Navigating Energy Procurement

Securing energy contracts can be done through a number of ways. Directly, through public or private buying groups or through private sector brokers. At times, all can be seen as unattractive options.

The procurement professionals do not historically have the niche expertise to manage the supply chain when it comes to buying energy so reliance on third party expertise is often sought.

However, the relationship with third parties can be managed much better if procurement professionals acquired some fundamental knowledge of energy costs. This starts with an understanding of what we pay for in our energy bills. Here is a rough breakdown:

[efstable width =”100%”]
[efstable_head]
[efsth_column]Cost[/efsth_column]
[efsth_column]Electricity[/efsth_column]
[efsth_column]Gas[/efsth_column]
[/efstable_head]
[efstable_body]
[efstable_row]
[efsrow_column]Wholesale Energy[/efsrow_column]
[efsrow_column]45%[/efsrow_column]
[efsrow_column]80%[/efsrow_column]
[/efstable_row]
[efstable_row]
[efsrow_column]Transport[/efsrow_column]
[efsrow_column]40%[/efsrow_column]
[efsrow_column]16%[/efsrow_column]
[/efstable_row]
[efstable_row]
[efsrow_column]Taxes[/efsrow_column]
[efsrow_column]15%[/efsrow_column]
[efsrow_column]4%[/efsrow_column]
[/efstable_row]
[/efstable_body]
[/efstable]

Fundamentally when we sign our energy contracts for gas or electricity, the timing of the purchasing decision only affects the costs highlighted in red. The wholesale energy costs vary day to day depending on the wholesale market. So access to simple historical wholesale graphs from the third parties can assist in the decision when securing energy deals; as the wholesale energy costs can be placed in historical context to see if they offer value.

Also, a fundamental misconception and often due to misinformation provided by the third parties is that by fixing prices for 1,2 or 3 year terms, you can achieve the lowest cost. Although long term rates can be attractive fundamentally, it is incorrect to assume that this offers the lowest cost. It does offer more “cost certainty” but not “lower costs” and the difference between the two must be understood. To achieve lower or the lowest wholesale energy costs, users need to consider flexible procurement strategies that buy the energy closer to the period of consumption over a sustained period of time. The dynamics of the wholesale energy costs in the UK mean that this is likely costs will be cheaper during these periods. However, this does forgo “cost certainty”, so the element of knowing what your unit rates will be each month/quarter. While flexible buying is likely to result in lower costs it will mean prices each month may be different, with some higher than others. There can be significant upsides financially, particularly in relation to gas contracts where 80% of the costs are made up of the wholesale energy costs i.e. the Natural Gas. Flexible buying may allow companies to be more competitive in bidding for new work, allowing them to fix the energy price at the time of fixing contracts with their buyers.

A large element of electricity costs highlighted in green above are transportation costs. These are primarily the local and national costs of bringing the electricity to site. Again, these costs can also be mitigated by the industry through a better understanding of these charges. A large proportion of these costs are made calculated by how much electricity is used between 4pm and 7pm Monday to Friday (or “Peak Time”), as this is the busiest time for the industry. By asking the supplier not to include these “transport costs” in the unit rate and charge them on what’s known as a “pass through” basis, these costs can be made transparent and the user can see the proportion of “transport costs” they pay for each day, week or month etc. Any attempts to reduce energy usage during these times or switch to alternate energy sources can then immediately reduce the impact of “transport costs”. This is known as Demand Management and is practiced a great deal in the manufacturing sector. Although it can be more difficult for the other sectors like leisure to implement Demand Management strategies; we believe that at the very least, other industries should be auditing their premises to see if any Demand Management strategies can be implemented without compromising services, as lower transport costs can be the net result.

In conclusion, a better understanding of the fundamental cost elements of energy bills and fundamental procurement options will allow organisations to make better procurement decisions, either directly or when managing the supply chain.


 

Energy procurement services from Pulse protect your company from energy price rises and increasing business energy costs. To see how Pulse can help with your energy procurement, please click here.