Fundamentally, all organisations need procure energy. But the choices that sit as part of this process mean each energy buyer has a range of options to consider. ENER-G Procurement's Head of Corporate Sales and Accounts, Nick Linklater explores.
For many organisations, the importance of energy to the business means it’s no longer just be a question of reviewing your energy procurement strategy because your contract is up for renewal. It’s about reflecting the overall approach you take to procurement, to ensure it meets your needs both now and for the lifetime of your contract.
When it comes to procurement in the modern energy market, here are three questions to consider about procurement in the modern energy market:
#1 How do you control the cost of your energy?
Deciding on your cost control options is clearly an important part of any procurement strategy. On one hand you can secure your budget with a fixed-price deal. But that will expose you to market risk whereby you won’t benefit from falling prices. And, of course, a supplier will cover its own risk when offering fixed rate with an additional premium.
On the other hand, you can take advantage of spot reductions by opting for a deal that tracks the wholesale market. Though, this approach does require effective risk management, to help manage fluctuations in the market.
There are, however, sources of assistance to navigate this minefield. Aggregators bundle the demand of many users and use the single combined load to lever a better deal out of a supplier than the individual users might be able to negotiate singly. They can be just the ticket for small users. They reduce stress and the fixed-price premium.
The challenge for organisations is in gaining a measure of how you buy at the best price, while mitigating your risk exposure. Getting a handle on whether budget risk or market risk is the greater is tricky. It comes down to choosing the best approach for the organisation and gauging which route is most appropriate.
#2 Are you on top of your peaks?
If you have access to detailed information on your demand, this can give you real leverage in negotiations with potential suppliers. This data gives suppliers a clear picture of your load shape – the peaks and troughs in demand over time. And greater granularity in the load shape reduces the risk faced by suppliers.
Less risky means less need to hedge, which makes suppliers more willing to make winning offers. What’s more, detailed meter data improves your capacity to analyse your consumption and view it alongside utility bill data, enabling you to monitor for any over-billing.
Demand side deals – where rates are subsidised on the grounds that the user is available to be called upon to decrease or remove its load at short notice – have been long sort after but with little uptake. Barriers have been largely perceived ones – particularly wariness of diminished service as well as a paucity of incentives in the market.
But with demand side response being and effective means for suppliers to hedge against imbalance and to level peak loading, they are inclined to offer strong incentives to attract to energy users to take up these schemes.
#3 Are you green compliant?
Some of the greatest complexity in the energy buyers’ world is in and around environmental regulation. The penalties for failing to comply with the gathering complexity in environmental legislation are very real reasons for taking your consumption into consideration.
The costs of emissions allowances under the government’s labyrinthine CRC Emissions Scheme for large, non-energy-intensive organisations are the stick that beats you to reduce demand. And this year the Brussels-driven Energy Savings Opportunity Scheme (ESOS) is in play. It requires large undertakings (250 employees or more) to conduct energy audits and to identify opportunities to improve efficiency.
If you’re an energy consumer in the industrial, commercial, agricultural or public services sectors you could be liable to Climate Change Levy payments on the electricity gas and solid fuels you buy and use.
Users with low energy demand are among those exempt from the tax. And energy intensive business can get a 90% reduction in CCL for electricity and a 65% reduction for gas, coal and other solid fuel.
For the rest, accredited renewable energy suppliers or good quality combined heat and power that qualify for levy exemption certificates provide a means to offset CCL charges.
There are real opportunities in energy procurement. But to be in the best position to benefit, it’s essential that buyers consider all of their options or risk being left with an energy contract that doesn’t meet all of their needs.