Energy procurement strategy – some key things to consider

Energy Procurement and Management

An effective energy procurement strategy optimally matches your business needs with the right business energy deal.

As energy is one of the biggest overheads for any business, securing the right price and the right terms for your gas and electricity can make a huge difference to the health of the balance sheet.

Here are a few FAQs around the subject of business energy procurement that may help in your decision-making process.

What is the best Energy Procurement Strategy for 2021?

The best strategy will be determined by your business’ unique needs.

In these uncertain financial times, energy suppliers are being selective about who they deal with and are avoiding perceived high-risk industries, such as hospitality, catering, retail and travel.

Only this week Arcadia Group, which owns renowned High Street stores like Selfridges, Topshop and Topman, announced it was going into administration.

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. As soon as prices go up, they can just as quickly go down. 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.

World Energy Outlook sets out a vision for the future

covid-19

World Energy Outlook 2020 has shown how the response to the Covid-19 crisis can reshape the future of energy.

Amid deep disruption and uncertainty caused by the pandemic, the 464-page publication states a surge in well-designed energy policies is needed to put the world on track for a resilient energy system that can meet climate goals.

But whether this upheaval ultimately helps or hinders efforts to accelerate clean energy transitions and reach international energy and climate goals will depend on how governments respond to today’s challenges.

Pivotal period

The World Energy Outlook (WEO) 2020, the International Energy Agency’s flagship publication, focuses on the pivotal period of the next 10 years, exploring different pathways out of the crisis.

The new report provides the latest IEA analysis of the pandemic’s impact: global energy demand is set to drop by 5% in 2020, energy-related CO2 emissions by 7%, and energy investment by 18%.

The WEO’s established approach – comparing different scenarios that show how the energy sector could develop – is more valuable than ever in these uncertain times.

In the Stated Policies Scenario, which reflects today’s announced policy intentions and targets, global energy demand rebounds to its pre-crisis level in early 2023.

However, this does not happen until 2025 in the event of a prolonged pandemic and deeper slump, as shown in the Delayed Recovery Scenario at the bottom of this article.

Slower demand growth lowers the outlook for oil and gas prices compared with pre-crisis trends. But large falls in investment increase the risk of future market volatility.

Starring role for renewables

Renewables take starring roles in all our scenarios, with solar centre stage. Supportive policies and maturing technologies are enabling very cheap access to capital in leading markets.

Solar PV is now consistently cheaper than new coal- or gas-fired power plants in most countries, and solar projects now offer some of the lowest-cost electricity ever seen.

In the Stated Policies Scenario, renewables meet 80% of global electricity demand growth over the next decade. Hydropower remains the largest renewable source, but solar is the main source of growth, followed by onshore and offshore wind.

“I see solar becoming the new king of the world’s electricity markets. Based on today’s policy settings, it is on track to set new records for deployment every year after 2022,” said Dr Fatih Birol, the IEA Executive Director. “If governments and investors step up their clean energy efforts in line with our Sustainable Development Scenario, the growth of both solar and wind would be even more spectacular – and hugely encouraging for overcoming the world’s climate challenge.”

Weak linkThe WEO-2020 shows that the strong growth of renewables needs to be paired with robust investment in electricity grids. Without enough investment, grids will prove to be a weak link in the transformation of the power sector, with implications for the reliability and security of electricity supply.

Fossil fuels face varying challenges. Coal demand does not return to pre-crisis levels in the Stated Policies Scenario, with its share in the 2040 energy mix falling below 20% for the first time since the Industrial Revolution.

But demand for natural gas grows significantly, mainly in Asia, while oil remains vulnerable to the major economic uncertainties resulting from the pandemic.

“The era of global oil demand growth will come to an end in the next decade,” Dr Birol said. “But without a large shift in government policies, there is no sign of a rapid decline. Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”

The worst effects of the crisis are felt among the most vulnerable. The pandemic has reversed several years of declines in the number of people in Sub-Saharan Africa without access to electricity. And a rise in poverty levels may have made basic electricity services unaffordable for more than 100 million people worldwide who had electricity connections.

Green shoots

Global emissions are set to bounce back more slowly than after the financial crisis of 2008-2009, but the world is still a long way from a sustainable recovery.

A step-change in clean energy investment offers a way to boost economic growth, create jobs and reduce emissions. This approach has not yet featured prominently in plans proposed to date, except in the European Union, the United Kingdom, Canada, Korea, New Zealand and a handful of other countries.

In the Sustainable Development Scenario, which shows how to put the world on track to achieving sustainable energy objectives in full, the complete implementation of the IEA Sustainable Recovery Plan moves the global energy economy onto a different post-crisis path.

Nuclear momentum

As well as the rapid growth of solar, wind and energy efficiency technologies, the next 10 years would see a major scaling up of hydrogen and carbon capture, utilisation and storage, and new momentum behind nuclear power.

“Despite a record drop in global emissions this year, the world is far from doing enough to put them into decisive decline. The economic downturn has temporarily suppressed emissions, but low economic growth is not a low-emissions strategy – it is a strategy that would only serve to further impoverish the world’s most vulnerable populations,” said Dr Birol.

“Only faster structural changes to the way we produce and consume energy can break the emissions trend for good. Governments have the capacity and the responsibility to take decisive actions to accelerate clean energy transitions and put the world on a path to reaching our climate goals, including net-zero emissions.”

A significant part of those efforts would have to focus on reducing emissions from existing energy infrastructure – such as coal plants, steel mills and cement factories. Otherwise, international climate goals will be pushed out of reach, regardless of actions in other areas.

Detailed new analysis in the WEO-2020 shows that if today’s energy infrastructure continues to operate in the same way as it has done so far, it would already lock in a temperature rise of 1.65 °C.

Despite such major challenges, the vision of a net-zero emissions world is increasingly coming into focus. The ambitious pathway mapped out in the Sustainable Development Scenario relies on countries and companies hitting their announced net-zero emissions targets on time and in full, bringing the entire world to net-zero by 2070.

Drastic action

Reaching that point two decades earlier, as in the new Net Zero Emissions by 2050 case, would demand a set of dramatic additional actions over the next 10 years.

Bringing about a 40% reduction in emissions by 2030 requires, for example, that low-emissions sources provide nearly 75% of global electricity generation in 2030, up from less than 40% in 2019 – and that more than 50% of passenger cars sold worldwide in 2030 are electric, up from 2.5% in 2019.

Electrification, innovation, behaviour changes and massive efficiency gains would all play roles. No part of the energy economy could lag behind, as it is unlikely that another would be able to move fast enough to make up the difference.

The different pathways in the WEO-2020

  • The Stated Policies Scenario (STEPS), in which Covid-19 is gradually brought under control in 2021 and the global economy returns to pre-crisis levels the same year. This scenario reflects all of today’s announced policy intentions and targets, insofar as they are backed up by detailed measures for their realisation.
  • The Delayed Recovery Scenario (DRS) is designed with the same policy assumptions as in the STEPS, but a prolonged pandemic causes lasting damage to economic prospects. The global economy returns to its pre-crisis size only in 2023, and the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.
  • In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals. The assumptions on public health and the economy are the same as in the STEPS.
  • The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis. A rising number of countries and companies are targeting net-zero emissions, typically by mid-century. All of these are achieved in the SDS, putting global emissions on track for net-zero by 2070. The NZE2050 includes the first detailed IEA modelling of what would be needed in the next ten years to put global CO2 emissions on track for net-zero by 2050.

Source: iea.org

PM’s green energy industrial revolution

During the Covid-19 nationwide lockdown, wind farms accounted for a larger percentage of the UK’s overall power generation than before.

And following Prime Minister Boris Johnson’s Conservative Party address today, that seems to be an irreversible trend.

The PM pledged on Wednesday to spend £160m to upgrade ports and factories for building turbines to help the country “build back greener”, with the aim of creating 2,000 construction jobs and support 60,000 more.

He vowed that the UK would become “the world leader in clean wind energy” and that every home would be powered by wind alone within the next decade.

Mr Johnson said the government was raising its target for offshore wind power capacity by 2030 from 30 gigawatts to 40 gigawatts.

By placing his faith in wind energy and reducing coal-fired power, greenhouse gas emissions would be dramatically slashed.

“Far out in the deepest waters we will harvest the gusts, and by upgrading infrastructure in places like Teesside and Humber and Scotland and Wales, we will increase an offshore wind capacity that is already the biggest in the world,” he proclaimed.

Business energy procurement is best left in the hands of the specialists

Companies that do not necessarily have the in-house expertise or the time to manage their own energy demands often turn to external business energy consultants to take care of their needs.

Business energy procurement (the buying of the energy that powers your company’s premises) is not always straightforward and a trained eye is needed to avoid some common pitfalls.

Choosing the right business energy consultant is one of the key factors behind a successful energy procurement strategy.

Buying power at the right time and the right price is an art in itself considering the volatility of the market and the multitude of factors that influence price hikes and falls.

“As a Chartered Electrical Engineer I would like to make the important point that energy procurement is a technical specialist purchase,” said chairman and founder of Energy Management LLP, Gary Weston.

“Comparing apples with apples is difficult when some energy offers have pass-through clauses, and what seems like a fixed price quote is anything but.

“For example, volume penalties can distort the true costs which vary considerably between suppliers.”

Hidden errors

With one in five invoices found to contain errors, amounting to around three to five per cent of the overall cost of the bill, invoice validation is another important service offered by business energy consultants.

“Once you have the best offer in place, invoice validation and the suitability of fixed availability capacity charges require ongoing review,” he pointed out.

“And then there is the perceived black art of power factor correction, whereby the types of load connected can adversely affect the electricity supplies power factor, triggering additional costs which can be alleviated.”

Working with Energy Management can save companies valuable time and considerable amounts of money.

“Not only will you have peace of mind in the knowledge that you’re on the right contract, but that your energy costs are being managed professionally on a day-to-day basis,” Mr Weston added.

How green is your energy?

Choosing a green energy tariff is a valuable step towards making your business more sustainable.

Renewable energy Purchase Power Agreements (PPAs) are becoming increasingly popular as the corporate world acknowledges the role it can play in helping the UK to meet its carbon-zero targets.

However, some of the green tariffs on the market – and there is plenty of choice – are greener than others in terms of how much they directly support investment in the UK renewables industry.

A third of domestic customers surveyed by Which, for example, believe that if an energy tariff is marked ‘green’ or ‘renewable’ then they expect to get 100% renewable electricity into their homes. That is not always the case.

Rest assured, all supplied contracts issued under Energy Management’s Green Energy Framework will be accompanied by a Renewable Energy Guarantee of Origin (REGO) certificate which lays out the source of the energy in black and white.

The REGO scheme provides transparency to consumers about the proportion of electricity that suppliers source from renewable generation. All EU Member States are required to have such a scheme.

Read more about our Green Energy Framework>>

Renewables making headway in USA energy mix

The United States’ reliance on coal-fired power generation appears to be diminishing, despite President Trump’s best efforts to support the industry through favourable legislation.

On more days than not this year, utilities got more electricity from renewables – hydro, wind and solar – than from fossil fuel.

Last year, there were just 38 days when this was the case; however in 2020 already, the number is up to 122 days, including the whole of the month of April and all but three days in May.

While this is encouraging news in the global fight against harmful carbon dioxide emissions, the US is still lagging behind other nations in terms of cleaning up its act.

The UK, for example, went a record 67 days without any coal-fired power generation between April and June this year, when demand at the peak of the Covid-19 lockdown was admittedly low because of business closures.

Even so, that 67-day record represented the longest run without coal power since 1882.

In the US, government intervention does not seem capable of reversing the trend from coal to renewables, as natural gas is a cheaper alternative due to an increase in supply.

Hydraulic fracturing and horizontal drilling have enabled an 80 per cent increase in U.S. gas production since 2006, and about a 50 per cent decline in price. By contrast, coal prices have risen modestly over that period.

Sourcing green energy

Green business energy is proving more popular than ever as businesses increasingly set out a procurement energy strategy aligned to sustainability as well as cost.

While not all businesses are able to generate their own energy – a sustainable way of putting less pressure on the national grid – green energy contracts are widely available.

But what exactly is a green energy contract?

Basically, the gas and electricity that powers your premises of work comes from a supplier who has sourced it through a renewable energy generator such as wind or solar farms, hydroelectric power stations or biomass plants.

The amount of energy from renewable sources differs from supplier to supplier; however, it is a legal requirement for them to publish details of their fuel mix.

The more businesses (and households) that adopt this policy, the more renewable energy is fed back into the grid, and the country’s dependence on fossil fuels reduces, helping to alleviate the onset of climate change as a result.

If you’d like some advice on the range of green energy contracts that are currently being offered on the market, please get in touch with one of our energy consultants on 01225-867722

Energy procurement strategy – your questions answered

Energy framework

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.

An energy framework designed to tackle the climate change emergency

The climate change emergency was at the front and centre of the news agenda before Covid-19, and even while we are still in the grip of the pandemic, it is an issue that has rightfully refused to go away.

We have found that in our discussions with clients and potential new customers that the drive towards a carbon-neutral position – by 2050, or even 2030 in some cases – is still a key focus.

Figures released by BloombergNEF showed how purchasing green energy contracts rose by 40% on the previous year in 2019, reaching almost 20 gigawatts (GW), and that appetite for change is still there if our experience is anything to go by.

Our Choice Energy Framework is proving to be a popular option for those public sector organisations looking to not only save money in their energy procurement but also be more ethical in the way they power their facilities.

There has been tremendous interest in securing green energy contracts – ones that use wind and solar energy, for example – as opposed to traditional brown energy that relies on fossil fuel power generation.

The Choice Energy Framework involves up to six energy suppliers who have been shortlisted on the basis of tariff competitiveness, billing accuracy, max/min volume threshold restrictions and terms and conditions.

Fixed and flexible contracts will be offered by the suppliers with the length of the contract varying from 12 months to as long as four years.

If you would like to find out more, please contact one of our team on 01225-867722

Switching energy suppliers – what you need to know

Energy is often a business’ biggest running cost after wages. That is why it is crucial to ensure you are not paying over the odds for powering your office, factory or warehouse, particularly if you prefer the security of a fixed-term contract over a more flexible arrangement.

Many energy contracts simply rollover once the current term expires, and this can lead to a business paying more per unit for their gas and electricity than they need to.

With the market as volatile as it is right now, switching energy providers can be in your best interests. Normally, your energy supplier – whether it is one of the so-called ‘Big 6’ or one of the smaller operators – will contact you up to six months before your contract enters its renewal window.

Armed with the facts

At this time, it is important to have all the right information to hand and to understand how, when and where you are consuming the most energy, especially if you operate over multiple sites, as this could impact on how much you eventually pay.

Switching energy suppliers can take anything between four to six weeks but without any disruption to your current supply.

Many businesses, particularly at times of great stress, either don’t have the resources to handle this energy procurement process or do not have the expertise to shine a light on unfavourable terms and conditions which may hit the business financially in the long run.

If you consider yourself to be in such a situation, we’d be more than happy to assist you in getting the right deal at the right time and for the right duration.