Energy Purchasing – The Options

Introduction

Most companies are facing increasing  energy bills.  Blame the economic downturn, the political situation in oil-producing nations, or just the need of the big energy firms to deliver increased profits, the fact remains that power will almost certainly take a larger chunk of your budget.

Uncomfortable as it is, this is a situation businesses could mitigate with a well-considered energy purchasing strategy.  Mike Jones, MD at Innovative Energy Consultancy, says companies that plan ahead will stay ahead.

Developing an effective strategy

An energy strategy need not be lengthy or complex.  What’s important is that in producing the strategy you will be forced to pause for thought.  

By fully considering your current and future energy needs you’ll be well placed to decide the best approach to purchasing. In addition, any cost increases can be planned and accounted for.  

The options

Most businesses adopt one of three options when procuring energy.

1.    Fixed price – where energy is bought in advance at a fixed price
2.    Flexible price – where energy is purchased at current market rates
3.    Basket purchasing – where a supplier or broker pools the needs of a number of organisations in order to negotiate a favourable price from an energy wholesaler.

Not surprisingly, these options have various advantages and disadvantages and the right choice will depend upon a number of factors.

Determining the best option for you

To determine the best purchasing option for your business you should of course consider your actual energy needs.  Unless you’re a new business it’s highly likely you can predict with reasonable accuracy what water, gas and electricity your business is likely to need, based on whether your production output is likely to stay the same, increase or decrease.

This means we can calculate the likely cost of buying energy in different ways.

If it transpires that a flexible purchasing strategy is favourable, it’s important to consider how your business will cope should the price of energy increase.  This means taking account of your attitude towards - and your organisation’s resilience - to risk.

Of course, companies that opt for a flexible purchasing strategy can opt for a fixed price contract if the cost of energy rises.  The disadvantage is that the fixed cost options are likely to be more expensive at that time and that the contract terms in place with their current supplier may prevent them from moving from flexible products immediately.

Fixed cost contracts – the pros and cons

Advantages

• The cost of your energy will not change for the duration of the contract so you can predict and manage costs with relative ease.  
• By securing a fixed-term price you are protected if and when energy prices rise.  Energy markets are influenced by a number of outside factors such as the price of oil and global economic performance.  By fixing a contract at a time and rate that is right for you, then you are eliminating the effect these external factors can have on your energy costs.
• Clarity of charges – with a fixed agreement you know what charges you are paying and for what period this covers.  Therefore if there are any anomalies in the charges these can be identified easily, which may not be the case with flexible purchasing options.

Disadvantages    

• Your energy costs for the short/long term may be dependant on the price of energy on a specific day.  
• If energy prices fall over duration of your contract then you will be paying an unfavourable rate.  The risk also increases if you are placing a long-term contract as you are secured to those rates for an extended period.

Flexible cost purchasing – the pros and cons

Advantages

• There are a number of different flexible purchasing products offered by the various suppliers to reflect what is now a highly competitive market.
• If energy markets go down during your contract you can expect to be paying less for your utilities in response to the market movement.
• You are able to spread the risk of future energy costs as you are not forced to purchase your whole energy requirements on one day.

Disadvantages

• Lack of control - when the energy wholesale markets increases, then your energy costs are likely to increase in line with this.
• Unable to predict energy cost or spends for budgets.  If you are an organisation who has a strict budget in place then a flexible contract may not be right for your business.  This is as with some products energy charges may not be known until after that energy has been used.

Baskets –  the pros and cons

Advantages

• Due to increased volume from grouping the consumption of a number of organisations into one energy contract a lower rate can be negotiated with the suppliers.
• Some products allow you to fix an exact percentage of your contract at the time of your initial purchase, so that an element of your energy cost can be risk free.
• Each Portfolio is usually managed by a dedicated Account Manager who will be the one point of contact to support baskets member with all their energy related queries.  This should eliminate organisational administration time and allows them to concentrate on their core business activities.

Disadvantages

• The contract terms which have been put in place may not suit all the group or basket members.
• Loss of Ownership – Due to a number of organisations potentially being in a basket then the decision of when to buy is likely to be forfeited for the increased buying power.
• Administration conflicts – For the organisation to have a detailed understanding of the energy basket and what best serves their needs they will need to have someone in place to remit this to the Portfolio manager.  However if there are several points of contact from each of the individual basket members then there is likely to be conflicting views on the procurement strategy.