Is your energy procurement strategy fit for purpose?

energy procurement strategy
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First posted 02Apr19, updated 24Mar21: Your energy procurement strategy should fit within a robust energy strategy which if executed well, should shelter you from rising commodity and non-commodity energy costs. Through a holistic approach this could even provide you with long term cost and carbon savings and revenue generating opportunities.

It should also be a living, breathing document, revisited frequently to ensure it is fit for purpose in a rapidly changing world. As markets remain volatile, non-commodity costs continue to rise and the net zero agenda rapidly ramps up, the time is ripe to create or review your energy strategy to make sure it reflects your organisation’s unique requirements.

WHAT ENERGY PROCUREMENT STATEGY?

One of the key considerations for any organisation is their appetite for risk, but this too should also be reviewed frequently, particularly in rising markets: some organisations who prioritise price certainty above all else opt to lock in their annual energy budget through ‘fixed’ contracts.

These are often seen as the best fit for the most ‘risk-averse’, but this can be a myth – particularly if prices are fixed at the top of the market and fall again. This is particularly true when contracts are renewed just before the contract end date, leaving businesses no choice but to settle for the prevailing market price which, can be far higher than the average over a contract period.

Re-assessing products on the market can also help to determine whether a shift in risk appetite is merited. A number of energy consultants like Energy-Smarts offer portfolio products where businesses with small / medium energy spends can take advantage of flexible purchasing arrangements, rather than fixed.

Organisations can also choose to apply strategies such as a capped strategy that delivers price certainty whilst also providing the potential to capture benefit from falling prices.

IDENTIFYING THE MOST SUITABLE CONTRACT TYPE

Finding the most suitable contract type can be tricky and if you would like some help to understand the key differences between different energy procurement strategies before renewing your organisation’s contract, we'd love to help. You can book a free 30-minute consultancy call here.

This should be one key step on the road to formulating a better energy procurement strategy for your business.

A HOLISTIC APPROACH TO YOUR ENERGY STRATEGY

A robust strategy should consider all elements of an organisation’s energy usage. Remember, the total cost of energy is the unit rate multiplied by volume: whilst securing the best possible commodity price for each unit of energy is vital, managing non-commodity charges and reducing total consumption is key to mitigating rising prices.

There is also a middle ground, where there is also the opportunity to optimise your average unit rate through smart consumption of your energy and many organisations have some flexibility in their energy usage to help avoid some of the highest rates of non-commodity charges, e.g. Transmission Network Use of System (TNUoS), Distribution Use of System (DUoS) and Capacity Market charges.

These charges are levied based on the time of day you use energy, so finding ways to reduce or more consumption during periods of peak demand can make a big difference to the bottom line. (See important updates below.)

FAIRER ENERGY COSTS FOR SMALL-AND-MEDIUM-SIZED ORGANISATIONS (SMEs)

This article was updated in March 2021, and now there is good news for SMEs. Ofgem believes that the current charging system means those users who are able to shift load outside of more expensive periods are benefiting at the expense of other users and wants to make the system fairer for all (whereas those users who currently reduce demand during these periods argue that they perform a vital role by reducing both the strain on the grid and balancing charges). A more detailed summary of the reforms is available here.

So Ofgem is minded-to introduce a fixed charge for all users (though the charge will depend on the connection voltage, region and in some cases the line loss factor codes that apply to the site), creating a level playing field between all system users. This could have a big impact on the bottom line for some of the largest and most flexible energy users, but be good for smaller organisations.

LOW HANGING FRUIT - ACTING ON EXISTING ENERGY REDUCTION RECOMMENDATIONS

Similarly, acting on the energy saving recommendations that ESOS audits uncover this year could also help to reduce overall consumption. Getting to grips with energy data to understand your consumption will also help to make well-informed energy management decisions.

Many SMEs are not required for fulfil ESOS reporting because they are not large enough to qualify or are exempt, such as some Multi-academy trusts. If you fall into this category one of our blogs here may help you get started.

SEEK EXPERT GUIDANCE

Business energy is becoming increasingly complex, but an up-to-date and holistic energy procurement strategy can provide the framework to guide organisations through volatile markets, and act on opportunities. Seeking external support can help, particularly for those organisations with limited resource or internal expertise.

To speak to an energy expert about energy in your sector and how we can help your business, get in touch with us now, and we'll be happy to give you all the specialist help and advice that you need.

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