Risk Deep-Dive: Volatility in the energy market
The Corporate Director Environment, the Energy Sustainability and Consulting Manager and the Head of Economic Development Projects and Transport Planning, attended to discuss the risk management strategy for the principal risk of “Volatility in the energy market”.
The following points were noted during discussion:
· The Council currently purchased its energy directly from the market via a contract with SSE. Prior to the current energy contract being awarded in 2020, a procurement strategy was approved by Executive in January 2019, which considered the options of continuing to buy directly (via a contract) or to purchase energy via a Public Buying Organisation (PBO). However, the decision was to continue buying in-house due to a range of factors, including the flexibility offered and the lack of control over timing of purchasing and fees that using a PBO would incur.
· The Council later procured an energy supply contract with SSE for the 2020–2024 period. The contract was not for supply at a specified price but allowed the Council to purchase through SSE via trades at the time of its choosing. The Council could purchase an entire year’s supply in a single trade but could also purchase for longer or shorter periods. The Council was able to make a trade for a full year ahead at some point prior to the start of the financial year, to give budget certainty, with the aim being to purchase during a dip in prices.
· Whilst the energy market was stable, the strategy on purchasing energy worked well. However, increasing prices and significant volatility from September 2021 onwards meant that the approach of waiting for prices to dip was not possible prior to the start of the 2022/23 financial year.
With a view to mitigating costs for this and future years, a first priority was identified as fixing prices and reducing costs for 2022/23, while the second was to reduce exposure to future price rises
· An energy consultancy firm had been appointed to advise the Council on energy purchasing and a risk management strategy was produced to advise the Council on the timing of making trades in order to hedge against future increases in energy and to take advantage of rises and falls in the markets. Market prices were monitored on a daily basis.
· With a view to reducing energy consumption across the Council, webinars were held for site managers to inform them on how to reduce energy use
· On mitigating costs for 2023/24, the possibility of joining a Public Buying Organisation (PBO) was considered, alongside the mutual termination of the contract with SSE in order to join a PBO for up to two years. There could be a reduction in costs to the Council of over £10m
· Members suggested that, although it was not possible to control the energy market, it should be possible for the Council to control energy costs. For example, in the medium term, would it be possible to look at communal heating and windows in buildings such as the Town Hall? The Energy Sustainability and Consulting Manager responded that Housing Services were looking at systems to achieve this, including systems sensitive to outdoor temperatures and work with UCL on insulation and retro-fitting of buildings. They were also looking at decarbonisation of buildings. As long as funding was in the energy budget for these items for future years, it would be retained.
· This financial year’s budget had been set months ago, when the £30m extra cost pressure for energy was not expected. It was noted that the General Fund reserve would cover energy pressure costs this year. There was likely to be additional pressure next year, but officers were anticipating being able to achieve a balanced budget for next year.
· In response to a question about any anticipated risks or urgent steps needing to be taken to protect schools, the HRA or leisure, the Corporate Director Resources said that the Council was hoping to hear from the Government on financial assistance with costs. Schools’ budgets were being closely monitored by Children’s Services who were also advising them on their budgets and reducing energy consumption.
He anticipated increased costs for 2023/24 and a cap on energy risk.
· In response to a question from Members about measuring value for money from the energy consultants, it was reported that the Council monitored energy prices daily and deferred to them on making trades. The Council’s contract with the energy consultants was for six months and the Council hoped to join a new provider, together with other local authorities
· There were safety issues associated with buildings and many people felt safer in public buildings when the lighting was on. It was noted that buildings would be lit differently in the future
· The costs associated with insulation of homes etc was not yet known as this work had not yet been progressed, due to the need for planning permission. Funding bids would be made to the public sector decarbonisation scheme for the retro-fitting work and insulation works.
· The Energy Risk Management Committee, comprising four Energy Services Managers, would not be required once the Council had joined a PBO
· A question was asked whether any consideration had been given to the Council joining an Energy Consortium at an earlier stage, given that energy risks had already been identified in the Principal Risk report. Officers replied that it had been considered and one consortium had turned the Council down as they had no capacity for the Council to purchase energy. The Council approached SSE in August about the possibility of pulling out of the contract with them
· Looking forward, Members asked whether there was a likelihood of a school or leisure provider not being able to pay energy costs? Officers reported that the situation with leisure providers was being closely monitored as energy costs would be a significant pressure on their revenue costs. Schools had been in a challenging budget situation even prior to the energy crisis. Children’s Services were looking at whether there was over-provision of places and it would be important to have a strategic view of how schools were to be sustainable in the longer term. It was anticipated that a Government announcement on funding would help the Council in the short term.
(a) That the report of the Corporate Director of Environment detailing the risk management strategy for the principal risk “Volatility in the energy market” be noted.
(b) That the Corporate Director Environment, the Energy Sustainability and Consulting Manager and the Head of Economic Development Projects and Transport Planning, be thanked for their attendance at this meeting.