Procurement
Buying Smarter = Savings and Efficiencies
You can expect to achieve significant levels of savings when your energy procurement requirements are rolled into the much larger single portfolio of multiple customers.
In the past, gas and electricity contracting was through either:
- Individual organisations letting contracts directly with a supplier for their own requirements, or
- Organisations conducting mini competitions from a framework with a number of suppliers that has been put in place by a central purchasing body (CPB).
With these fixed price/fixed term contracts, the supplier would cost the customer’s requirement individually, regardless of whether the supplier was on a framework or not. Without aggregating demand, economies of scale cannot be realised.
Flexible frameworks allow Government Procurement Service to access a very different pricing structure. Our large volumes and number of customers are combined at the tender stage, and all negotiable elements of the energy price (excluding the cost of the raw energy) are competed as part of the tender process.
This releases the benefits of volume leverage; a supplier tendering for large, committed volumes can reduce margins and cost to serve.
Also, because our flexible frameworks are normally let for four years, compared with the one or two years of fixed term, fixed price contracts, suppliers know they have committed volumes for longer periods, with the possibility of more being added. Again, this enables them to cut margins further.
When purchasing electricity and gas from suppliers under fixed term, fixed price contracts, suppliers often base prices on their view of energy prices at the time, plus various premiums to cover risks they takes due to the contract structure.
But with flexible contracts, Government Procurement Service purchases the wholesale energy in real time at live market prices, with no delays, which means that the suppliers don’t have to hold prices open. The risk premium is removed, which can amount to a sizeable saving.
Through these cost-saving, aggregated energy procurement frameworks, Government Procurement Service is working closely with the Pan Government Energy Project.
The project, launched by the Office of Government Commerce, is reviewing public sector energy usage and procurement, with the aim of delivering increased value for money through both cost and carbon savings. A series of recommendations for improving energy procurement and management has been developed.
For more details on the project please access the following link.
Its first key recommendation is that all public sector organisations buy their energy through an aggregated, flexible, risk managed framework managed by energy experts such as Government Procurement Service.
By placing energy requirements through Government Procurement Service, organisations are assured they are deemed ‘compliant’ with identified best practice energy procurement. They no longer have to justify the switch to this methodology but rather they have to justify why they have not already done so.