Contracting out of non-core activities has become a key strategy to improve business efficiency. As the production of energy and the management of its consumption are not central activities of most private companies or public-sector bodies, it is not surprising that a market has grown up for contract energy management.
The top end of the business involves the established electricity generators building combined heat and power plants to meet the steam, power and heating requirements of large industrial sites on a long-term contract, usually of 15-20 years.
Both the big non-nuclear UK generators, National Power and PowerGen, are active in this market. National Power has 11 schemes under way, which total 271MW of electrical and steam capacity and represent an investment of £170 million over the past four years.
Two of the company’s more recent projects involve substantial generating plants: a 50MW unit built in joint venture with Rolls-Royce in Derby and a 75MW plant for BASF at Seal Sands. `We started with some small ones but they have grown,’ says the company.
A feature of these large projects is their ability to sell surplus power to National Grid, which makes them very much the province of companies familiar with linking into the high-voltage transmission system.
Scotland’s Hydro-Electric is active in the market, too. Alan Blair, the company’s head of energy services, says its portfolio of eight projects will require an investment of £150 million. Unlike National Power and PowerGen, Hydro-Electric also has designs on the smaller end of the contract energy management business, which covers a much wider range of services. `We’re involved across the whole spectrum of providing energy solutions,’ says Blair. `We’re just beginning to tackle the smaller end of the business.’
The biggest participant in this more specialised market in the UK is AHS Emstar, ultimately a subsidiary of the French Compagnie Generale des Eaux group. AHS has 2,700 contracts with customers in the private industrial sector and both public and private commercial sectors. These range in scope from the provision and operation of combined heat and power plants up to 20MW in size – `beyond that you become an energy generator, which we are not,’ says Thomas Rottner, the firm’s sales and marketing director – to fuel purchasing contracts and the monitoring of energy consumption.
BP Energy is second in this market. It is about half the size of AHS Emstar in terms of committed business. Among its customers is Nestle, for which it designed, built and operates an £8million, 9.6MW gas turbine CHP plant at the company’s York factory. There are about half a dozen other large companies and a plethora of smaller operators. At the bottom of the market, there are now operations which are little more than nameplate companies offering a fuel-purchasing service.
Rottner says contract energy management should, in theory, involve capital investment. The need to amortise this investment leads to an average contract length of 10 years. Terms of less than five years are rare. By contrast, many small operations offering a fuel purchasing service under the guise of contract energy management are looking for no more than three-year commitments.
AHSEmstar’s larger contracts include two worth over £46 million each for Zeneca, the bioscience company demerged from ICI in 1993. The contracts cover the construction of a 16MW CHP plant at Huddersfield, a 7.5MW one at Grangemouth, and the provision of all power and steam to both sites for 15 years.
Hoovering up savings
At the Hoover factory in Merthyr Tydfil, south Wales, the contract involves the upgrading and operation of existing power and heating systems. AHSEmstar has invested £1.3million in switching the boiler house from heavy oil and coal firing to gas, the installation of direct gas-fired radiant tube and warm-air heaters, a new monitoring system and other energy saving measures.
Its contract for the 21ha Guinness Brewing site in London, by contrast, involves the operation and monitoring of existing facilities. Other clients include Amylum UK (formerly Tunnel Refineries), Redland Roof Tiles, London Zoo, the University of Leeds and the Royal Liverpool University Hospital.
So what are the big advantages of using a contractor to provide energy services? One company with a clear view of the benefits is Chartham Papers of Canterbury, the world’s largest manufacturer of translucent papers. It signed a 10-year deal with BP Energy in 1994 to provide its electricity and steam requirements from a new 4.5MW CHP plant.
Simon Brissenden, the logistics director at Chartham, says the key gain is that `you focus on your core business rather than the peripherals’, leaving energy production and management to an operator whose core business it is. As a consequence, energy costs become totally forecastable and expertise on energy matters is always on tap. Asked if the company has noticed any disadvantages of contracting out, Brissenden is adamant. `None whatsoever. Like all our plants we’ve had our failures, but BP has paid for them.’
The engineering manager at another big industrial company, which signed a 10-year contract with AHSEmstar to build and operate a 14.5MW CHP plant in 1989, echoes these sentiments. He says the move freed resources for the company’s core activity. Not least of the savings was on 13 staff formerly employed in the company-operated powerhouse. It also enabled it to invest in a second production unit.
Companies which have contracted out their energy requirement tend to be reticent about how much this has saved them financially, in part because they fear their customers will seek commensurate price reductions. But cost cutting is clearly the key driver. Rottner says savings of between 20% and 30% are not uncommon. This can translate into spectacular cash figures. The Hoover factory, for instance, has cut its energy costs by £250,000 a year, while the Royal University Hospital estimates that a 2.8MW CHP plant operated by AHS will save it £550,000 a year over the first 10 years of the contract and £882,000 a year over the next 10. Eclipsing both is the Zeneca deal, which is expected to save the company £2.5million a year.
But there are those who express caution about contract energy management, certainly in some of its more recent manifestations. Eddie Proffitt, chairman of the gas group on the Major Energy Users’ Council and the person responsible for fuel purchasing at glassmaker Pilkington, views the short-term contracts on offer with scepticism. `I struggle with the concept,’ he says. This is because the offered savings rely heavily on providing fuel at a cheaper price, and he says he would have strong words with any supplier offering a nameplate operation at a better price than it offered him.
But he acknowledges that smaller companies with less in-house energy expertise could find short-term contracts useful. And the further deregulation of the electricity and gas industries, which will enable all consumers to shop around, is likely to boost demand for these fuel purchasing agencies. Sites with a requirement of less than 100kW will no longer be captive to their local regional electricity company and many will want to contract out the search for alternatives.
The market for contract energy management proper seems certain to grow too, although the leading participants seem unsure of its ultimate size. In 1994, BP Energy identified a target market of all industrial commercial and public sector sites with a combined heat and power requirement in excess of 2MW, which it said had an annual energy bill of £9billion. At that time, contract energy management accounted for less than 1% of it.