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Burning a hole in your budget
Local Government Chronicle – 23 February 2006

Fuel costs are going up and emissions must be cut in order to control global warming. Mark Smulian looks for answers to one of the toughest challenges today

The rising cost of energy could be the next thing to blow a hole in council budgets.

Factors as diverse as North Sea reserves running low, increased demand from India and China, closure of coal-fired power plants, oil exporters' policies, instability in the Middle East and market speculation will all hit the price councils pay for fuel.

So how bad are things likely to get? Andrew Bainbridge, director general of the Major Energy Users Council, warns: "It is going to be a bleak year. It is clear local authorities are going to have to find extra money from somewhere."

Mr Bainbridge says there should be sufficient gas and electricity even for a severe winter, but warns councils to "be prepared for a price helter-skelter".

When competition for power supplies started in the early 1990s, prices fell as rivals firms vied for customers.

Since then industry consolidation has left only half a dozen major suppliers each for electricity and gas.

"The old ways of buying are gone," says Mr Bainbridge. "Our advice to members is to form very close relationships with the few suppliers that remain and then adopt risk management programmes to share risks between customers and suppliers.

"Suppliers say they only make a profit after 18 months of a contract, and they need to get to know clients' businesses and so are reluctant to take on customers who may ditch them as soon as someone else offers a better price."

David Taylor buys energy for 68 public sector clients in southern England through the Laser consortium, based at Kent CC.

He says: "The market is probably as high as it has ever been and there is substantial volatility in prices.

"Even if you buy outside tight periods you will find prices have risen. You must bide your time unless you have to do a deal."

Most local government deals are for two year fixed periods, which has proved beneficial in the face of rising prices but can land councils with a large increase when their contract ends.

Mr Taylor advises: "You need to plan ahead. We are in the market months ahead so can do a deal in February for October."

The North East Purchasing Consortium, which buys for 21 councils, is trying to take advantage of price fluctuations.

Corporate procurement officer Michelle Gibbons says: "The market has changed drastically and market intelligence suggests prices will continue to rise.

"We are looking at flexible contracts, perhaps buying in 10 tranches to get the best price on different days.

"Prices have risen 40%, and next year we fear another 50% increase."

Councils have been hit hardest on their street lighting budgets.

Because streetlights do not have individual meters, rates must be negotiated according to estimates of the power consumption of each type of lamp.

There are few savings available through reduced use, since councils must keep roads and public spaces lit for reasons of road safety and crime prevention.

They could also face legal action if accidents happened as a result of poor illumination.

Even if councils were willing to take this risk, it is technically difficult to turn off individual lamps.

Nor does energy efficiency offer much hope. Dave Coatham, technical services manager of the Institute of Lighting Engineers, says few efficiency savings are possible when old lamps are replaced because new lamps must meet a new and higher British Standard.

"Those new lamps tend to be more energy hungry," he says.

Roger Elphick, head of highways maintenance at Durham CC and chair of the UK Lighting Board, saw his county's street lighting bill rise 44% in 2005 - an extra 650,000.

"It looks as if we are getting similar prices nationally," he says. "It is worrying that costs are likely to go up again because there is a knock-on effect as street lighting comes out of the pot that includes highway maintenance, and that will suffer."

The LGA's research, part of its work on the annual financial settlement, found street lighting costs, which total some 133m, rose by 30-75% in 2005, depending on when contracts were renewed, with similar rises expected this year.

Mr Bainbridge gives a grim warning: "Some councils coming out of long-term contracts have to face a white-knuckle ride to cope with the price increases - it could be as bad as 100%.

"Where prices will go to? We don't know."

Start saving now...

Energy efficiency might be of limited help for street lighting, but offers substantial potential savings for other needs.

It also helps a wider role of tackling climate change by reducing carbon emissions, both in itself and as an example to others.

Mr Taylor says: "The days of cheap energy have gone. Conservation is very important and there is now a real will to implement it, and about time too."

Councils take energy conservation more seriously than does the private sector, according to Mr Bainbridge, and are well-placed because they often have environmental evangelists among their staff. He predicts that areas prepared to pay well-trained energy specialists generously will more than make their money back.

But he urges that efforts should be directed as much at education as technology.

"There is a lot of technical equipment which will control energy use, but it is expensive to rely on technical fixes and the payback period may be a long one, which is difficult for local authorities," he says.

"There is a need to motivate staff to save energy and to motivate the public."

Garry Felgate, director of the government-funded Carbon Trust, says rising prices mean councils face three options.

"You can put up council tax, cut services or reduce your energy demand," he says.

"That choice ought to be quite a strong driver for energy efficiency. It should be a win-win because it mitigates the price issues and allows councils to show leadership on climate change."

Staff and public awareness of what causes carbon dioxide emissions is important.

He explains: "Every time you get in your car it is obvious that it emits exhausts, but when you switch on a light it is not obvious that anything is emitted.

"However, every light needs supplies from a power station and that emits carbon."

Dr Felgate agrees with Mr Bainbridge that councils are often ahead of the private sector in promoting energy efficiency, "because their staff are engaged with doing good and doing the right thing".

Councils should look at where education or technology is most appropriate, he says.

"The order in which to do things is, switch off all the lights you don't need - that is education, then fit energy efficient bulbs to those left on - that is technology, and after that you might consider buying green energy," Dr Felgate advises.

Energy efficiency offers councils a rare chance to save money and do something popular. And help is at hand.

The Carbon Trust offers a free carbon management service to councils, with guidance, technical support and software. There are also workshops for senior staff.

Bristol City Council was one of 16 that piloted the trust's programme for authorities in 2003.

It had emitted 55,612 tonnes of carbon from its premises and services, at an annual energy cost of more than 6m.

The trust made recommendations designed to save Bristol more than 400,000 in the next five years.

Its key recommendations were: