Internal Market, Industry, Entrepreneurship and SMEs

More efficient public procurement of electricity

More efficient public procurement of electricity
Published on: 09/11/2016
We use electricity every day and it's hard to imagine life without it. Electricity prices are often volatile however and can change by over 10% in a week leading to unpredictable bills for public authorities.

For the production and distribution of electricity, large scale companies also need to make expensive investments and they will only do so if they can expect a fair return. These circumstances pose a particular challenge for public purchasers, such as universities, hospitals, schools, police headquarters and administrations. They often purchase electricity on their own, failing to take advantage of the economies of scale that could be achieved by purchasing electricity together with other public bodies. They also have to contribute to the greener, more sustainable provision of energy and make purchasing electricity more efficient, in particular to manage the risk of high energy price volatility. But despite these challenges, there are good practices and ideas on how to spend taxpayers' money more efficiently.

Making electricity procurement more effective and CO2 neutral

New opportunities for more effective public procurement were opened up by new EU public procurement legislation from April 2016. This includes the option to purchase innovative solutions, to centralise purchasing, and to purchase in other EU countries. To enable more public procurers to reap the benefits of bundling demand or innovative procurement solutions, the European Commission is encouraging the sharing of best practices to help countries make the buying of electricity more cost efficient. Some countries are already testing innovative forms of purchasing electricity with real cost savings and with an increased share of green electricity. For example, some electricity procurers pooled their demand to enable the centralised purchasing of electricity in the wholesale markets where prices can be considerably lower compared to the retail markets where public bodies usually buy their electricity.

Examples of considerable savings via electricity procurement through Central Purchasing Bodies (CPBs)

Demand aggregation is considered one of the key strategies that could help public authorities spread market price risk and avoid buying during periods of peak market pricing. All public sector organisations in the United Kingdom were asked to adopt aggregated, flexible and risk-managed energy procurement by buying energy via the flexible frameworks of a Central Purchasing Body, Crown Commercial Services (CCS). Accounting for 75% of the energy needs of the entire UK public sector, CCS achieved considerable savings for customers with its more efficient purchasing approach. For example, Transport of London reduced the BSP (Borough Spending Plan) by £780 000 starting in the financial year 2014/15.

There are more CPBs in the UK who offer a flexible and risk managed approach to energy procurement. They employ staff members with expertise and energy trading skills. The key benefits of procurement via CBS include lower energy supplier management fees, reduced balancing risk premiums (the difference between forecast and actual energy usage), increased options to spread market purchases, and the ability to purchase wholesale energy from the entire market, not just from the lowest price a supplier is willing to offer.

In Slovenia, demand aggregation and centralised purchasing is used to meet targets in buying green electricity.

Savings in excess of €21 million have been achieved by the National Procurement Service (NPS). In Ireland, when purchasing electricity and natural gas for the public service in 2011, the NPS approach also helps ensure the country meets the national renewable electricity requirements target of 40% by 2020.

Involving external experts in purchasing electricity

Public authorities can also improve their risk management in procuring electricity with the help of external experts. In this case, they are granted the flexibility to both buy and sell energy from the wholesale market, which means purchasing, selling, and re-purchasing varying volumes of energy for different delivery dates prior to finally buying it. They will be advised by a third party expert who will alert them when it is best to purchase or sell energy. These consultants have to permanently assess the energy markets for the specific needs of their public clients to lower their electricity bills.

Commission plans dialogue to make the public procurement of electricity more efficient

To make the purchase of electricity more efficient and greener, the Commission intends to start a dialogue with public procurers to exchange best practice and to discuss and evaluate innovative models of public procurement.

Background on the EU electricity sector

With considerable investment required for establishing long-term production facilities and distribution networks, the electricity sector is dominated by large enterprises. The main trend in the electricity sector since 1990s is toward liberalisation with the goal to open up markets to competition by eliminating monopolies and vertical integration. This will give consumers a choice between service providers. But competition can only be introduced in the generation and supply parts of the supply chain, whereas the transmission and distribution functions are natural monopolies.

Electricity is traded in two related markets. In the wholesale market (sale and purchase of electricity between large consumers, suppliers and generators of electricity), electricity is traded (bought and sold) prior to its supply to the destination grid of the end customer (individual customer or commercial entities). The retail market is the market for the sale and purchase of electricity between public consumers of electricity (customers) and retailers of electricity (suppliers).

Similar initiatives in municipal waste and health

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Savings of up to 20% thanks to the 2016 European public procurement reform

The initiative to make the public procurement of electricity more efficient must be seen in the context of the April 2016 reform of European public procurement. New rules have changed the way EU countries and public authorities spend a large part of the €1.9 trillion paid for public procurement every year in Europe. With more competition among bidders, trans-border procurement, and e-procurement, public purchasers can achieve considerable savings. Authorities that have already made their procurement smarter report savings of up to 20%.

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