Nick Linklater, ENER-G Procurement's head of Corporate Sales & Accounts, explores how effective energy buyers make informed decisions about when and how to purchase energy.
Typically, the energy buyers doing the best for their companies are those that are fully aware of the options available to them. They’ve made an informed choice – but not a rigid one – about what they do and the approach they take.
Increasingly, the most informed energy buyers these days have negotiated flexible buying terms to optimise their strategy in the face of various scenarios.
What does this mean in practice?
Essentially, it means they recognise what flexible procurement can do, recognise what elements of it are manageable, and what elements are less manageable, and have made a choice about the degree to which they would get involved with flexible procurement, which they keep under review so it’s always relevant to their needs and the market conditions.
These energy buyers have a clear understanding of the way the market moves and the way opportunities can arise at any time. Importantly, they have also shared this knowledge within their organisation, so that everyone involved in the decision making process understands the choices they have to make and the time-critical nature of each decision.
To enable quick decision making, the energy buyer will have a framework for making decisions and collaborating with decision makers, so they can all respond reasonably quickly when the market moves. This means that they are in the best possible position to make the most appropriate choice for the organisation as a whole.
The opposite is true of less effective buyers. It may well be that energy is not big priority for them or their organisation, so it’s not necessarily a criticism. If energy is not something that they need to put resource into, as it’s not that important to their business, then it’s natural to procure energy on a very simple basis.
But if they are taking this approach, then they’re the organisations that can easily make improvements by outsourcing some or all of that effort by using a broker to actually just take the whole thing off their hands.
What’s preventing these organisations from adopting best practice?
It’s pretty well established now that if you just buy fixed price, a year at a time, or two years at a time, you’re just playing a lottery. When you decide to focus on your renewal, or when you’re suppliers actually decide to propose prices for your next contract, you’ll get a price that reflects the market at that time.
You can do as well as you like in terms of negotiating a lower margin from the supplier, but fundamentally, the vast majority of your contract is set by the wholesale market at the time that you do the deal.
Now obviously, it’s not easy to choose the best time to buy, and if you ever try to buy anything that’s based on a market price, you know that there’ll be dips and peaks that you need to try to navigate.
Sometimes if you’re in a sustained period when the market’s going against you and you approach a point where you have to buy, then you’ll feel like you’ve been caught out. But that’s why effective energy buyers should use risk management techniques to recognise opportunities and protect against the rising market, helping them to have control over the total spent.
Sometimes, there will be resistance to flexible procurement from other functions in the buyer’s organisation, because they think the finance team won’t want it. This may be due to a perception that bills will become unpredictable, and budgeting will suffer.
But, actually, flexible contracts now give you total control over the degree of billing stability you want to achieve. For example, you could choose to set all your prices for the forthcoming year, weeks or months before it starts, or you can keep your options open much closer to real time if you prefer, giving a different price each month, or even one which is not finalised until after the energy has been consumed.
The final raw energy prices achieved can then be rolled-up into a simple delivered rate structure, or can be fully disaggregated to give total transparency of all individual cost elements.
And if you get to the finance director and explain flexible procurement in terms of commodity markets, very often it’s a conversation they will be interested in having. They’re very aware of market drivers and most will have experience in commodity price hedging, whether for raw materials or for treasury operations.
For example, if you’re a large scale bakery business buying wheat in the bulk markets your company will have to manage both currency and raw materials in such environments, and it’s then very easy to explain the kinds of tools available for risk managing a flexible gas or electricity contract.
You can find an organisation that originally felt it was not up to flexible procurement is actually very well suited to it, especially with the right support and experience.