon dioxide

emissions (MtCO2) per year by 2020.

The commitment is basically an emissions

trading scheme requiring companies to purchase

at the beginning of a financial year

allowances covering the equivalent amount of

CO 2

that they produce for that year.

Organisations which have at least one HH electricity

meter settled on the HH market and a HH metered electricity

consumption of at least 6,000 MWh in 2008 are

impacted by this scheme.

What does it mean? If you’re covered, you’ll have to

forecast your annual carbon emissions for a financial

year and purchase allowances equivalent to these

emissions at a fixed price of £12 per ton of carbon

dioxide for the three first years. After that, you pay the

market rate. But note that the number of allowances

available on the market will be capped. The price per

tonne of carbon is therefore likely to increase encouraging

organisations to reduce their carbon emissions

year on year.


38

What’s more, you’ll have to report on your

carbon emissions and maintain evidence backing

up your carbon reporting in case your

company is audited.

The whole idea is to give you extra incentive to reduce

your energy consumption. Do that, and not only will

your electric bill go down, but you also may be able to

sell off the allowances you don’t need. The best performers

essentially gain at the expense of the worst.

Being a better performer also is helpful to your reputation.

The relative performance of participating companies

will be publically available when a league table is

published each year. It’s one key to a healthier bottom

line. And the main idea is that the planet benefits as the

cap on allowances drops over time.

Green Future: In the Red

or In the Black?

Do nothing about carbon before the taxes and

restrictive regulations kick in and you might

find carbon having a troublesome impact on

your bottom line. You could wind up struggling

to buy carbon emissions rather than

making a profit by selling your extras. You

could see your customer count dwindle.

Immediate action is needed, not only for the future but

also to take advantage of this new way of doing business

from now on.

Pay now or pay later

The truth is, the cost of carbon emission allowances

have been factored into electricity generation costs for


39

a few years now. Those European power plants that

burn fossil fuels must own sufficient carbon allowances

to cover their operations and resulting emissions.

The impact comes if a generator runs out of carbon

allowances – if the emissions exceed what’s allowed.

That generator must then acquire more allowances

from other companies that may have some to spare, or

it must pay a fine.

The cost of those extra allowances follows – you

guessed it – the laws of supply and demand. Whether

allowances are purchased or a fine is paid, the end

result is that the cost of power from that generator is

impacted by carbon trading.

Improving your reputation

This all sounds like a hassle, but it’s actually an opportunity.

There are tangible benefits that come from

having an image as a “low carbon company”.

Customers increasingly are interested in buying more

sustainable products. According to the Carbon Trust,

six out of ten shoppers are more likely to buy a product

if they know the manufacturer has taken steps to

reduce the product’s carbon footprint.

You’ll save money, too

Your energy bill is probably one of the more

significant areas of your budget. When you

pay attention to your carbon footprint and go

about reducing carbon, you’re probably cutting

your energy consumption. Needless to

say, that cuts your electric bill, so saving the

planet ends up saving you money.


40

Clearing the Air But Muddying

the Water

It all seemed so easy, back in those days when your

main concern was minimising the bottom line. Carbon

trading is a significant new complication in the process

of energy buying.

Consider that whole supply-and-demand thing one

more time. Peak rates – those rates charged for energy

during particularly high-usage times – are understandably

higher than off-peak rates, because the whole definition

of an energy usage peak is that it’s when the

demand is the highest.

Now factor in how peak electricity is generated.

Typically, electricity generated to meet

peak demand comes from a plant that can be

ramped-up quickly. That tends to be a fossil

fuel-burning plant, rather than something like

a nuclear power plant. A coal plant, for example,

requires less than 15 minutes to ramp up.

Problem is, a coal plant is a bigger carbon generator,

and carbon reduction schemes will add

to the price of its power down the road. Thus,

buying electricity at peak hours could turn out

to be even more costly.

Plus if you, as the buyer, have a finite number of

carbon allocations, where you get your peak electricity

may have an impact on your own carbon situation. You

may be able to afford the higher energy prices, but not

the higher carbon rates.


Part VI

Ten Ways to Prosper in the New

World of Electricity Buying

Electricity buying is not what it used to be – it’s a

whole lot more complicated. But that doesn’t mean

it’s devoid of simple wisdom. Here are some secrets to

success.

✓ When seeking quotes for electricity contracts, be

sure they are like-for-like. You’ll have a rough time

comparing bids if they’re not.

✓ If a quote seems too good to be true, there’s a

pretty good chance that it is. Go back and check

the fine print and the details to be sure there’s not

a mistake.

✓ If you are using consultants, keep a close eye on

how much you are paying them and how they’re

being paid. And don’t forget to compare their

costs with the potential benefits.

✓ When choosing a supplier, be sure to gauge how

much each candidate is willing and able to assist

you. Cost is important, but service is also critical.


42

✓ You’re not just a buyer – you need to sell your

company’s attractiveness to the seller! The more

the seller wants to sell to you, the better the price

will be.

✓ Be informed, but don’t be timid. When an outstanding

price comes along, you need to feel confident

enough to grab it quickly, because it could

disappear as fast as it appeared.

✓ Study that fine print. Even a simple, fixed-price

contract contains details that you must understand,

such as what you need to do to renew the

contract – or cancel it.

✓ Get special help for special situations. If you represent

a governmental entity, or if you are buying

for sites across Europe, there may be a special

programme for you.

✓ Don’t wait until prime contract renewal time to

sign your new contract. Those times when everyone

is signing are not likely to have the best rates.

✓ Great rewards come from reducing your company’s

energy buying risks. Lock in as much of your

consumption needs at a low rate and your boss

will love you.


Part VII

Glossary

Carbon Reduction Commitment Energy Efficiency

Scheme (CRC): Sets national goals for reduction of

carbon emissions, and has an impact on many

companies.

DNO: The distribution network operator, which runs

the local distribution network, takes power from the

national 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. It’s

short for distribution use of system.

Fixed price contracts: Good for smaller users, these

contracts set the price now and keep it stable for a

long time.

Flexible purchasing contracts: These allow the buyer

to take charge of when power is purchased, and how

much.

HH (Half-hourly metering): This is the system used for

sites with large energy needs, particularly those

greater than 100 kilowatts. Half-hourly meters are just

what they sound like – meters that provide a reading

each half hour of the day.

MPAN (Meter Point Administration Numbers): These

are like the addresses of your meters. They’re numbers

that are unique to every property.


44

NGC: This is the National Grid Company that owns the

national grid transmission system that delivers your

energy a large part of the distance from the power

plant to your location.

NHH (Non-half-hourly metering): This is the opposite

of the half-hourly metering system. Just as the name

suggests, meters do not provide a reading every half

hour. Instead, readings are taken manually every

month or every quarter. These are for sites with

medium to low energy usage, including homes, with

have NHHq meters (non-half-hourly, read quarterly).

Rolling monthly lock-in: A contract that calls for

energy purchases every month, with a new price

locked in monthly.

TUOS: This is the charge made by NGC for transporting

your power from the generator to your local distribution

network. It stands for transmission use of system


Turn household food, waste, yard

clippings, and more into nutrientrich

compost

Build and maintain your own

compost bin

Use worms to aid in composting,

both indoors and out

Give your vegetable and flower

gardens a boost of energy

UK Edition

• Navigate waiting lists and find the best

patch for you

• Prepare your soil to encourage tip-top

growth

• Plant a huge range of fruit, veg, herbs

and flowers

• Grow organically and get the most from

your space

Weigh the pros and cons of solar-power

your home

Evaluate solar products, projects, and

applications

Apply for government incentives and

tax breaks

Assess the costs and payback potential

of a full-scale photovoltaic system



Making Everything Easier!

Allotment Gardening

Learn to:

Sven Wombwell

Garden designer and TV presenter




Making Everything Easier!

Composting

Making Everything Easier!

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• Get a grip on complex biology concepts

• Unlock the mystery of how living

things work

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• Get a handle on the laws of motion

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sound, forces, and fields

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energy

Quantum Physics For Dummies, and

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molecular genetics, behavioral genetics,

and more

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They say with power comes responsibility. So as the UK’s 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, you’ll see we are

addressing this from three main angles:

1) De-carbonising our electricity generation. We’re reducing

the intensity of CO2 emissions from our electricity production

by 60% by 2020.

2) Reducing our own carbon footprint. We’re taking action to

cut CO2 emissions from our offices and depots by 30% and

from our transport by 20% by 2012.

3) Helping our customers. We’re 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


Lots of successful energy

procurement tips inside

Get a good deal

for your business

Electricity is an essential supply for any business,

but securing a competitive supply contract

can be a harrowing experience for the

uninitiated. This step by step guide explains

how the UK electricity market works and how

to navigate it to your advantage. Come away

empowered and inspired, ready and able to

negotiate a good deal for your business.

Make sense of

electricity industry

jargon

Get organised to get

the most competitive

quote

Manage the risks associated

with volatile

commodity markets

Explanations in plain

English

‘Get in, get out’

information

Icons and other

navigational aids

A dash of humour and fun




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