A good energy procurement strategy optimally matches your business needs with the many choices that are available when it comes to buying energy.
Energy is often one of the biggest overheads for a business, so it is crucial to adopt the right approach in how you go about purchasing your gas and electricity.
Here are a few FAQs around the subject that may help in your decision-making process.
What is the best Energy Procurement Strategy for 2020?
The best strategy will be determined by the needs of your unique business.
Energy prices fell dramatically during the early stages of lockdown to reflect the lack of demand, but following the easing of restrictions and the resulting step up in business activity, they are now climbing out of what appears to be a market trough,
Even so, energy suppliers are being selective about who they deal with and are avoiding perceived high-risk industries, such as hospitality, catering and travel, that have all come under intense pressure since lockdown started back in mid-March.
Businesses within those sectors on a fixed energy deal in a market where prices are rising will feel they are in a relatively good position from an energy procurement perspective as they’ll be protected against the prospect of being hit by increased risk premiums.
However, these are unchartered times, and without a crystal ball, managing risk has never been more important. Hence, having the correct strategy in place and being able to respond quickly to opportunities as they arise is crucial.
What is the best Energy Procurement Strategy to manage risk?
Simply put, it’s the strategy that’s most suited to the business. But first, you need to understand the role of risk in your business.
Some businesses do not have the option of adopting higher risk for potentially higher financial returns as budget stability might be more important to them.
Your business may have long-term fixed customer sales contracts which do not allow for passing on increases in energy costs to your customers.
In order to protect profit margins, having fixed price energy contracts is preferential to having the opportunity to take advantage of falls in the energy markets. This is because the risks of energy price increases would ultimately be more damaging to the financial performance of the business.
For energy-intensive businesses, in order to compete on price, it’s important that you’re buying energy at the current market rate, so a flexible contract that tracks the market could be advantageous.
As a general comment, a fixed price contract which is renewed when the energy markets are low has historically added value, particularly as they often avoid increases in non-commodity costs.
What is the difference between a fixed and flexible energy procurement strategy?
Most people view flexible contracts as riskier than fixed ones but, in reality, they can be used as a hedging tool to smooth out the volatility of market movements.
A flex contract enables you to fix any amount of energy for any period of time. For example, you could fix energy prices for half your anticipated consumption for the duration of the contract, and let market prices dictate the cost of the other half once you have interpreted market dynamics through the use of helpful energy management analytical tools such as EM-Powered. The price you then pay is the average between the two actions.
Whether a fixed, midi-flex or full flexible strategy is adopted, it is important to have a dynamic approach. By this, we mean fixing contracts when market movements present opportunities and not when you come to the end of a fixed period contract in the blind hope that the markets will be favourable.
How can Energy Management guide you in your Energy Procurement Strategy?
We can assist you by establishing and implementing an energy procurement strategy that best serves the needs of your business.
Once the right products have been selected and delivered, the performance of energy suppliers will be audited to ensure optimum budget management moving forward.
Ongoing invoice validation and budget management are also key in managing your energy procurement strategy.