Government should be the energy market’s best customer.
We’re the biggest single spender by far. There’s a long-term demand for energy guaranteed.
Our credit is the best - and we can pay our suppliers quickly.
And yet - for too long government was not the smart shopper or the valued customer that it should have been.
Of course you can’t single out energy here - when this government came into office two years ago everywhere you looked Whitehall departments were not buying well -
While at the same time failing to use their huge purchasing power to support UK businesses and growth.
And when it came to energy buying - failing also to support the green energy sector and consequently our Climate Change commitments.
In short - it was a pretty bad deal all round. And this government moved quickly to get better prices by buying commodities, including central government energy and much of the wider public sector’s energy, through the Government Procurement Service.
This approach has already led to big savings - and today we are setting out an ambition to take centralised buying to a whole new level.
‘Energy for Growth’ is an innovative new strategy designed to unlock growth in the energy sector, support our green ambitions and, crucially, to save the taxpayer money.
I am announcing the first stage of this scheme today - a pilot project that will release a serious amount of investment for renewable energy projects around the country that have stalled in the current economic climate.
And this pilot is just the start - if we get this right, Energy for Growth has the long-term potential, alongside the government’s wider energy policy commitments, to increase this country’s generating capacity, reduce our dependence on foreign oil and gas - and cut energy bills for everyone.
Towards efficiency and growth
These would be worthwhile aims at any time, but never more so than today given the huge economic and financial challenges we face.
And Energy for Growth will play its part in the government’s ambitious agenda to get much more value for taxpayer cash.
In the early days of this coalition government the Efficiency and Reform Group was set up in Cabinet Office with a strong mandate to cut the fat across Whitehall. We made a then unprecedented savings of £3.75 billion in our first ten months in office. In August I announced that in 2011-12 we saved a further £5.5 billion.
Our work is by no means done. And we will continue to identify ways for departments to deliver the further savings required so taxpayer money can be targeted where it’s needed most - supporting frontline services and growing the economy.
Energy buying is a successful example of aggregating spending to achieve savings. Government spends a total of £1.5 billion on electricity and gas every year. And since 2010 all central government departments have sourced energy through the Government Procurement Service - saving £51million.
And much of the wider public sector, including 85% of NHS trusts and many local authorities are now choosing to purchase energy through GPS because it gets the best price. Many more will move to GPS over coming years - including from next year Transport for London.
And in total by acting as one customer for buying commodities for things like office supplies and travel as well as energy - central government saved £357million in 2010-11 and £422million in 2011-12.
Our procurement reforms are not just focused on making savings. We recognise the importance of using the public sector’s huge purchasing power, over £230billion a year, to support the UK’s entrepreneurial businesses and spur growth and jobs.
This means transforming the way government does business and to this end I have introduced reforms to make the whole procurement process simpler, faster, cheaper - and more open to a wider range of businesses particularly SMEs who were previously shut out.
And instead of holding businesses at arms-length and keeping them in the dark about future opportunities, as was the case in the past, today there is unprecedented transparency over government buying plans. We have published over £80 billion of potential business opportunities online and businesses now have advance warning so that they can gear up and make investment decisions well in advance.
Energy for Growth pilot
But reform can’t stop now. We are constantly hunting for innovative new ways of working with industry that will get value for the taxpayer and unlock growth.
And over the last year we have designed what we believe will be a ground-breaking new commercial model for buying energy - Energy for Growth.
At the moment there is still a failure to make the most of our power in the market. We currently buy all our energy wholesale, on a relatively short-term basis - up to three years in advance, which has several disadvantages.
Firstly government, just like other customers, is at the mercy of events affecting supply, and therefore price. This exposes the taxpayer to sudden, unplanned spending increases.
Secondly government gets tied into three-year deals with single suppliers, which as part of their contract manage generators. By going through a middleman in this way we can’t guarantee that a proportion of the energy comes from UK-based sources - with our oil and gas most likely to come from abroad.
Third, we are falling far short of our legally-binding commitments to move to renewable energy sources.
And finally, despite being the largest and most reliable purchaser of energy on the market, we have failed to use this power to generate growth in UK jobs and industry.
In the past these issues were essentially met with inertia - shrugged off as unresolvable - Energy for Growth tackles them head on.
I am announcing today the first pilot phase of this Strategy which will see us in the New Year tender for generators to supply 2% of the Government Procurement Service’s energy demand which is worth £25million each year. We will be offering, longer-term contracts, called Power Purchase Agreements, of up to 25 years, to exclusively renewable generators.
What are the benefits of buying like this?
Firstly, we believe bulk buying directly from generators on long-term contracts will shield taxpayers from volatile energy prices.
Government will buy a set proportion of a generator’s output and they can then bank on the government’s good credit to leverage investment. And in return for this security, we will expect the very best price. We estimate this pilot will result in direct savings for taxpayers of around £155million over 15 years.
This approach also has the potential to drive economic growth. In the past the wholesale market was inaccessible to small and medium players.
But fixed long-term contracts can guarantee long term business for small generators located across the country, which will make them attractive to investors and create jobs in the energy and construction industries.
A small 10 megawatt generator puts about £5million a year into the local economy through lease payments, corporation tax and community funds and other benefits come through building the infrastructure the plant will need to operate.
Energy for Growth will in particular boost the green energy sector. We are aware of at least 150 stalled renewable projects in the UK which have planning permission, but may lack finance.
This pilot means that a chunk of our electricity will only come from renewable sources. And this will not only boost local growth - it will also help us meet the UK’s carbon reduction and renewable energy targets.
So already through this pilot we expect benefits to the taxpayer, to business and to the environment - but looking ahead we are ambitious for even greater and more powerful outcomes.
If the pilot is successful, Energy for Growth ultimately aims to take up to half of our total energy portfolio, and divide it between a wide range of generators and other sources all plugged into the UK grid and many of them likely to be renewables.
This represents an important improvement in our purchasing of energy - to an even more sophisticated portfolio approach seeking to diversify across sources, suppliers, duration and pricing mechanisms. It means that we will buy short and long term, from renewable and traditional suppliers, on fixed and variable bases.
This approach complements wider government commitments to create the right conditions for investment in diverse, secure and sustainable energy production in the UK.
As set out in the Energy Bill published last month - it is imperative we start to transform our electricity market and move from predominantly fossil-fuels to a diverse low-carbon generation mix - if we want to keep the lights on in the future.
And Energy for Growth has the potential to increase the UK’s generating capacity by investing in local generators.
I have already touched on the economic benefits of this - the more business we have based in the UK, the more money is spent within the country.
Additionally by unlocking growth in the renewable sector we can also help to create the right conditions for a green technology market to thrive.
Finally if fully and successfully implemented, Energy for Growth has the potential to bring about lower prices for everyone.
Firstly because with long-term contracts and simpler procurement processes we are opening up opportunities for smaller generators - both existing and those yet to be built. In time this should create a greater number of increasingly diverse generators competing with each other to meet the UK’s energy demands - and this competition should lead to lower prices for all of us.
In addition to this, by ensuring more of the National Grid’s energy is generated by local renewable generators, prices will be protected from the high levels of volatility we see today. Renewables, unlike fossil fuels, are not finite resources. And home grown sources of power are not affected by rising global energy prices and volatile currency levels.
Lastly as government signs its first Public Purchase Agreements with Generators, we will be transparent and publish details so people can compare, judge for themselves what’s realistic to pay and push for a deal. This was not possible when purchasing energy through intermediate suppliers.
This government is committed to embedding transparency into everything we do - it exposes the inadequacies and inefficiencies, but it also drives choice and improvement.
In the past buying energy was just another commodity governments tended to throw money at without thinking about.
This government has shown already we are determined to get the best prices for taxpayer cash.
And today we are setting out how we will take centralised buying to the next level. Using our power as the energy sector’s biggest customer to actively shape the market to meet this country’s needs.
Supporting local growth and jobs; boosting renewable energy; reducing our dependence on foreign oil and gas; and in time lowering energy prices for everyone.
These are serious ambitions and we’re not expecting it to be easy. But by working with the industry, and across the public sector - we are determined that the whole country will reap the benefits of Energy for Growth.