Agenda item

(Cabinet Member with Special Responsibility Councillor Archer)

Report of the Head of Property Services.

(Cabinet Member with Special Responsibility Councillor Archer)

The Head of Property Services submitted a report asking Cabinet to consider the procurement of a new Gas contract for a four year period up to and including 31^st May 2013.

The options, options analysis, including risk assessment, were set out in the report as follows:

Option 1 (Fixed Rate) – This option would result in no change, with the Council continuing to acquire gas under the same sort of contract as now. The YPO will buy the Council’s total Gas requirement on one day, when the market conditions are favourable for the period 1^st June 2009 to 31^st May 2010. Each year thereafter, the same process would be followed to the end of the contract in 2013. The Council will shortly receive from the YPO a cost schedule showing the fixed charges for both options in both pence per kWh and per therm.

Within the recent tender for fixed cost elements it emerged that British Gas and Corona Energy impose certain restrictions. Both will impose additional costs for late payment of invoices and will adjust the contract prices in the event of a shortfall in gas usage. Corona did not quote for all Authorities.

E.ON Energy offer fixed costs with no penalties for late payment and do not require an estimate of usage for the term of the contract. Full details can be found on Page 8 of the main Confidential Report to Members Appendix 1.

Due to the volatility of the market and strong bullish trends there are risks associated with option 1. For example the Council are currently fixed until 31^st May 2009 at 78 pence per therm. The wholesale market at 15^th October gas was trading at 70.4 pence per unit. Conversely should North Sea production reduce further and if winter weather conditions are colder than usual the market may rise again.

Option 2 (Flexible Rate) - Move to a flexible purchasing option. The YPO will buy the Council’s Gas requirements over several transactions. Within this option the Council will still know the Gas price for the full 12 months.

This option will allow the Council to purchase flexibly within the contract period in 5,000 therm clips. The Council can trade live market prices; settlement prices, day ahead and month-ahead index prices, with all purchases made before the 24th of Month i.e. before the month of delivery. For example for August, purchases must be made on or before the 24^th of July.

E.ON Energy submitted their General Terms and Conditions of Supply and agreed to give the YPO the ability to do everything outlined in the original tender guidance documents, which were forwarded to all prospective bidders prior to the Tender, these included,

·                      The ability to fix all non-energy costs prior to contract start up.

·                      The ability to fix all volume prior to the start of this contract year.

·                      The ability to purchase in multiple quantities to fulfil the total volume

requirement as appropriate.

An important part of the E.ON Energy offer is that they would not impose cash out (take or pay) and therefore under any Contract with E.ON Energy there is absolutely no pressure on members to accurately nominate any likely consumption values for any contract year.

Acceptances for this option should be logged with YPO by Friday 28^th November 2008. Any received after that date will not have the opportunity to move to a flexible option and will have to remain on a fixed profile until the next anniversary which will be 1^st June 2010.

There are risks associated with purchasing gas on a flexible basis. If for example gas prices increase further and the YPO have not locked onto a fixed rate period the council could be paying more for their gas for a period. For example on 1^st June 2007 the council locked on at 63 pence per therm for a twelve month period. Wholesale prices continued to rise throughout the year. As at 1^st June 2008 the Council locked on at 78 pence per therm for a twelve month period. Wholesale prices now seem to be falling. As at the 15^th October 2008 gas prices were trading at 70.4 pence per therm.   

Option 3 do nothing - The existing four-year Gas supply Contract EN48GS/096 with the (YPO) expires on the 31^st May 2009. Should the Council chose not to purchase gas on a fixed or flexible basis then the rates charged by the current gas supplier (npower) will go variable until a contract is sought. We are advised by the YPO that the current fixed rate could double under the variable option. Within such a volatile market it is uncertain whether wholesale prices will increase or decrease.

Option 2 is the officer preferred option at this stage. It would be to permit the YPO to purchase Gas on a flexible basis from June 1^st 2009 to 31^st May 2013 with the supplier E.ON Energy.

It was moved by Councillor Archer and seconded by Councillor Kerr:-

“That the recommendation, as set out in the report, be approved.”

Members then voted as follows:-

Resolved unanimously:

(1)        To move towards a flexible method of purchasing gas energy through the Yorkshire Purchasing Organisation (YPO). The YPO will buy the Council’s Gas requirements over several transactions from 1^st June 2009 to 31^st May 2013.

Officers responsible for effecting the decision:

Corporate Director (Regeneration)

Head of Property Services

Reasons for making the decision:

The decision allows the Council to purchase flexibly within the contract period in 5,000 therm clips. The Council can trade live market prices; settlement prices, day ahead and month-ahead index prices, with all purchases made before the 24th of Month i.e. before the month of delivery. For example for August, purchases must be made on or before the 24^th of July.

(The meeting adjourned for lunch at 1.10pm and resumed at 1.35pm.)