28 April 2021
Energy is likely to be one of the biggest overheads your business has to deal with. That means securing the right price and the right terms on your business' gas and electricity is crucial. However, with current market conditions, fluctuating prices and other factors to contend with, energy procurement – and the elements that go into understanding it – is a major consideration for any business to undertake.
That's where a defined procurement strategy comes in. A must for any energy-intensive organisation, effective energy procurement can be hugely beneficial, helping to mitigate risk while easing certain operational pressures throughout your organisation.
With an extensive marketplace offering a range of bespoke and packaged options, the variants to consider are substantial. We’ve assembled this guide to help develop an effective energy procurement strategy that’ll help you navigate towards the most suitable energy agreement for your business.
It's easy to assume that energy procurement is all about getting the best price, but it's also a matter of ensuring the product is the right fit for your organisation. By this, we mean your strategy should be one that delivers value and supports the company's strategy and risk management requirements.
At the planning stage, you should focus on gathering and assessing information on tariffs, contracts and elements that can help manage risk. Such information not only informs the strategy, but will also provide instructions for the energy suppliers you choose to work with.
Although planning is mostly relative to company requirements and energy expenditure, it also allows you to do the following:
An energy procurement strategy should evaluate relevant internal company information, its budget requirements, any legislation or policy requirements, and supply and consumption information – more on this later.
Before you get started on developing a procurement strategy, you need to work out what aligns with the objectives of your company. For instance: what do you require in the future? What areas of the business need improving?
To achieve these objectives, you need to know the risks and market position associated with your business. Here, you'll have to consider various factors such as market volatility and stakeholder management.
Once you've evaluated your situation, documenting the link between procurement strategy and corporate goals is your next move. Although this will differ from industry to industry, it's a good idea to gather details on your company's corporate goals before mapping procurement objectives to each one.
A massive part of the energy procurement process is the relationship you'll have with your suppliers. The way you deal with suppliers plays an important role in increasing operational and cost efficiencies, so building trust and credibility with any suppliers you work with is crucial.
Vetting vendors ahead of time will also help give you an idea of price, reputation, customer service and turnaround.
Businesses should know if their targets are specific and measurable. Having a consistent method of tracking key metrics, and then linking these metrics to the procurement strategy lets you more effectively track progress in a particular period of time.
Your approach to market determines the tender process, your pricing mechanism and the type of contract you'll need for certain projects. Here, you'll also consider the delivery model, the nature of the work, any risks involved and the anticipated timeframe for delivery, along with deciding on a contract type that ensures high-quality, cost-effective outcomes.
Your business' budget can help inform decisions surrounding the length of contract as well as whether you opt for fixed or flexible energy procurement. A balance between savings and budget certainty is important, but it can be difficult to maximise both at once.
For some companies, the cost at which energy is purchased might affect their competitiveness. For instance, if you determine client rates based on the price you buy energy for, you could be more interested in chasing the market for the best price and opt for in intensive flexible procurement as a result.
On the other hand, you may be looking for the highest security instead. If you have a long-term budget, the price of energy may not be much of a concern – as long as it’s within budget and fixed for the longest possible period.
Every company will have different budget requirements; understanding your risk profile can determine the right fit. Risk-averse companies will be attracted to long-term deals with more security, while a risk-seeking corporate organisation will prefer to diversify their strategies.
If there are any internal or external legislative or policy requirements that could affect you and your procurement activities, then these also need to be considered.
For corporate energy users with policies geared towards sustainability, there's a strong green element to their buying. In developing a strategy for procurement, sustainability and green factors are big drivers, and so their procurement activity must remain in line with whatever sustainability-related corporate objectives are in place.
This means that, when such businesses develop a procurement strategy, things like outcome-focused deliverables (such as reducing CO2) and engaging with suppliers to ensure they better understand their corporate customers' green approaches become significant factors to consider.
If you're a corporate energy user, then aligning your green practices with an effective procurement strategy is something our experienced Corporate Account team are well-versed in. If you're looking for assistance in this area when procuring business energy, then be sure to get in touch – you'll find the right contact details at the bottom of this article.
You'll need up-to-date and accurate supply and consumption data so that suppliers can price up an energy contract. Doing so increases the accuracy of pricing as well as the success of the tender.
For best results, you should provide the supplier with information for the last 12 months of consumption, along with a forecast of future use if you're expecting a noticeable difference to your previous usage.
Once this information has been gathered from within your company, you'll have a clearer view of the preferred contractual arrangements and purchasing strategy. This will then allow you to create a list of requirements, which may include:
Businesses on fixed energy deals in markets where prices are rising might seem like they're in a good position from an energy procurement perspective, since they're protected against increased risk premiums.
But in these unpredictable times, managing risk is more important than ever. As soon as prices go up, they can go down just as quickly. The best strategy, therefore, will be determined by your business' needs and the ability to respond to opportunities as they arise.
Again, it's the strategy that's most suited to your business. To develop such a strategy, a greater understanding of the role of risk in your business is needed.
For SME and mid-market companies where budget stability is more important, then such customers lack the option of adopting higher risk for potentially higher financial returns. These businesses may have existing long-term fixed sales contracts which don't allow for passing on increases in energy costs to your customers.
Corporate companies i.e. those who use 10-50 million kWh of energy, on the other hand, opt for fixed price energy contracts to protect their profit margins. This is because the risks of energy prices increasing would be more damaging to the financial performance of the business in the long term.
For these energy-intensive businesses looking to compete on price, buying energy at the current market rate is important; a flexible contract that tracks the market is often advisable in this context.
The consensus view is that flexible contracts tend to be riskier than fixed ones, but corporate customers often use them as hedging tools when dealing with volatile market movements.
Such contract enable you to fix any amount of energy for any period of time. For instance, energy prices could be fixed for half of your anticipated consumption for the duration of the contract, with market prices dictating the cost of the other half. This latter half can be identified using energy management analytics tools. Once you've identified this cost, the price you pay is the average between the two halves.
Crucially, whatever kind of strategy has been adopted, it's important to be mindful of fixing contracts when market movements present opportunities, rather than waiting to the end of a fixed period contract in the hopes that the market will be in your favour.
Looking for professional guidance on risk mitigation, suitable energy contracts and what to watch out for when buying business energy? Visit the homepage or call our team today on 0161 837 3395 for more information on SEFE Energy's corporate energy deals.