Purchasing Energy by Paul Bennett, Executive Chairman of BSSEC
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Energy in Buildings and Industry and the Energy Institute are delighted to have teamed up to bring you this Continuing Professional Development initiative MARK THROWER MANAGING EDITOR SERIES 15 | MODULE 08 | ENERGY PURCHASING Purchasing energy By Paul Bennett, executive chairman of BSSEC nergy is the lifeblood of Figure 1: Energy market forces commerce, business and industry. Organisations are now spending more on energy E than they have ever done before, and, energy spend will only go in one direction in the future – up. Therefore, the purchasing of energy is a vital activity in the energy management and procurement profession. In this CPD article we will take a look at the energy markets and how legislation is impacting future pricing of energy. We will look at the two predominant energy sources of electricity and gas and how these markets operate and consider the information needed to procure energy in these markets. Finally, we will look at practical steps to take when procuring energy. There are many factors that afect energy markets and their price and year carbon budgets have also been Traded Commodity – Energy is stability including: set until 2032, which act as milestones a commodity that is traded on the Global Supply – Global energy to achieve the 2050 reduction targets stock exchange, meaning that prices producers such as Saudi Arabia and set by the CCA. The Renewable Energy constantly luctuate and there are the USA have major inluence over Directive requires all members of the both good and bad times to purchase oil output and prices. Coupled with European Union (EU) to commit to energy. Trading enables energy to be European gas connections with producing and promoting renewable bought in advance, from the short term Russia it can be quickly understood energy, with a target of 20 per cent to much longer term. For example, that the availability and price of renewable energy generation by energy can be purchased for the day, energy can vary. Factors such as this 2020.5 The Energy Act ensures that week, month, quarter, season, year mean that the stability of energy can energy demands are met despite the and up to ive years ahead. As this be volatile depending upon global discontinuation of older power plants is possible, prices can be locked for events. While gas in the UK is not and decarbonisation by investing more identiied volumes (a price lock is a imported directly from Russia, their money into new infrastructure and irm commitment to Take-Or-Pay). two largest customers, Germany and schemes. Other measures in place in Hedging is a diferent option, behaving the Netherlands, are connected to the the UK include the Feed-in Tarifs (FiT) like an insurance policy where a fee is UK via two major gas pipelines. 57 per scheme which promotes the use of paid upfront to guarantee a capped cent of the UK’s gas is supplied from technologies that generate renewable commodity price. If the market ends imports1 and this is predicted to rise and low-carbon electricity typically on up being higher than the cap, the to 93 per cent by 20402, with Norway a small-scale, by requiring electricity counterpart refunds the diference. supplying approximately 61 per cent of suppliers to make payments for the Capacity – The UK infrastructure is the gas that the UK imports.3 generation and export of electricity ageing, has had little investment and Political Intervention – Govern- to eligible installations. Support for is nearing capacity. 20 per cent of the ments intervene in the energy market large-scale generation of renewable UK’s electricity generation capacity to attempt reforms – however this electricity is ofered through the has been lost since 2010 due to the has directly increased energy costs. A Renewables Obligation (RO) in which closure of power stations, and it is sample of these reforms include the electricity suppliers source increased estimated that a further 35 per cent will Climate Change Act, Renewable Energy electricity from renewable sources. be lost by the end of 2030, however Directive, Energy Act, Feed-in Tarif, The Climate Change Levy (CCL) is peak demand is expected to increase, Renewables Obligation and Climate a tax applied to the energy bill of adding further pressure to meet our Change Levy. The Climate Change Act non-domestic consumers in the UK needs.6 Energy distributors charge (CCA) was enforced in 2008 with the to encourage a reduction in energy customers on the amount of energy aim of cutting carbon emissions by 37 consumption and emissions unless they use, coupled with the maximum per cent by 2020 and 80 per cent by they source or supply low-carbon or demand, and customers are charged 2050 against a 1990 baseline.4 Five- renewable fuels. on this peak demand whether they Produced in Association with FEBRUARY 2018 | ENERGY IN BUILDINGS & INDUSTRY | 21 SERIES 15 | MODULE 08 | ENERGY PURCHASING reach it or not. Demand-side response Figure 2: Electricity market structure is a new method to increase the lexibility of energy consumption which involves rewarding consumers for changing their consumption patterns through new tarifs and schemes, and technology such as smart meters. Another method that focuses on managing demand, improving network eiciency and reducing the energy charges for large industrial and commercial users is the triad charging system. Consumption is measured every half an hour, and peak demand The customer enters into a contract with an energy supplier to provide metered electricity. during the triads is calculated. The Large consumers of electricity are provided with electricity meters to code of practice 5 (up to 1MW), 3 (1MW to 10MW) and 2 triads are three periods during winter (10MW to 100MW) which record consumption over each 30-minute period and are therefore often referred to as half hour meters where energy demand is at its highest. Customer or half hourly read meters. Energy suppliers receive charges for Smaller consumers of electricity below the Code 5 threshold are sub-divided into proile classes ranging from domestic users (proile classes 1 & 2) to signiicant energy users (proile classes 7 & 8). The vast majority of business customers in proile classes 38 the transmission and distribution of have manually read meters. energy that is purchased, which are then passed on to the customer and The supplier is licensed to supply electricity to the customer and charge them for their consumption. The supplier also coordinates are known as TUoS (transmission use the associated contracts with the meter operator, meter asset provider, data collector and data aggregator. of network) and DUoS (distribution use The supplier uses an electricity meter to bill the customer. The unit charge of electricity is the kWh and is billed per unit consumed. Supplier The electricity supplier collects the consumption data through the Balancing and Settlement Code system. This provides accurate of network) charges. TUoS is where bills for the customer as well as accurate predictions of electricity demand for all parties within the electricity industry. Customers costs are recovered from running and with a capacity of less than 100kW are entitled to opt into the settlement system if they are prepared to pay additional charges and maintaining the national grid, and upgrade their meter. DUoS is where the costs are recovered The generator owns the plant which generates the electricity and is licenced to sell electricity directly to the supplier. Some Generator for distributing electricity across the generators are owned by suppliers. national network. The distributor owns the local distribution network through which the electricity reaches the customer. This includes cables, Big Players – UK energy companies Distributor are very large and operate with power, transformers, meters and other infrastructure assets. with the largest known as the ‘Big Six’ The meter operator has overall responsibility of operating and maintaining metering equipment. The meter operator is contracted Meter operator which is comprised of SSE, EDF Energy, to the supplier and normally has a separate contract with the meter asset manager to manage the meter. British Gas, npower, EON UK and The meter asset manager is contracted to install, commission, maintain, remove and dispose of the meter and to ensure that it Scottish Power. Suppliers must manage Meter asset manager complies with regulatory requirements. commodity costs, transport costs and government taxes that result from The data collector is responsible for the collection and processing of consumption data from actual meter readings, or the Data collector policy to fund renewable energy. determination of an estimate. This consumption information is then passed to the data aggregator. Energy Markets Regulator - The data aggregator is responsible for the aggregation of data regarding the electricity supplied to customers. The supplier uses Data aggregator Regulated by Ofgem in the UK and this aggregated information for balancing and settlement purposes and to ensure that customers are billed correctly. Ofreg in Northern Ireland. The Oice of Gas and Electricity Markets (Ofgem) regulates the monopoly companies smart meters will provide the UK with Gas Market Information needed for energy which run the gas and electricity a net economic beneit of £6.2bn.7 As The gas market is structured as procurement networks. It makes decisions on price of September 2017, small and large customer, supplier, shipper, transporter, Once the site information has been controls and enforcement, acting energy suppliers are responsible for meter operator and meter reader. collected as previously outlined, the in the interests of consumers and the operation of 7.67m smart meters in Energy brokers can be used to information can be organised for helping the industries to achieve domestic properties, and 939,700 smart procure energy on behalf of customers, procurement into a tender pack which environmental improvements.