Why LA School Energy Procurement Frameworks are destined to fail

Background

Many Schools have historically procured their electricity and gas through a so-called Local Authority Flexible Framework or Consortium.

A Consortium is defined as “an Association between organisations acting as Members, working together towards a common end”. The use of the term Consortium implies a common shared objective, and as such it is designed to reassure users that they are benefiting from a better service, price or contract.

However, in the context of Energy Frameworks, the term Consortium is potentially misleading, and suggests a degree of mutuality which simply does not and was never intended to exist.

There is no form of “Association” and no cooperation between “Members”. This is not a semantic issue; it is about accuracy, honestly and transparency, and goes some way to explain why existing Local Authority Energy Frameworks are proving to be an outmoded and inappropriate way to deliver “best value and best practice” for schools in an increasingly competitive energy supply market.

Flexible Energy Frameworks

The framework uses one single supplier for each energy type, Half Hourly electricity, Non-Half Hourly electricity and gas. That supplier will be contracted for a period of at least three years, often in excessive of 5 years.

Surprisingly, the selection criteria for identifying the most suitable supplier are not fully disclosed to the Framework Members, neither are the commercial terms between the intermediary broker and supplier.

Even more alarmingly, the tender process does not actually include competitive tender for the energy itself. This is because the supplier is only ever contracted to supply energy at the prevailing market rate.

Known as Flexible buying, the Framework buys blocks of energy at a time determined by the broker.

There is no competitive energy rate negotiation, since there is no facility for changing supplier once the framework has been created.

Perceived benefits of Energy Frameworks

With very large and complex energy contracts, for example when procuring for 1000+ meters, the process of changing supplier requires careful control and is an added task for those administering the Framework. A fixed supplier base avoids this complexity.

For the broker managing the Framework, the unchanging supplier base, simple buying process without tender and Schools contracted for many years offers a very attractive financial model.

For a School, the increased buying volume within the Framework is expected to deliver better energy rates than would otherwise be achieved by users acting on their own account. (In practice, very little evidence exists to support this core attraction. In fact, quite the reverse with considerable evidence to suggest the lack of transparency and hidden costs within flexible contracts actually lead to higher unit rates and supplier margin).

For a School the Framework virtually removes the need (or ability) to make decisions about energy. The contract is managed by others, and the invoices simply come in to be paid. Schools will be locked into the Consortium for a period of between 3 and 5 years, and for some there can be an attraction in this rigidity.

A framework may appear to represent a low-risk strategy even if the outcome is suboptimal.

Fundamental weaknesses of Energy Frameworks

The inherent weaknesses of the Flexible Framework impact directly upon all Schools, and have resulted in excessive costs, onerous administration and accounting, and considerable uncertainty over future rates.

Although described as a Flexible Framework, from the perspective of the School, the system is rigid and prescriptive; any attempt to exit early is subject to considerable yet often unquantified financial penalties.

The School has no visibility of accurate future energy rates, and no certainty they will not change adversely without warning. Only once energy has been block bought will the School be advised of the rate they are contracted to pay.

The School has no choice of supplier, even if the existing supplier performs poorly.

Importantly, because there is no transparent competitive tender between suppliers, it is not possible for a School to select a supplier of choice. With over 18 suppliers now able to provide commercial energy in the UK, and increasing, it is unacceptable for Schools to be denied access to those competitive rates.

Remember, each school is already a relatively large energy user, and is able to attract very competitive energy rates on their own account. There is no need for a large user to be part of a Framework to achieve highly competitive energy rates.

The School has no choice of contract start date. This prevents the School from aligning contracts with the ideal period for financial control and budgeting.

The School has no choice of contract length, and is exposed to future energy fluctuations.

Flexible buying relies upon the competence of buyers to pick to right time to buy in a highly volatile market. With so much at stake, this is a very high-risk strategy which few private sector users would accept.

Lack of accountability; Schools do not know how the framework administrator is rewarded and how much is added to their energy costs to cover this process.

Lack of transparency; Schools simply will never know how much the broker earns, how decisions are made about choice of supplier, who makes the decision to buy energy at any given time, and what incentives are hidden in the relationship between broker and supplier.

The main beneficiaries of the Energy Framework appear to be the Local Authority, the intermediary broker and the supplier.

Best Value and Best Practice Energy Procurement.

Powerful Allies Open Competition Charter.

The framework fails to deliver on virtually all of the core principles of Best Procurement Practice, namely; Accountability, transparency, choice, control, cost reduction, certainty, predictability, versatility.

A new and proven approach is required to meet the needs of large energy users. This is in the form of a warranted procurement Charter called OPENCOMPETITION.

A Charter for Best Value and Best Practice Energy Procurement

OPEN

  • All tenders will be open and fully transparent, capable of simple independent audit. Copies of all tender documents will be quickly provided whenever requested.
  • All commission payments to Powerful Allies will be declared and agreed in advance, warranted as the only payment to be received, and available for verification at any stage.
  • There will be no fees payable to Powerful Allies.
  • There will be no hidden rewards or incentives which may distort the choice of supplier.
  • As far as practically possible, all variable (and hence risk bearing) elements will be eliminated.
  • All tariffs and other charges will be highlighted and included within comparisons.
  • The consumption data used for benchmarking will be the latest available, without modification.
  • Powerful Allies will present information without complex industry jargon and we value the cherished Crystal Mark under the Plain English Campaign; www.powerfulallies.com features an interactive Jargon buster.

COMPETITION

  • Full competitive tender between multiple motivated suppliers ensures market forces produce the lowest possible energy supply costs for clients.
  • This is in contrast to established energy “frameworks” where a supplier is largely predetermined, and is not required to compete on the fundamental energy cost itself.
  • All tenders will include the existing supplier, plus at least 3 other leading alternative suppliers approved in advance by the client.
  • Contracts will provide fixed and fully inclusive rates within each energy type.
  • There will be no supplier favouritism, and all relevant suppliers will be considered during the tender process.
  • All tenders will be fair and accurately presented, without distortion or preference.
  • Comparisons will be comprehensive, simply prepared and jargon free.

Are you looking for more information?

The Powerful Allies team are here to help, please get in touch or call us on 01380 860196.