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- Utility Procurement Case Study - Buro Happold
Buro Happold, London
huge savings via competition
For the past year Jerry Young, a highly experienced partner at international engineers Buro Happold, has been assisting his clients to establish infrastructure services for a new project in London.
One of Jerry’s key tasks was to negotiate the upgrading of the electricity supply to power the new buildings and services planned for the £1.6 bn development.
Initial enquiries with the incumbent distribution network operator (DNO) were not promising, with early estimates running at a jaw dropping £10m for the necessary infrastructure; and when guarantees were sought that electricity supplies would be provided for the duration of the development, none were forthcoming.
Unsurprisingly, the prospect of major up front costs without the certainty required, cast an immediate shadow over the viability of the development as a whole.
Jerry Young takes up the story, “This situation was clearly a major issue for our clients and I felt that we had to find a way to bring competition from the market into proceedings to produce a more acceptable solution.
“First of all it was clear that a full strategic review was necessary to ensure that no stone was left unturned as we explored our options. It was important that we thought as creatively as possible about how to unravel the issues in order to get the right deal for our client, who are, after all, taking a substantial risk to make the redevelopment of this area happen”.
One problem, identifies Jerry, is the lack of privately licensed distribution network operators. By having more private DNOs, Jerry Young believes that market forces would bring an all-important element of price competition and customer focus to the process.
A critical contribution to Buro Happold’s review came from their specialist legal advisors who were able to identify new possibilities for the team to pursue and means of offsetting costs through legitimate recharging routes.
One outcome from the review was a competitive tender process, which brought the price down from £10m to around £6m, but still Jerry Young felt that there was room for further exploration and negotiation.
“By not accepting the status quo we introduced an element of competition between organisations, which previously were used to being in a monopoly position within established geographical areas. Suddenly it became important to win the contract.
“I felt that those organisations then started to think creatively about how to meet the customer’s needs. However, £6m, in our view, did not represent value for money”.
A further round of negotiations resulted in a significant cost-saving breakthrough. An alternative means of supply was devised by the incumbent DNO, leading to a revised tender price which, when including distribution use of system (DuoS) rebates, provided a quantum reduction.
Jerry sums up the result and the key lessons learned from the process as follows,
“It was the right result, driven by market forces rather than regulation. Within the utility arena, gas and telecoms are the most deregulated and competition is creating a vibrant marketplace. Electricity and water have a long way to catch up and it is to be hoped that government takes further steps to make this happen. Private DNOs have arrived on the scene and this will develop the market further.
“In the current environment my advice to anyone buying electricity on a significant scale would be:
- Undertake a strategic review of your options first
- Seek the assistance of expert professional advice to guide you through what can be a complicated regulatory and legal landscape
- Resist the calls to “get on with the design” and give yourself enough time to negotiate productively
- Do whatever you can to introduce competition into the process”
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