Energy procurement

9 May 2013

Energy is often a company's biggest expense after salary, yet it is seen almost as a 'distress' purchase - in other words, one made without much forethought.

Proper planning and management of this large item of expenditure is not given the priority it deserves. Buying energy is complex, with prices fluctuating on a daily basis.

Yet, the further ahead you start planning, the more options you will have.


Set a realistic budget      
All companies need to set a budget for the coming year's spend, but all too often we see clients who just add a percentage to last year's figure, to arrive at the current year's anticipated cost. 

A good way to provide a robust figure for budgetary purposes - and to challenge your procurement partner to do the best possible job for you - is to ask your existing supplier to send you a renewal offer. You will not be committing yourself to this price as, at this stage, it is just an indicative offer.


The contract options     
One method of purchasing energy is not necessarily better than another. You do need to take time to examine all the options in order to decide the method that best suits your organisation. In broad terms, energy purchasing is based on two options: fixed or flexible.

A fixed contract is just that. The contract terms are agreed prior to the contract start date and the price should remain fixed throughout the contract duration. The only variable is the amount of energy consumed (unless the supplier decides to change the goalposts mid-contract, which
is not uncommon these days).

The main features of a fixed contract are budget certainty (within reason) and a transparent and auditable process. Prices are gained from all interested suppliers via a negotiation process, the various offers are compared and the best option is chosen. Picking the right day to 'fix' the contract is the single biggest element in getting the best fixed price as prices fluctuate wildly. This is where energy consultants really add value.

And it's never too early to plan. Often, the lowest fixed energy prices are available prior to the end of Quarter 1 for an October renewal, for instance.

Statistically speaking, a flexible contract is the cheaper option. EnergyTEAM has analysed prices over the past seven years, finding that a flexible contract was the cheaper option for five of those years while on one year it was budget-neutral. Only in one year out of the last seven has a fixed contract been the cheaper option, but that was 2008 - the year the financial markets crashed.

A flexible contract allows for purchasing energy on the wholesale market, ideally taking advantage of market lows. You have to be a very large energy user to purchase energy on the wholesale market in your own right, but smaller organisations can still opt for this method by joining part of a buying consortium or 'basket' managed by an energy procurement partner. As the price is not fixed up front, you are relying on that energy partner, so do check the credentials.

A third option, not provided by all energy consultants, is what's called a 'fixed multi-purchase' option. Energy is purchased on multiple dates prior to the beginning of your contract year. As all the purchases will have been made before your renewal date, you will know exactly what your costs are going to be for the year ahead at the commencement of the contract, but with the benefit of having had access to the wholesale market.

The earlier you commit to a fixed multi-purchase contract, the longer is the market cycle over which your energy partner can identify market lows, and buy tranches of energy on your behalf.

An analysis of seven fixed multi-purchase offers secured for clients in 2012 are given in the table below. Overall, these companies saved a total of between £13,500 and £42,000 for the year, depending on when a 'fixed' price would have been agreed. Clearly, exploring all your options is a sound approach to energy procurement.

Paul Garratt, head of procurement at energyTEAM