Are you selecting your energy contract for the right reasons?

Posted on 3 Sep 2015 by The Manufacturer

Rather than choosing your next energy contract with a specific price in mind, it’s important to think about what you require from it and the reasons behind your decision, says Paul Garratt – head of operations for energyTEAM.

It’s not just about identifying the traits in a contract that will help you to save money and reduce the cost of your energy. Nor is it just about setting up a contract that you forget about until your renewal reminder comes in one, two or three-years time.

Paul Garratt, head of operations, energyTEAM.
Paul Garratt, head of operations, energyTEAM.

It’s about making sure you’ve got the right intelligence on your organisation.

What works for one organisation won’t be right for another, as each will have different usage levels, number of sites, and business priorities.

In reality you’ll require an energy contract that fits the organisation as it is now and how it will be in the future, taking into account any plans for growth or acquisition.

A flexible procurement strategy offers more choices

Consider this: many organisations automatically select a fixed rate contract, without evaluating the potential benefits of a flexible contract.

While a fixed contract will be the best option for some, how can you be sure without reviewing the different options?

Without a clear evaluation of the advantages and disadvantages of each contract for your business, why would you be surprised that it ends up being the wrong fit for your specific needs? 

There are some clear features of flexible energy contracts that should be considered as part of any procurement strategy:

  • Risk premiums are reduced: flexible procurement allows you to purchase energy closer to the date of use, reducing the risk premium you pay with fixed contracts.
  • Fixed, transparent ‘pass-through’ charges: In the past, a key benefit of fixed contracts was the certainty of one fixed price for the contract duration. However, most fixed contracts allow the non-energy element of the price to be ‘passed through’ to the customer if those elements exceed the supplier’s original expectations, so customers often see increases in their energy ‘tariffs’ during their contracts. With a flexible procurement contract these non-energy charges can be fixed or passed through at their published rate and clearly itemised on bills. This not only allows clearer visibility of what is being charged, but also allows you to compare each supplier’s non-energy costs when it comes to contract renegotiation time.
  • A long-term energy strategy: When setting up a flexible procurement framework, a two-three year energy strategy will often be devised. This will take a long-term view of the energy market and allow your organisation to do the same, assisting with long term energy budgeting and forecasting. Your energy strategy will also consider your organisation’s objectives, such as budget or cost savings, and all purchasing decisions can then be made based on this plan.

But aren’t flexible energy contracts just for the big guys? 

There is a misconception that you have to be spending millions on energy to access flexible purchasing options.

In fact, the volume thresholds have halved over the past few years, from in excess of 100GWh five years ago, down to 30GWh and now as low as 7GWh.

Smaller companies can also look at flexible collective products, so size is no longer a constraint.

It is well worth reconsidering your options based on the product features currently available.

Flexible procurement does not have to be complex; companies can buy ‘with a fixed mentality’ e.g. buying energy once a year but doing so within a flexible framework.

This provides the ability to change the buying point if the market increases or decreases, offers slightly lower premiums, access to additional product benefits, and a consultant constantly watching the market on your behalf.

While flexible procurement is not for organisations that demand 100% budget certainty, it does allow risk to be capped with parameters in the purchasing strategy to protect budgets if required.