Powering up energy purchasing

Posted on 10 Jan 2008 by The Manufacturer

Energy prices are all over the place – and so are predictions about where they will go. In a volatile market how should small and medium sized manufacturers buy their energy? John Dwyer reports

E nergy prices are falling, says the Department for Business, Enterprise and Regulatory Reform (BERR). The figures for all gas and large electricity consumers bear this out. But prices to small and medium electricity consumers rose about 10 per cent.

The latest EEF energy figures show that smaller manufacturers are paying more per unit for gas and electricity than larger ones. And larger companies have reduced their energy use by investing in more efficient equipment.

Energy adviser John Hall Associates (JHA) says increasing price volatility has driven a lot of companies to adopt different ways of buying energy. Where once a company would have picked a supplier and renewed once a year, they are now much more willing to switch than they were. As a result, says JHA, they are beating the market average.

For Marc Beaumont, energy and utilities manager at Smith & Nephew Wound Management (S&N), Hull, smart energy purchasing is an important way to cut energy costs. And the UK, he believes, is one of the best places to do it. You can buy a block of electricity from March to December, says Beaumont, then watch the price and “buy a bit of February. You can pick out bits at the best prices.”

He echoes regulator Ofgem’s view, saying: “We have the most open market in the world.” Energywatch chief executive Allan Asher disagrees. He told the Major Energy Users’ Council Conference in London in December 2007 that “the energy market is delivering neither choice nor value.” Energywatch sees a tide of complaints about poor customer service by the big six energy suppliers and a sharp rise in the numbers of disputes about billing, transfers and the way contracts are sold.

Says Energywatch’s Paul Savage: “We don’t think [the market] is working at all for the SME sector.” There’s no pricing information detailed enough to allow valid comparisons between suppliers, and there’s no information at all about quality of service.

Small businesses’ contracts are “extremely restrictive,” says Savage, and switching suppliers is “harder and harder.” He is particularly scathing about suppliers’ right to make objections even to switching requests which observe contractual notice periods.

Suppliers don’t usually send reminders of contract-renewal dates. “They rely on intertia,” says Savage. Energy users could find themselves paying punitive out-of-contract rates “that may run into thousands and thousands of pounds” until disputes over objections are sorted out.

The regulator, Ofgem, “is designed for stability of investment, not to ensure choice and value for [energy] consumers,” says Savage. Meanwhile, “customers are bleeding through every conceivable orifice.”

Stuart Lee of energy trader, Inenco, disagrees: “Energywatch doesn’t quite get it, unfortunately.” Changing suppliers should be easy, he says, “if you pick the right supplier and manage the process properly. There could be problems,” he concedes, “but it depends how adept you are at sorting them out.” By that, of course, he means whether you’ve employed expert help.

But René de Souza of the influential Chartered Institute for Purchasing and Supply (CIPS) supports some of what Savage says. The CIPS energy committee is also concerned by how well the market is working, he says, and that, when Energywatch disappears in 2008, there will be no independent voice for small business consumers: “The blue chip companies can look after themselves,” says de Souza. But smaller companies have fewer skills available to deal with energy purchasing.

The EEF’s energy expert, Roger Salomone, points to a paradox in EEF’s latest survey. A year ago, he says, companies concerned about volatile prices went for longer contracts to lock themselves into early, lower, prices. This year, with medium-term prices falling, there is a trend towards shorter contracts that allow companies to buy more energy later at what they hope will be lower prices.

But there is a split between large and small companies. Some larger manufacturers still favour longer – two years or more – fixed contracts to lock them into a lower price, while a higher number of smaller companies are taking shorter contracts. Salomone says he thinks smaller companies concerned about day-to-day cash flow are tempted by cheaper deals over a shorter timespan.

That’s despite a shortage of the resources to manage them. The EEF says 70 per cent of companies with fewer than 100 employees don’t have a dedicated energy buyer. “Larger businesses,” says Savage, “are more experienced. They have more resources they put into staying on the case, understanding the risks and managing them.” De Souza agrees that you have to be skilled enough to handle the risk, which means being, or appointing, someone who is dedicated to the job of energy buying.

CIPS agrees with Energywatch about the difficulty of switching between suppliers to some extent, but, “it’s not totally one-sided.” It may be, de Souza says, that the customer doesn’t understand their own contract or the process of going about switching. And it just isn’t wise for companies to leave energy purchases until the last minute. Better training could solve a lot of the problems, de Souza suggests.
Buying at short notice is hazardous, agrees Lee, because you have to take whatever price is available, and you may be forced to buy at the top of the market. If your contract expires in a month, you need to do something about it. If you leave it to the last minute, “you are taking a huge risk.”

Traditionally, buying energy was a low-risk matter of purchasing a year or so’s usage at a fixed rate. In today’s market, making such a decision carries a higher risk than it used to. Fixed contracts give a known energy cost but it’s bound to be higher than you need to pay. Buy a year’s supply and you pay the supplier a risk premium against possible future price changes in that period.

However, you can save money on a fixed contract. A multi-rated structure is an alternative to buying units of energy at a single price. If your business doesn’t need to use its energy at peak times, it can use off-peak energy at lower prices.

But flexible contracts like Beaumont’s give customers the option to make multiple purchase decisions throughout the term of the contract. James Hanks, JHA’s head of price analysis, says flexible buying won’t always beat fixed, “but the benefit is that you spread your risk. With a fixed contract you get one chance to buy at the best price, or in a potentially rising market, one chance to protect against additional costs.” On average, says Hanks, flexible buyers pay less, provided they stagger their buying over a long enough period.

Beaumont too warns that buying flexibly, “has to be balanced against risk.” If you leave too many unfilled slots in your forward-buying plan, he says, “you can be caught out if the price rises at the last minute. If you haven’t bought any for December you may have to pay that high price.”

Flexible contracts are only really suitable for larger companies who have the experience, time and support to deal with the extra work involved. But many manufacturing sites are part of a bigger group, says Salomone, whose combined volume gives them more negotiating clout. Shropshire-based plastics company, Telford Extrusions, no longer buys its own energy, says business excellence systems manager Paul Nelms. All energy purchases are now made by its parent company, Epwin Group.

And many manufacturers now find they can afford in-house or external expertise because energy is now such a sizeable proportion of their materials costs that the savings more than cover the cost of the in-house or third-party expertise needed to manage it.

Energywatch says that around 60 per cent of all energy consumed by businesses is bought through third party intermediaries (TPIs): agents, brokers, consultants or advisers. Anglian Windows, for example, says energy consultant Energy 2000 cut a third from Anglian’s £1.6 million total energy bill in the first year. Half the savings came from forward buying and choosing the best times to trade, the rest from energy savings, which gave Anglian Climate Change Levy rebates on qualifying sites’ energy invoices.

TPIs may give a small company access to bulk-buying and other contract types not otherwise accessible, but Energywatch is concerned that the TPIs are unregulated. Its website has a guide to how to choose a TPI (tinyurl.com/2pgqfp).

Most SMEs, however, would be advised to start by looking at reducing their energy consumption. The next step is to read the bills. Most companies pay more than they need to. Billing errors are horrendous, says Beaumont, who has claimed back £100,000 from suppliers because of them. Suppliers will admit errors, says Beaumont, “but if no-one is checking the bills they don’t get picked up.” Beaumont’s other tip is to use BACS rather than direct debit. That way, he says, you can refuse to pay if the bill is wrong.