It's easier when

you know how

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W
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ED
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ited Edition
Making a world of difference
Choosing the right energy contract can make a world of difference
to your business. On the other hand, so can cutting your energy
use. To really make a difference, you need the best of both worlds.
Providing a wide range of energy supply contracts for our customers
has helped us grow to supply more power to British business than
any other energy company*. As youll see in this guide, wholesale
electricity costs are highly volatile which makes the support we
provide our business customers all the more important. One
example is our Market Insight service providing daily reports
and analysis of current wholesale energy costs to help our
customers make more informed purchasing decisions. Log on at
edfenergy.com/marketinsight. Perhaps thats one reason why EDF
Energy is also rated number one for customer satisfaction by UK
businesses**.
Of course getting a good deal for your energy is only half the story.
We also provide a great range of energy saving options that deliver
long term cost savings and carbon emissions reductions.
See how we can help your business save today to save tomorrow.
www.edfenergy.com/largebusiness
*source: Datamonitor B2B market share data: 2006-2009
** source: Datamonitor Major Energy User Customer Satisfaction Survey: 2009
By EDF Energy
A John Wiley and Sons, Ltd, Publication
lecrriciry 8uying
FOR
DUMmIES

Electricity Buying For Dummies

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Introduction
Y
ou may be new to electricity buying, or you may
have been in the business for decades. Either way,
you are likely to find the task to be a challenging one
these days.
Energy prices are more volatile than ever. Just when
you think youve seen everything, the market takes a
dizzying new turn. How can you be sure youre getting
the best deal for your company? How can you prepare
your company for the markets wild fluctuations,
making informed decisions so youre less likely to pay
too much?
About This Book
Electricity Buying For Dummies is a handbook for those
navigating these daunting waters. Well take a look at
how the business has changed, and why. Well explore
whats behind the pricing volatility that has caused
untold indigestion among energy buyers in recent
years. Well outline some of the strategies for master-
ing the new reality. And well take a look at how carbon
reduction schemes will impact energy buying.
Foolish Assumptions
In writing this book, weve made some assumptions
about you. We assume that:
You are an energy buyer, by choice or by default
perhaps new to the role, maybe a veteran pining
for the simpler days of yore (or not all that long
ago).
Youre in need of some new strategies for making
sure your company gets the best electricity deals,
both today and tomorrow.
You want to be sure your company is ready for
the new challenges carbon trading will bring to
energy buying.
How This Book Is Organised
Electricity Buying For Dummies is organised into seven
distinct sections:
Part I: Electricity Buying in Todays Market. We
summarise how the energy business in the U.K.
has changed in the past two decades, and exam-
ine how energy buying has been affected.
Part II: A Menu of Electricity Contracts. We take
a look at some of the contract options available to
energy buyers.
Part III: Risky Business. We detail the volatility
common in todays energy market, and explore
ways to reduce your companys risks.
Part IV: Best Foot Forward. We discuss how to be
the most attractive customer when youre seeking
bids, and how to form a strong partnership with
your supplier.
2
3
Part V: Counting Your Carbon. We look at the
carbon emissions content of your power and dis-
cuss how carbon reduction targets and legislation
will impact energy buying.
Part VI: Ten Ways to Prosper in the New World
of Electricity Buying. We share the secrets to suc-
ceeding in todays volatile environment.
Part VII: Glossary. For those not completely
fluent in the terminology of energy buying, we
offer a helpful list of definitions.
Icons Used in This Book
To make navigating to particular information even
easier, youll find these handy icons highlighting
key text:
Make a special note of these sentences,
because theyre particularly important (even
if you skip some of the other paragraphs).
This is a piece of advice that will help you
understand the topic better and achieve more
success in energy buying.
You dont really have to understand these
details, but they just might be of interest
to you.
Heres a caveat that might save you or your
company some trouble or some money.
4
Where to Go from Here
This is a short book, and you ought to be able to make
your way through in no time. But we wont be offended
if you dont. Feel free to skip around and find the parts
that interest you the most, and use the headings to
help you find what you need.
Part I
Electricity Buying in
Todays Market
In This Chapter

Understanding the evolution of electricity buying

Learning the ropes as a buyer

Negotiating the business of buying

Linking up the electricity supply chain

I
f youve had a long career in the energy buying
business, youve witnessed a tremendous evolution
in the way that power is bought and sold in the United
Kingdom.
It was only about two decades ago that the energy
market was government-owned and highly regulated.
Today, electricity is a commodity, traded in a manner
not all that different from gold or oil.
All home and business customers can choose their
electricity supplier. U.K. companies may pick from
seven major suppliers and a few smaller ones. There
are some 170 power stat ions that are part of the whole-
sale market, and 43 medium-to-large power generators,
all plugged into a national grid that matches supply
with demand.
What Has Happened to
the Electricity Industry?
The market began its move toward todays structure
around 1990. Before then, the government owned most
of the countrys generation plants, and government
monopolies oversaw distribution as well. Customers
could not negotiate the price of their electricity supply
because they had no choice in providers. The price
was relatively stable more so than today but the
government felt it was too high and that efficiencies
could be made in the market to benefit consumers.
The road to privatisation
Privatisation and transformation to a competitive
market was seen as the answer. For the first decade, a
wholesale market called The Pool facilitated the com-
petition. Generators sold power into The Pool, compet-
ing on wholesale price, and suppliers purchased the
power out of The Pool on behalf of their customers.
Prices gradually declined through this competitive
scheme.
More restructuring came in 2001, driving
prices even lower through the creation of
greater competition among generators. The
one-price-for-all system maintained by The
Pool was replaced with a commodity market
under the New Electricity Trading Arrangement.
Not only did the change result in generators
and buyers negotiating prices more directly, it
6
7
also brought new buyers into the market,
including speculative traders who were not in
the business of producing or supplying
electricity.
Volatility on the rise
Though the 2001 restructuring was followed by more
reductions in the wholesale price in power, the trend
reversed only a few years later. Wholesale prices began
to rise dramatically as supply-and-demand pressures
brought new volatility and the price of electricity rose
to reflect the increasing price of the gas often used to
generate it. Between 2003 and 2006, wholesale gas
prices rose by more than 250 per cent, and wholesale
electricity prices jumped nearly as much, according to
the research firm Heren Energy. In 2008, prices rose
and fell by 80 per cent. These volatile market prices
can be seen in Figure 1-1.

10
20
30
40
50
60
70
80
90
100
Jan
2005
Jul
2005
Jan
2006
Jul
2006
Jan
2007
Jul
2007
Jan
2008
Jul
2008
Jan
2009
Jul
2009
Jan
2010

/
M
W
h
Gas
Electricity
Figure 1-1: UK wholesale electricity and gas prices
8
This volatility has driven the need for a more
strategic approach to energy buying for busi-
ness and making the roles of the energy buyer
and energy manager all the more important.
Nobody wants a price shock at the end of a
contract!
The Evolving Role of
the Energy Buyer
Oh, for the simpler days! The original focus of the
energy buyer was price, which made it relatively
The Governments Role in the Energy Market
The energy business in the U.K. is regulated by Ofgem, the
Office of the Gas and Electricity Markets. The office is all
about protecting consumers by promoting competition, but
also providing appropriate regulation of the monopoly com-
panies that operate the countrys electricity and gas
networks.
Other governmental entities with a hand in the energy busi-
ness include:
The Department of Business, Innovation and Skills
The Department of Environment, Food & Rural Affairs, the
official protector of the environment.
The Department of Energy & Climate Change, formed in
2008 to consolidate the energy responsibilities of the two
previously listed departments.
9
simple to discern the best deal. And as prices became
ever-more competitive, with reductions across the
market, price-focused energy buyers were overjoyed.
These days, of course, price fluctuations are constant
and sometimes dramatic, and the cost of electricity is
determined by a combination of factors. It is more diffi-
cult than ever to predict the best time to go to market.
Another new challenge for energy buyers, especially of
large energy users, is ensuring that their companys
energy consumption is not far off the amount of energy
that was forecast they would use when they signed
their supply contract. Those that stray significantly
from their original forecast may incur additional
charges as energy suppliers seek to recoup the costs of
managing these variances in the wholesale markets.
Tools of the trade
The job may be more difficult than ever, but
todays energy buyers have many tools at
their disposal that enable cost-effective energy
procurement. Different types of sites in their
portfolios are metered differently. Larger sites
have half-hourly metering (also known as HH)
or if theyre smaller users (normally less than
100 kilovolt-amps or kVA) they may stick with
non-half-hourly metering (thats NHH for short),
whichever seems the most appropriate for the
particular situation. HH meters are read elec-
tronically every half hour. Conventional NHH
meters are read manually only once a month
or once a quarter. However, these are being
phased out to be replaced by Automated
Meter Readers (AMR) that can function much
like half hourly meters.
10
With energy now more of a commodity, buyers
can examine more precisely the various com-
ponents that make up their electricity bill, and
take charge of those components. About three
quarters of that final bill is typically the actual
cost of the energy, while the remainder covers
elements such as the cost of transporting the
energy from the source to the point of use
across both the national grid and local distribu-
tion network systems. Figure 1-2 illustrates this.
Energy 75%
Margin 2%
Shape & Volume
Risk 1%
Hydro Levy 1%
Elexon 1%
Renewable Obligation 5%
BSUOS 2%
Transmission
Losses 1%
Distribution
Losses 3%
Distribution
Charges 4%
Transmission
Charges 5%
Figure 1-2: Electricity Costs
A roadmap toward a new energy contract
In this more complicated market, here are some of the
first steps that you as an energy buyer must take to
pursue a new contract:
11
Collate a full record of all sites that will be
covered.
Divide those sites into two groups: HH and NHH
sites. Your current supplier should be able to help
identify your HH sites and provide annual HH data
for all applicable sites.
Total-up the consumption and cost for each
group.
Expect your supplier to talk about your credit
worthiness and how this affects the payment
terms you may be offered.
Ask your current supplier for any materials that
might help in understanding energy and
procurement.
Determine a realistic view of what you hope to
achieve with regard to energy reduction and
control.
Check with your supplier to learn about other
products that might help manage and reduce
energy consumption.
Look at the terms and conditions, service levels,
and customer satisfaction price is not the only
consideration.
Determine your energy supplier options and con-
sider approaching other suppliers.
Learn more about the suppliers youre consider-
ing, including their commitment toward energy
usage reduction and the ways they can assist.
12
Energetic Energy Supply Chain
Electricity is something most people just take for
granted you switch on a light and the bulb glows, you
plug in a television and The X Factor fills the screen.
Few people think about how that energy travels from
its birthplace to the place where its used.
Fortunately for modern society, thousands upon thou-
sands of people do think about the electricity supply
chain 24 hours a day, every day of the year. What goes
on behind the power socket is complicated.
Start to finish
The supply chain begins at the point of generation,
power plants that typically are powered by nuclear,
gas, coal, water or even wind. There are around 170
power stations across the U.K, though a large share of
the generation takes place in the north, where most of
the coal once came from. Power station operators are
of course affected by the international commodity mar-
kets for their feed stocks, such as coal and gas.
From the power plant the electricity moves
onto the national grid. The national grid is a
cross-country transmission network consist-
ing of nearly 24,000 kilometres of transmission
cables. From the national grid the power
makes its way onto local distribution networks
owned by DNOs, short for distribution network
operators. The 14 DNOs are owned by seven
companies, which maintain more than 665,000
kilometres of distribution cables. You will be
connected to one of these cables.
13
At the end of this cable will be your meter. This meter
has a unique registration number called an MPAN,
(shown inf Figure 1-3) which identifies it among all the
other meters in the U.K. To ensure that your meter
does its job accurately you must appoint a meter opera-
tor (known as the MOP) to maintain and service your
meter regularly.
008 845 00
451 0023 0001 12
S
Prole Class Meter Time Switch Code Line Loss Factor
Host Rec Check Digit MPAN Core
Figure 1-3: Meter Point Administration Number
Also playing a role in managing your metering data is
the data collector (the DC), which uses a telephone
modem to read your meter every day and download
your HH data thats 48 half-hourly readings. This
information is then sent to the data aggregator (the DA),
which makes sure the data is complete with no gaps or
errors before passing it along to the supplier, from
which you get your monthly bill.
Even though you get just one bill from the supplier, the
energy supply chain works with the help of a number
of settlement processes that take care of all usage,
including all regulated charges. These charges include
the cost for using the national grid (you may see this
called TUOS, short for the transmission use of system
14
charge) and the distribution system (the acronym here
is DUOS, or distribution use of system). Your HH data
works its way through the settlement system, and the
supplier pays the NGC and DNO for the use of their
systems.
The supplier also has to pay for the energy it buys for
you, so ultimately, the power stations get paid as well.
And then, of course there are taxes, such as VAT and
the Climate Change Levy.
Meanwhile, metering costs are paid by you to the
appropriate MOP (thats a meter operator, not a floor
cleaning device).
Whats left? Not a whole lot, really. Its the suppliers
margin, which tends to be quite low.
The Business of Buying
If energy buying were as simple as purchasing food at
the market, there would be no need for a guide like
this. Buying energy is more like buying other commodi-
ties, which seems simple enough how much is pro-
cured depends upon how much you need, when youre
going to use it and for how long. In reality, even though
energy is traded like a commodity, buying power can
be a lot more complicated because electrical energy
cannot be stored like other commodities.
Whats in your energy bill?
That price displayed on the electric bill actu-
ally is the sum of many components. The great
thing is, you can negotiate the price of some of
those elements.
15
Lets go back to the market for a minute and imagine a
can of beans on the grocery shelf. A large part of the
price covers the beans themselves, but you also are
paying for the preparation and packaging of the beans,
the delivery of the can to the store, and the shopkeep-
ers overhead and profit. You pay one price to the
cashier, and all of the players get their cut. The suppli-
ers margin is essentially the label.
With electricity, you pay the electric supplier that
sends you an invoice, and that payment gets divided as
it works its way backward through the supply chain.
Delivery of that electricity makes up a significant part
of the total charge. Youre paying something to use and
maintain the national grid as well as the local distribu-
tion network and the industrys shared systems. The
price for all of this is regulated and fixed, and is thus
non-negotiable.
Though its fixed, it does vary by area and location. For
example, national grid costs may be higher if youre in
the southwest, because most of the generation hap-
pens up north and thus the energy must be trans-
ported across a greater distance.
Meanwhile, your supplier gets a cut of the bill, too,
though its relatively small as little as one or two per
cent, depending on the size of the contract. Some may
also go to pay your energy broker or consultant if you
use one. The rest covers the commodity cost of the
electricity youre buying. This is not only the majority
of the bill its also the most volatile component, caus-
ing the most potential trouble when it comes to trying
to stay within budget.
16
High volume, low margin, high risk
The delivered price of your energy is sup-
ported by having the suppliers lock in for-
ward contracts that protect them against
volatile market conditions. Such contracts are
needed because energy is a featureless com-
modity, traded in large volumes but with high
risks and low margins.
If youre buying for a large site or multiple sites, youll
benefit from portfolio contracts with your suppliers.
Youll need to engage with the suppliers to review your
options, but the real key in getting the most appropri-
ate price is your certainty in the level of consumption
youll have in the future. The less certain you are, the
more risk there will be for the supplier, and that means
a higher price. Youll be well-served by a good set of
energy consumption forecasts.
One thing youll notice if youre buying for a variety of
sites is that there are different price options and for-
mats for each market and location. For example, there
may be a different price for each HH site unless the HH
site contracts are bundled.
If you buy your energy through a flexible contract, you
can negotiate with your supplier on management fees,
calculate what the fixed costs will be, then devote your
attention to managing the commodity cost of the elec-
tricity. This takes a solid understanding of the various
factors that drive the commodity price of electricity, as
well as how your contract is written.
17
Be ready to act quickly
As you can see, there are a lot of pieces to the puzzle,
and many of them come with fixed, non negotiable
prices. The biggest chunk, though, is also the most vol-
atile: the wholesale energy prices. Those are liable to
change daily, and its common for them to change peri-
odically during the day, too.
The wholesale price on the market can change
on a daily basis, so theres no hanging around.
To get the price you want, you must be ready
to accept an offer quickly, in some cases,
within a few hours.
Part II
A Menu of Electricity Contracts
In This Chapter

Fixing the price

Choosing flexibility

Making choices

Seeking expert assistance

D
ining out wouldnt be much fun if you couldnt
choose a meal thats right for you. You want a
menu thats broad enough to satisfy everyone in your
party.
Likewise, when youre buying energy you wouldnt be
well-served by a one-size-fits-all approach. You need a
menu with options that fit your budget as well as your
appetite in this case for risk. Fortunately, you have
choices, plenty of them. You can decide to fix your
price for the duration of the contract some people
sleep better at night with that kind of predictability. Or
you can choose any of a number of flexible contract
options.
Given the wealth of choices, there is plenty of
temptation to move your portfolio when its
contract time. Just be sure to consider the
19
costs of moving. Check your incumbent sup-
plier provides you with correct data, and that
your new supplier can register you on time.
Ordering Prix Fixe
A little surprise now and then can make life interesting,
but when it comes to money matters, surprise is not
always welcome. And lets face it owners of small to
mid-size businesses have enough to worry about with-
out having to think about their power rates spiking.
Smaller energy diets
Fixed price contracts are for these kinds of customers.
Theyre exactly what the name implies: contracts that
allow customers to fix the price for electricity and then
stick with it for a predetermined period of time, typi-
cally anywhere from six to 42 months.
These kinds of contracts are especially suited
for (but are in no way limited to) customers
who dont use large volumes of electricity
generally less than 10 gigawatt-hours (GWh) a
year. How much power is that? Well, a small
supermarket will use roughly 1 GWh a year,
while a large department store on Londons
Oxford Street could consume around 5 GWh
annually.
Fixed price contracts are geared for buyers who have a
low appetite for risk, companies that want to fix their
budgets and costs. This also includes many very large
energy users, such as water utilities and train
operators.
20
Energy suppliers are willing to enter into these deals
ensuring a good price for a longer term because it
helps them plan too. They know youll be a customer
for that period of time, and can forecast the amount of
electricity youll need (normally based on how much
you used last year), so they can line up sources for
your energy well in advance. They receive benefits for
doing so, and they can pass those benefits on to you,
the customer.
Your business is probably used to using as
much or as little electricity as it so desires with
little consequence. In future using a signifi-
cantly different amount of energy to what was
originally forecast in your energy supply con-
tract could prove expensive. Thats because
managing these unplanned swings in energy
consumption can be costly for energy suppliers
and many are now beginning to recoup these
unforeseen costs from those customers.
Dont neglect the details
When youre considering a fixed price con-
tract be sure to check whats included in the
price so you wont be surprised. Also, read the
fine print to understand the terms and condi-
tions, including the details about when the
prices can be changed. And make certain you
understand the termination obligations, as
well as how the contract can be renewed if
you so choose.
Comprehending all of these details is important not
only for your long-term satisfaction as a customer, but
also is critical when youre evaluating bids from a
21
number of suppliers. If one supplier has prices that
seem quite a bit lower than others, there may be some
exclusions that account for the difference.
One important thing to consider that almost goes with-
out saying: Youll be happiest with your fixed price
contract if the price you fix is a good one. Do what you
can to sign on when the market is low and fix the price
at the low rate.
The Flexible Approach
Weve already discussed how volatile energy costs
have become in recent years and that for companies
that count energy as a big part of overhead, the volatil-
ity can be a significant risk. You can think of it like the
stock market, but in fact the stock market tends to be
more stable than the wholesale price of electricity.
One study found that an organisation consuming 240
GWh of electricity in 2005 might have paid anywhere
from 4.5m to 10.2m, depending upon the timing of
their purchases. Clearly, that can make quite a differ-
ence in a companys financial situation.
Flexible (aka floating) contracts can spread
electricity purchases according to a price risk
management strategy. This helps manage
market volatility risk and keep energy buying
in line with budgets. However, flexible con-
tracts do not guarantee savings and specula-
tive energy buying should be avoided!
Basically, flexible contracts provide you the
ability to make your own decisions regarding
when to buy your electricity, and how much,
depending on the prevailing market price.
22
It sounds simple but it isnt, really. It takes a lot of
experience and technical expertise to manage these
kinds of contracts well, which makes it important to do
business with a provider that can offer such expertise
and explain the contracts in a way that helps you pre-
pare for this kind of energy purchasing. You need to
have access to market data and the right information at
the right time and be prepared to make decisions
quickly so you can react accordingly to changes in the
market.
There are a couple of primary purchasing
strategies designed to make the most of a flexi-
ble contract and keep your energy costs to a
minimum. One is to make your purchases
according to a pre-defined schedule, and the
other is to base your decisions on certain
market triggers.
For example, you may choose to make purchases on a
monthly basis, buying your electricity as a purchasing
deadline approaches each month. This is known as the
rolling monthly lock-in, and its an alternative to simply
buying all of your energy at the beginning of the con-
tract year for the price thats available then.
A variation on this strategy is a progressively hedged
rolling monthly lock-in, where your monthly purchases
are made in several blocks to hedge the price of each
block against future price rises.
Strategies tied to market triggers include a
stop-loss plan, where your company sets an
upper limit on the price. If the price hits that
limit you lock the price for the remainder of
23
the month or season to protect against even
higher rates. Companies with more appetite
for risk may try a strategy known as lock/
unlock per block, which aims to benefit from
market volatility. At its best, this concept
allows you to lock-in blocks of electricity when
rates are low, unlock and sell the blocks back
to the market when rates are high, and then
buy them back when the market drops again
one hopes below the original price of the
blocks. However, theres always the risk you
may lock-in too high and then the rate drops.
More Choices to Make
Both fixed-price customers and those lining up flexible
contracts may choose deals that are fully inclusive,
with a set price that builds in all of the costs that go
into getting electricity to your meter. Or there may be
variations, such as an energy-only contract that fixes
the cost of the energy which is the bulk of what you
pay but passes through the distribution and transmis-
sion costs.
Depending upon the type of meters you have and the
amount of energy you use, you might arrange a con-
tract with a single fixed rate, or it might establish two
rates that are in effect at different times, such as day
and night. Your contract may include seasonal time of
day rates- known as STOD, which have high winter
peak rates. If you are able to cut your usage during
these winter peak times, you may save yourself some
money. Any of these options are possible provided
your company uses half-hourly metering.
24
You have other options for NHH sites. Youll be offered
rates that are appropriate for the number of registers
on your meter, and can enjoy the simple life with sim-
plified rates.
And just as you have to choose the colour of the shirt
youre buying, youll find that energy contracts come in
different shades of colours from green to brown. You
also may choose a CHP contract thats short for com-
bined heat and power.
Calling the Specialist
Certainly every customer is unique but when it comes
to energy buying, some are more unique than others.
Your needs may be quite different from the average
business.
For example, what if youre operating not only in the
UK but also across Europe? Youll find that the electric-
ity markets are as different as the languages!
You may be up to the complicated task of
buying energy in different markets from differ-
ent players following different rules. Or you
may choose to seek a supplier that operates in
multiple markets and can strike a deal that
simplifies your purchasing.
Alternatively, perhaps your organisation operates in
the public sector closer to home, maybe, but with its
own set of complicated purchasing guidelines along
with budgets that get tighter every year. Youll find that
electricity is one of the most complicated things your
organisation will buy.
25
It doesnt have to be that way. Your power
provider may be able to connect you with a
specialist buying group geared specifically
toward public sector situations. Such a pur-
chasing arrangement should be geared toward
getting your organisation the best possible
rates through the wholesale market. It should
offer access to renewable energy in order to
meet environmental targets, and handle
administrative aspects in order to save your
organisation time and money.
Specialist customer contracts also cover energy from
renewable sources, which helps meet government tar-
gets on energy procurement. For example, levy-exempt
energy contracts deliver energy from accredited genera-
tion technologies in order to qualify under the Climate
Change Levy exemption scheme. Choices include green
energy contracts that deliver power created through
wind or hydro generation as well as biomass. Another
possibility is a low-carbon energy contract that uses
the highly efficient combined heat and power generat-
ing technology. Nuclear power is yet another source of
low carbon energy.
Time to Sign?
If you tend to procrastinate, youre in good
company. Plenty of energy buyers bide their
time and wait until the last minute before sign-
ing a contract. After all, why put your name on
the dotted line any earlier than necessary?
Youre keeping your options open, right?
26
Maybe, but youre also at risk of ending up on the
wrong end of the law of supply and demand. If youre
dealing at a time when a lot of other buyers also are
wrapping up their own deals, you might find that
youre in a sellers market. August through to October
tend to be the busiest time for suppliers, which can
mean fewer deals and less service.
Start speaking with your energy supplier well
in advance. This will give everyone time to
assess your requirements and agree on the
most appropriate terms.
And dont forget the market is volatile, so if the price
seems right, get it in writing and sign up quickly. Hot
prices can be withdrawn at any time, so watch the
market carefully.
Part III
Risky Business
In This Chapter

Watching out for volatility

Managing your risk

L
ike any other commodity wheat, sugar, corn the
price of electricity is governed by the laws of
supply and demand. But its not as simple as it sounds,
because were not talking about the supply and demand
for just power, but also for gas, coal, and oil. And were
talking about the weather, politics and wars, in places
near and far. Its enough to make your head spin.
Its Volatile Out There
Truth is, it makes sense that the wholesale price of
power is heavily influenced by how much it costs to
produce the electricity. The biggest factor controlling
the cost is the price of the raw fuels used in generation,
such as coal and gas.
As the price of coal or gas goes up, so does
the cost of electricity (as shown in Figure 3-1).
But the price of oil has a major impact on
electricity too, because the price of oil has a
strong influence on the price of gas. And we all
know how volatile oil prices have been in
recent years.
-
10
20
30
40
50
60
70
80
90
100
Jan
2005
Jul
2005
Jan
2006
Jul
2006
Jan
2007
Jul
2007
Jan
2008
Jul
2008
Jan
2009
Jul
2009
Jan
2010

/
M
W
h
Gas
Electricity
Figure 3-1: Gas and electricity prices
The prices of these raw materials are driven by all
kinds of factors that dont always seem logical to
people not involved in the business. Factors such as
fear the fear that traders have that supply wont meet
demand.
Weather can impact that fear, as can regional conflicts
and other geopolitical factors. Thus, a spike in oil
demand in China can drive up the cost of electricity in
the U.K. So can a hurricane in the United States, or
strife in Nigeria.
Complicating matters even further is the involvement
in the commodities markets of investors who actually
have nothing to do with the power business, or the oil
28
29
industry, or the business of sugar or wheat, for that
matter. Such outside investors have an influence on
commodity prices and that influence may be informed
by how these investors are faring on other fronts, such
as the stock market.
It all translates into dramatic ups and downs
in power costs. Its not uncommon to see the
wholesale price of electricity rise or fall
between two and five per cent per day, and
shifts of 10 or 15 per cent are not unheard of.
Uncertainty x Exposure = Risk
Unlike such commodities as wheat, coal, sugar, and
gas, electricity cant be stored on a large scale. The
supply must be instantaneous to meet the demand,
which means the amount of electricity being generated
at any given time needs to remain in balance with the
amount that homes and businesses need to use.
In order to maintain the balance, the industry must be
able to accurately forecast needs. Thats why those in
the business value customers with accurate consump-
tion data and precise forecast information. This kind of
information allows energy providers to estimate the
ups and downs of every customers needs, and plan for
the peaks and valleys in the load they need.
Such precision forecasting helps the industry avoid
such uncertainties as surprise peaks or valleys in
demand, which makes their business a lot less risky.
And the less risky their business is, the more willing
they are to cut a good deal for electricity.
30
That good deal, in turn, reduces the risk facing your
company. Youll need a certain quantity of energy over
a given time period, and youve got a certain amount of
money budgeted to pay for that energy. The risk is you
wont have enough money in the budget to pay for that
energy.
Think about risk as being the product of
uncertainty and exposure. The uncertainty is
the price volatility and the chance that the
price will get too high for your budget. The
exposure is the portion of your energy need
for which you have not locked in a good price.
You might not buy all of your power in one big chunk,
but rather in smaller contracts here and there. Perhaps
youve signed attractive contracts covering about 85
per cent of your anticipated power consumption. That
means youve eliminated the uncertainty regarding 85
per cent of your needs, and thus eliminated a big por-
tion of your risk. The other 15 per cent of your power
needs is still at the mercy of the whims of the market
its your remaining exposure to pricing uncertainties.
That 15 per cent is still at risk. Buy cleverly, get that
exposure down to zero and youll sleep more easily.
Part IV
Best Foot Forward
In This Chapter

Understanding the viewpoint of the seller

Establishing a cooperative relationship

Y
ou may be one of those people who really enjoys
buying a car. For you, its a game of cat and
mouse, trying to outwit the dealer and take home the
best car at the lowest price. You see the dealer as the
adversary to be conquered, and the automobile as the
spoils for the victor.
It may be tempting to think of your energy purchase in
the same way its you versus the energy provider, a
battle to see who can win the most at the others
expense. Try not to give in to that temptation, though.
Youll be happier if you work toward a partnership that
benefits all parties involved.
With this line of thinking, you understand the sellers
point of view and know what you must do to be the
most attractive buyer. And the seller gets to know you
and your business in order to provide you with a deal
that ensures your companys long-term prosperity.
Pretend Youre the Seller
Step back for a moment and think about what life must
be like for companies in the business of generating and
selling power. Customers all count on being able to
switch on their lights and machinery and appliances
and gadgets whenever they need them there needs to
be enough power to meet the demand, whatever that
demand might be.
Gearing up to meet that demand would be a nightmare
if there wasnt some predictability to power usage. If all
buyers consumed power whimsically and wildly, pro-
viders might need to expand their generating capacity
beyond reasonable expectations just in case.
So, what kind of customer will seem the most
appealing to a power company? One that has a
good handle on its own energy consumption,
with predictable usage and a healthy stack of
usage data to back up that picture of
predictability.
That means gathering and carefully studying
half-hourly load data. The more you know
about your own companys energy use, the
more you can help a potential supplier under-
stand your needs. And the more comfortable
that supplier is about the demand youll be
placing on the system, the greater your
chances at landing the best possible deal.
Of course, that information is valuable to your own
operations, too. If youre keeping a watchful eye on
your half-hourly data, youll be the first to notice waste
that you just might be able to eliminate. Thats great
for the bottom line.
32
33
Working Hand-in-Hand
Now switch your hat back youre the energy buyer
again. What is this, you wonder, a police interroga-
tion? Why do I have to answer so many questions?
Yes, there are a lot of questions, but its
important to keep them in perspective. This
shouldnt be an antagonistic relationship its
important to view the supplier as a partner in
your companys success, because thats
exactly what a good energy provider can be.
Those questions are needed to establish that
close working relationship and get a good
sense of your companys needs and
preferences.
Beyond the obligatory whats the name of your com-
pany? query, here are some of the questions you
should be prepared to answer:
What kind of meter and pricing profile does your
company have? Half-hourly or non-half-hourly?
Youll be able to share the most useful informa-
tion if youre on half-hourly metering.
Do you have supply numbers or MPANs (Meter
Point Administration Numbers) for all of the
meters serving the premises for which youre
seeking quotes? These are numbers, unique to
each property, are typically found on your electric
bills (but theyre not the customer number).
Can you provide good consumption data? The
more you can provide, the more likely it is to
obtain the most accurate pricing.
34
Do you have the half-hourly data, if applicable?
Your current supplier can provide this data.
Again, providing the best consumption data you
can ensures the most accurate price, and if it hap-
pens to be a years worth of HH data, youll have
the benefit of being a lower-risk customer.
Can you provide any additional forecast data? If
your forecasts are different from what your con-
sumption has been in the past, your supplier will
want to know.
How long a contract are you seeking? Do you
prefer the comfort of a longer-term contract, or
the flexibility of a shorter-term deal? Typical
choices include one-, two-, or three-year
contracts.
Do you prefer a fully fixed, all-inclusive price, or
would you want certain variable costs incurred by
the supplier simply passed through to you? The
former is more predictable from your perspective,
but may require the supplier to raise the price a
little to cover the uncertainty.
How soon do you need a quote? Dont expect it an
hour from now it might take several days to pull
the information together. Try setting a target date
for receiving all competing quotes.
Any idea what tariff structure will suit your busi-
ness needs the best? A day/night tariff perhaps, or
maybe a STOD (seasonal time of day)? Dont be
put off by the more complex tariff structures,
because depending on your usage, they might
provide the best value.
35
How do you wish to pay? If youre willing to sign
up for direct debit payments, you may be able to
secure better terms.
Whats your companys credit rating? This infor-
mation will also play a role in determining your
payment arrangements and terms of supply.
What are your billing requirements? Do you want
to combine all sites onto one bill, and would you
like that delivered electronically?
Have you notified your current supplier that you
wish to terminate the contract? Check the fine
printthat may be required, even if in the end
you decide to stick with your current supplier.
Part V
Counting Your Carbon
In This Chapter

Committing to reduce carbon

Understanding the bottom line benefits

Complicating energy buying

T
heres one more elephant in the room regarding
energy buying, and its an issue that wont be going
away. Its that little matter of climate change, and the
efforts that are being made to reduce the impact
human activities are having on the environment.
Climate change, of course, is often referred to as global
warming, because its all about a gradual increase in the
earths average temperature. Most scientists agree that
the increase is largely the result of the things we humans
do in our industrialised world, particularly the burning
of fossil fuels. This creates greenhouse gases that warm
the atmosphere, the best known being carbon dioxide.
Many power plants (hydro, nuclear, wind farms being
amongst the exceptions), unfortunately, generate
carbon. Because they do, their operations are subject
to the impact of national and international efforts to
reduce carbon emissions. And your company is quite
possibly subject to these efforts as well, in ways that
affect your energy buying as well as other operations.
37
Making a Commitment
to Carbon Reduction
The Carbon Reduction Commitment Energy Efficiency
Scheme (CRC) is a regulatory scheme that requires
organisations from businesses to schools to report their
emissions that are linked to energy use, with penalties
and rewards issued according to how they perform.
You may have heard of the European Union Emissions
Trading Scheme the CRC is a lot like it but on a
national scale and with different rules. It is estimated to
save up to up to 11.6 million tonnes of carbon dioxide
emissions (MtCO2) per year by 2020.
The commitment is basically an emissions
trading scheme requiring companies to pur-
chase at the beginning of a financial year
allowances covering the equivalent amount of
CO
2
that they produce for that year.
Organisations which have at least one HH electricity
meter settled on the HH market and a HH metered elec-
tricity consumption of at least 6,000 MWh in 2008 are
impacted by this scheme.
What does it mean? If youre covered, youll have to
forecast your annual carbon emissions for a financial
year and purchase allowances equivalent to these
emissions at a fixed price of 12 per ton of carbon
dioxide for the three first years. After that, you pay the
market rate. But note that the number of allowances
available on the market will be capped. The price per
tonne of carbon is therefore likely to increase encour-
aging organisations to reduce their carbon emissions
year on year.
38
Whats more, youll have to report on your
carbon emissions and maintain evidence back-
ing up your carbon reporting in case your
company is audited.
The whole idea is to give you extra incentive to reduce
your energy consumption. Do that, and not only will
your electric bill go down, but you also may be able to
sell off the allowances you dont need. The best per-
formers essentially gain at the expense of the worst.
Being a better performer also is helpful to your reputa-
tion. The relative performance of participating compa-
nies will be publically available when a league table is
published each year. Its one key to a healthier bottom
line. And the main idea is that the planet benefits as the
cap on allowances drops over time.
Green Future: In the Red
or In the Black?
Do nothing about carbon before the taxes and
restrictive regulations kick in and you might
find carbon having a troublesome impact on
your bottom line. You could wind up strug-
gling to buy carbon emissions rather than
making a profit by selling your extras. You
could see your customer count dwindle.
Immediate action is needed, not only for the future but
also to take advantage of this new way of doing busi-
ness from now on.
Pay now or pay later
The truth is, the cost of carbon emission allowances
have been factored into electricity generation costs for
39
a few years now. Those European power plants that
burn fossil fuels must own sufficient carbon allowances
to cover their operations and resulting emissions.
The impact comes if a generator runs out of carbon
allowances if the emissions exceed whats allowed.
That generator must then acquire more allowances
from other companies that may have some to spare, or
it must pay a fine.
The cost of those extra allowances follows you
guessed it the laws of supply and demand. Whether
allowances are purchased or a fine is paid, the end
result is that the cost of power from that generator is
impacted by carbon trading.
Improving your reputation
This all sounds like a hassle, but its actually an oppor-
tunity. There are tangible benefits that come from
having an image as a low carbon company.
Customers increasingly are interested in buying more
sustainable products. According to the Carbon Trust,
six out of ten shoppers are more likely to buy a prod-
uct if they know the manufacturer has taken steps to
reduce the products carbon footprint.
Youll save money, too
Your energy bill is probably one of the more
significant areas of your budget. When you
pay attention to your carbon footprint and go
about reducing carbon, youre probably cut-
ting your energy consumption. Needless to
say, that cuts your electric bill, so saving the
planet ends up saving you money.
40
Clearing the Air But Muddying
the Water
It all seemed so easy, back in those days when your
main concern was minimising the bottom line. Carbon
trading is a significant new complication in the process
of energy buying.
Consider that whole supply-and-demand thing one
more time. Peak rates those rates charged for energy
during particularly high-usage times are understanda-
bly higher than off-peak rates, because the whole defi-
nition of an energy usage peak is that its when the
demand is the highest.
Now factor in how peak electricity is gener-
ated. Typically, electricity generated to meet
peak demand comes from a plant that can be
ramped-up quickly. That tends to be a fossil
fuel-burning plant, rather than something like
a nuclear power plant. A coal plant, for exam-
ple, requires less than 15 minutes to ramp up.
Problem is, a coal plant is a bigger carbon gen-
erator, and carbon reduction schemes will add
to the price of its power down the road. Thus,
buying electricity at peak hours could turn out
to be even more costly.
Plus if you, as the buyer, have a finite number of
carbon allocations, where you get your peak electricity
may have an impact on your own carbon situation. You
may be able to afford the higher energy prices, but not
the higher carbon rates.
Part VI
Ten Ways to Prosper in the New
World of Electricity Buying
E
lectricity buying is not what it used to be its a
whole lot more complicated. But that doesnt mean
its devoid of simple wisdom. Here are some secrets to
success.
When seeking quotes for electricity contracts, be
sure they are like-for-like. Youll have a rough time
comparing bids if theyre not.
If a quote seems too good to be true, theres a
pretty good chance that it is. Go back and check
the fine print and the details to be sure theres not
a mistake.
If you are using consultants, keep a close eye on
how much you are paying them and how theyre
being paid. And dont forget to compare their
costs with the potential benefits.
When choosing a supplier, be sure to gauge how
much each candidate is willing and able to assist
you. Cost is important, but service is also critical.
Youre not just a buyer you need to sell your
companys attractiveness to the seller! The more
the seller wants to sell to you, the better the price
will be.
Be informed, but dont be timid. When an out-
standing price comes along, you need to feel con-
fident enough to grab it quickly, because it could
disappear as fast as it appeared.
Study that fine print. Even a simple, fixed-price
contract contains details that you must under-
stand, such as what you need to do to renew the
contract or cancel it.
Get special help for special situations. If you rep-
resent a governmental entity, or if you are buying
for sites across Europe, there may be a special
programme for you.
Dont wait until prime contract renewal time to
sign your new contract. Those times when every-
one is signing are not likely to have the best rates.
Great rewards come from reducing your compa-
nys energy buying risks. Lock in as much of your
consumption needs at a low rate and your boss
will love you.
42
Part VII
Glossary
Carbon Reduction Commitment Energy Efficiency
Scheme (CRC): Sets national goals for reduction of
carbon emissions, and has an impact on many
companies.
DNO: The distribution network operator, which runs
the local distribution network, takes power from the
national grid and brings it to your neighbourhood.
DUOS: This is the charge made by the DNO for using its
distribution network to get your power to you. Its
short for distribution use of system.
Fixed price contracts: Good for smaller users, these
contracts set the price now and keep it stable for a
long time.
Flexible purchasing contracts: These allow the buyer
to take charge of when power is purchased, and how
much.
HH (Half-hourly metering): This is the system used for
sites with large energy needs, particularly those
greater than 100 kilowatts. Half-hourly meters are just
what they sound like meters that provide a reading
each half hour of the day.
MPAN (Meter Point Administration Numbers): These
are like the addresses of your meters. Theyre numbers
that are unique to every property.
NGC: This is the National Grid Company that owns the
national grid transmission system that delivers your
energy a large part of the distance from the power
plant to your location.
NHH (Non-half-hourly metering): This is the opposite
of the half-hourly metering system. Just as the name
suggests, meters do not provide a reading every half
hour. Instead, readings are taken manually every
month or every quarter. These are for sites with
medium to low energy usage, including homes, with
have NHHq meters (non-half-hourly, read quarterly).
Rolling monthly lock-in: A contract that calls for
energy purchases every month, with a new price
locked in monthly.
TUOS: This is the charge made by NGC for transporting
your power from the generator to your local distribu-
tion network. It stands for transmission use of system
44
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AR7S &CRAF7S
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They say with power comes responsibility. So as the UKs largest
electricity generator and electricity supplier to businesses, we
at EDF Energy recognise we have a great responsibility to cut
carbon emissions from the production and use of energy.
In our Climate Commitments, the biggest package of environmental
initiatives of any major UK energy company, youll see we are
addressing this from three main angles:
1) De-carbonising our electricity generation. Were reducing
the intensity of CO2 emissions from our electricity production
by 60% by 2020.
2) Reducing our own carbon footprint. Were taking action to
cut CO2 emissions from our ofces and depots by 30% and
from our transport by 20% by 2012.
3) Helping our customers. Were reducing the proportion of CO2
arising from our customers energy consumption by 15% by 2020.
Visit our website to see how we're progressing and how we can
help your business cost effectively cut its carbon emissions by
saving energy.
www.edfenergy.com/sustainability
ISBN: 978-0-470-68710-9
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