Britain's public sector is to start buying electricity on a day-to-day basis on the spot market, under a new deal with EDF Energy, as government tries to cut energy costs by taking risks.
The deal with EDF Energy, worth around 1 billion pounds ($1.98 billion) over the next four years, also guarantees about a third of the electricity from renewable sources until at least 2011.
Soaring energy prices in the few years until last autumn and increased demand for flexible supplies has generated growing governmental interest in playing the spot market, rather than through long-term contracts, despite greater price volatility.
"Now quite a number of public sector customers are willing to take the additional risk of going into the day-ahead market," Steve Griffin, senior customer services manager at the Office of Government Commerce's (OGC) buying arm told Reuters. "It's probably come more to the fore in the last year or two... We are now seeing a greater interest from the smaller customers," he said.
Some of Britain's biggest public-sector consumers, like the National Health Service, already buy a portion of their power on the day-ahead market, which OGCbuying.solutions (OGCBS) says has delivered savings of about 8 percent, compared to month-ahead power purchasing, over the last two years. By acting as one buyer through the OGCBS, smaller public sector bodies will for the first time be able to use the spot market.
"Historically we have aggregated the total volume together, but we have always bought forward because public sector customers like a fixed price," Griffin said. "I think you have seen the market change over the last couple of years. The interest in day-ahead is growing significantly." Higher energy prices in recent years as Britain's gas output dwindles has prompted more public bodies to look for ways to keep their costs down.
But although prices have declined since last autumn as British gas supply has been boosted by new imports, interest in dabbling in the spot market is strong as forward prices have fallen less markedly.
"I think higher prices have had a psychological effect, to say the least. People wanted to keep their costs down," Griffin said. "But even now that the market is obviously falling, buying day-ahead can still offer financial benefits versus buying on the forward market."
Under the deal with the UK arm of France's EDF, OGCBS will aggregate the total volume of power that the public sector wants to buy and EDF will then buy for and supply it to them. UK government bodies consume about 3 terawatt hours of electricity a year, at a cost of 200-250 million pounds, and the new deal guarantees a third of that will come from renewable sources at no extra cost.
The EDF contract includes site assessments for renewable onsite generation, energy efficiency programmes and a carbon off-setting option which allows customers to buy certified carbon emissions reduction certificates, OGC said in a statement on Monday.
As part of British efforts to fight climate change, central government departments are required to source at least 10 percent of their electricity from renewable sources by March 2008.
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