How does your provider pay for power?

Universities use a lot of energy.

So much so, in fact, that alone or in consortia they often have the ability to purchase at advantageous prices and negotiate terms that allow for long term stability in costs and supplies. The university sector is also developing approaches to generating their own sustainable energy and heat, cutting bills even further.

What help is coming?

Unfortunately this good news doesn’t apply to all providers – approaches and costs vary, and as we will see for those paying a supplier in a similar way to households the immediate future does look fairly expensive. Providers in this latter group will be among those who benefit most from the government energy bills relief scheme – announced today by the Department for Business, Energy, and Industrial Strategy.

The new scheme will cap the unit price (for one megawatt hour (MWh)) for electricity (£211) and gas (£75) – roughly in line with the previously announced measures for domestic property. Should a university (or other entity) find itself paying more than this for power, they will pay the capped rate with the government paying the remainder.

For those who have recently signed a fixed rate contract the help will cover the difference between the wholesale price the day the contract was signed and the governments supported price – for those on variable contracts the discount will be subject to a maximum level to be announced, and there are heavy hints from BEIS that a fixed contract is a better idea right now.

The global energy crisis in a nutshell

Though the rise in energy costs we are all facing is often linked directly to the illegal invasion of Ukraine by Russia, and to the sanctions (including controls on energy purchases) subsequently imposed – the energy sector in the UK has not been in a good place for a number of years.

Older coal, oil, and – notably – nuclear power generation has been phased out over the last four decades in the UK. The growth and performance of renewable (solar, wind, tidal, hydro-electric…) power generation has been undeniably impressive but these improvements have not kept pace with capacity that has been lost. Noise is often made about a new generation of nuclear power, but we’ve yet to see anything actually built and running.

Much of the UK’s energy infrastructure is predicated on the availability of cheap and abundant natural gas for use as an energy source in its own right or for electricity generation (on a cold autumnal morning more than half of the UK’s electricity is generated from gas)- a change wrought by the flow of hydrocarbons from offshore fields off the Scottish coast that started in 1967. But as output from these reserves has slowed, and as demand has risen, the UK has increasingly sought gas from overseas.

Though 48 per cent of gas still comes from UK sources, the remainder arrives via two main routes – from Europe, via a direct pipeline from Norway (our single largest import), and from Qatar and the US via the (hugely expensive) container transport of liquified petroleum gas (LPG). In a globalised world of just-in-time delivery, and with advances in linepacking to meet peak demand, the UK has not preserved much capacity to store gas in large quantities, meaning that it is more exposed by day to day price and availability fluctuations. The UK also imports energy as electricity – from Ireland, Belgium, Holland, France, and Norway – via a series of interconnected undersea power lines.

The UK has historically bought very little gas from Russia – but it competes in a marketplace for gas with many countries that do, and who wish urgently to stop. This has two impacts on our UK gas supply – less gas overall is available to purchase, and what is available is more expensive. And this state of affairs has two impacts on business – energy gets more expensive, and supply becomes less certain.

The impact on universities

In the UK 135 providers of higher or further education are part of an energy purchasing consortium called TEC – about 70 per cent of the traditional sector. In banding together to purchase energy via procurement framework, the sheer volume of energy involved means many providers can get access to better rates and conditions than they would if they negotiated individually.

As a centralised team TEC have been on top of the emerging crisis for months – they have used a mix of fixed and variable agreements with suppliers to ensure that members get the best possible rates. Some larger providers have sufficient purchasing clout and internal capacity on their own to have negotiated similar agreements individually with suppliers – others use commercial energy brokers to manage campus power needs in a similar aggregated way to TEC.

In situations like these, today’s announcement provides a useful backstop should energy costs rise sharply, but it is unlikely to have an impact on energy expenditure directly.

Other providers purchase energy in much the same way you or I would, via a standard direct contract with an energy supplier. Rising prices and poor risk portfolio management have driven many of these suppliers out of the market, so it is likely that these arrangements will have changed in recent months. In these cases, the new government cap will apply, meaning that costs – while still incredibly high by historic standards – will not reach the extremes that have been predicted.

Providers in Wales may use the Welsh Government Energy Service, and a Scottish Government contract deals with energy costs (alongside a range of other centrally procured services) for providers in Scotland.

Thinking longer term

Even should Russia leave Ukraine and do whatever it takes to rejoin the international community the energy crisis will continue. The UKs energy infrastructure remains wedded to a source of energy that is finite and is attracting ever-increasing opprobrium for the environmental damage it causes. Any number of unpredictable but likely events around the world could plunge us into a similar global scramble for gas, all against the background of concerns around both financial and environmental sustainability (in the medium term, very much the same thing).

Universities have long generated their own energy (with some even selling a surplus to the national grid: Bradford, Ulster, and Wolverhampton top this particular league table) – and more and more providers are seeing the sound financial and ESG arguments for doing so.

Not all on-campus generation is based on renewable energy – though Ulster does sell a large surplus from wind and solar power initiatives. The most common approach is combined heat and power (CHP) generation – natural gas is burned on campus to produce both electricity and heat in a very efficient way and at a significant saving to traditional gas heating and grid electricity costs (this Warwick case study is instructive).

Manchester has a different approach to off-grid power, using liquefied petroleum gas (LPG) rather than mains gas for heating. Back in 2021 I heard it had secured power supply via a broker through to March 2023 – an example of purchasing power and a mixed energy use portfolio forestalling the impact of price rises.

For the sector, and, indeed, for the nation the future has to be renewable energy. Many providers have made commitments to that effect – and one financial benefit from leading the way here is easier access to finance. Any new campus building is likely to have been built or refurbished to the highest standards of energy efficiency, meaning less power overall is needed to run the estate.

Universities really are world-leading in these endeavours – and this commitment to sustainable energy use is what has made so many able to avoid some of the more painful impacts of the energy crisis, in the short term at least. Longer term approaches pioneered by UK universities hold a big part of the key to a sustainably powered future.

As the legendary Jane White, AUDE Executive Director put it:

Universities are massively engaged around every aspect of energy supply and the related push towards sustainability and the net zero carbon agenda. Many universities ‘hedge’ their energy costs well into the future and to some extent are protected in the short term. And many have diversified into renewable energy sources, with solar panels, wind turbines and ground source heat pumps a feature of an increasing number of campuses. A wholehearted push in the public sector towards these renewable and emerging technologies would be supported – this is the answer long beyond the current war, just as it was for years before it.

Bonus data

If you’ve ever wondered how much power, and what kinds of power, your provider uses the venerable HESA Estates collection has you covered (for now at least).

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Alas, the expenditure series in the HESA Finance open data doesn’t disaggregate energy spending from other estates costs.