Why are firms opting for flexible fuel contracts?
By Brian Rickerby, joint Managing Director of energyTEAM.
The volatility in energy costs would suggest that businesses would be looking for a fixed price deal to give them budget certainty but that is not what we see in practice. So what factors are driving the choices of businesses?
There is a continuing trend towards flexible energy contracts, which now accounts for about half of our procurement business.
This is in sharp contrast to the situation 12 to 18 months ago when flexible contracts, rather than fixed deals, accounted for no more than 25% of our business. Before that the proportion was consistently as low as 10%.
Logic suggests that businesses ought to opt for the comfort of knowing exactly what their outgoings will be in these difficult times, and inevitably signing up to a flexible contract where the client is unaware of the amount they will be paying at the outset of the contract takes a leap of faith. So just what is it that is giving them the courage to brave market fluctuations?
By working with procurement professionals, firms of all sizes can benefit from best prices, as smaller businesses can be consolidated enabling access to wholesale markets which used to be reserved for big business. The trick is to know how to get the best service and value from a procurement adviser.
The first step is to ask them to explain how the wholesale electricity and gas markets work, in order to take away the mystique surrounding them. At energyTEAM our approach is to provide statistics on savings achieved in previous years, which clearly demonstrate that adopting a flexible purchasing strategy can provide significant savings over a fixed price option. As we are purchasing energy at a price based on the wholesale market, clients can avoid additional margins that a supplier adds to cover their exposure to risk surrounding market volatility.
Simple logic says that completing multiple purchases of gas or electricity throughout the contract period, taking advantage of any dips in the market, increases the chances of getting a better rate compared to a fixed price contract where you lock in the price once and hope that you have picked the best time.
Smart procurement is about watching the market carefully and constantly, and reacting quickly to market movements. The skill of the experts is to ‘lock in’ at the best rate. Locking in is effectively a promise to pay at the agreed rate, but not until the time of delivery.
While predicting what will happen with future electricity and gas prices is not an exact science, an experienced energy consultant is familiar with market trends and knows what factors are likely to drive energy prices up or down. Having someone experienced monitoring the forward traded price curve will secure energy at optimum time prices.
Total energy management
In addition to effective energy purchasing, business is at last waking up to the commercial benefits of energy efficiency. All too rarely has energy purchasing been linked with energy usage but we believe an energy consultant should provide help on both counts. A total energy management consultancy like ours does not have a vested interest in keeping your consumption high.
I’ve been in this business for 20 years now and have witnessed as much cynicism about the green agenda as anyone. Few firms invest in energy saving for the sake of the planet – it is the balance sheet that drives them. You will be as well informed as anyone on the range of controls available to manage production equipment and heating and ventilation services. But a control is only as good as its settings and the first step towards energy reduction is a complete energy audit.
A flexible purchasing arrangement can then reap huge rewards if production patterns can be varied, for example, so that energy intensive equipment is used at times when energy costs less. Of course this takes a coordinated approach but with energy often the biggest expense for today’s business after salary, such cooperation should be driven at board level.
By taking a genuinely comprehensive overview, firms can also prioritise the measures they can take to reduce costs, and factor in any capital expenditure to their budgets. In practice, the savings reaped can quickly pay for themselves. We also continue to be enthusiastic about the potential for the Green Deal to be applied successfully to non-domestic premises, and will watch its progression with interest.