A solution on paper that really works

An increasing number of companies generate some or all of their own electricity, and this can bring them many benefits including cutting energy bills, creating new revenue streams, and if the generation is renewable reduce carbon emissions and improve sustainability.

But often the full benefits of on-site generation aren’t realised and financial risk can be increased.  For example many companies don’t coordinate the purchase of their electricity supply with selling output from their generation, and end up having “bought high” and “sold low” – that is paid a higher energy rate for their supply than they receive for their exported power.  This is often a sign that the company isn’t talking internally – in many instances the electricity supply contract is dealt with by the procurement team and the generation export by the facilities or engineering team and unless they work effectively together value can be lost.

We’re trying to change that – we want to help our customers get the best value from their own generation, and I think companies should be able to obtain the same energy rates for the electricity they sell as they pay for the electricity they consume.

Last year we signed a new type of energy contract with one of the UK’s leading recycling and waste management companies, having spent a lot of time working closely with them to understand their needs and help them develop their knowledge of how to manage their energy risks.  The company generates over a terraWatt hour (1,000 GWh) of electricity a year from its landfill gas and waste-to-energy sites, and consumes around 50 GWh of electricity a year.

What’s different about this contract is we’ve made it possible for our customer to manage their electricity imports and exports through the same contract.  Rather than treat supply and exported generation separately we’ve simply combined them into a single net position.  This means that all the electricity it consumes is treated as if it was supplied from their own generation.

What does this mean for them?

Firstly their exposure to volatile energy markets is reduced, as the power they consume has the same price as the exported generation that it is netted against.  This means that none of their supplied electricity and a reduced portion of their exported generation are exposed to energy market price changes.

Secondly it allows them to develop and adopt a single hedging strategy for the remaining energy they have to sell, reducing risks and complexity.

They also benefit from only having to administer a single contract, and receive a single consolidated statement.

The contract has been so successful for the customer that after only six months they have extended the contract so they can develop a longer term strategy for hedging their energy risks.

This contract is a breakthrough for businesses that have separate electricity supply and generation export contracts, and I hope many others are encouraged to follow this shining example.

Bio

Posted by Paul Bennett

Paul Bennett used to head the Export & Low Carbon Energy team at EDF Energy. He has extensive commercial experience in helping businesses maximise the value of their electricity generation and managed the export business, Renewable Obligation, Climate Change Levy and Fuel Label. He is now Head of Financial Valuation - M&A and Investment at EDF Energy.

Comments

John Moore
Paul, the contract structure looks successful in providing the customer with assurance of fair value for their exported energy. This is important for the customer to build trust in its energy supplier, reducing contract management overhead and allowing the customer to focus on their main business.
September 30, 2013 at 12:20pm
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