Ask the expert: How to build the perfect procurement strategy – Part One

Everyone’s talking about energy prices – and for good reason. For many businesses, the energy buying decisions they make this year will make a significant difference to their bottom line – so it’s important for them to ensure they have the ideal procurement strategy in place.

With this in mind, we sat down with one of our energy procurement experts, Dan Turvey, Senior Risk Manager, to get his advice on how businesses can perfect their procurement strategy. 

Wholesale energy costs are very high right now, and they look set to continue to rise – what can businesses do to keep their energy bills from spiraling?

Firstly, we’d recommend that every business looks to reduce their consumption any way they can, because the cheapest kWh is the one that you don’t use. If they’re required to comply with ESOS, they should have a list of practical energy efficiency recommendations that they could implement. Those that aren’t affected by ESOS may wish to carry out an energy audit to help them to identify areas for efficiency improvements, so they can take decisive action to reduce their consumption.

In such a challenging market, it’s also wise for businesses to review their current energy buying strategy. Many businesses find it helps to have the support of an external energy consultant here, because they can bring invaluable procurement expertise and an insight into the market that it’s not possible to achieve in-house. 

Businesses should also take time to ensure that they’re being billed correctly, because errors in energy bills are common and can leave businesses paying more for their energy than they should be. Again, working with an energy consultant is advisable because business energy bills can be very complex. A consultant can also help businesses to recoup costs from historical erroneous invoices, a service known as revenue recovery, which could help businesses to offset against current price highs.

With non-commodity costs now making up the majority of most organisations’ energy bills, businesses should check whether their business qualifies for any environmental levy exemptions. Energy intensive businesses can claim exemption from up to 85%  of their Contracts for Difference (CfD), Renewables Obligation (RO) and Feed-in-Tariff (FiT) costs, for example. It’s important for organisations to review whether they could benefit from these types of exemptions, as they can make a significant difference to their bills.

For those who are due to renew their current energy contracts shortly, what would you recommend? 

UK energy prices are currently increasing at an alarming rate and we’re seeing growing levels of extreme volatility in the market, which makes energy buying a very complex process right now.

Businesses that are due to renew fixed energy contracts are facing prices as much as five times higher than the price they secured for their last contract. Agreeing another fixed contract at these prices isn’t economically viable, as it could ultimately jeopardise their ability to operate over the short, medium or long-term. Many suppliers aren’t offering any fixed contracts at the moment anyway, and those that do are adding extreme risk premiums due to the unprecedented volatility.

In a market like this, our primary recommendation for all businesses is for them to consider their flexible buying options. They shouldn’t wait and hope that prices come down for a fixed renewal, even if the renewal is not until October. We know that many businesses prefer to have support with flexible procurement, as determining the best time to buy can be difficult – that’s where our procurement experts come in. We can help businesses to make flexible purchasing decisions with confidence.

Price is a key consideration for any business when it comes to buying energy, but what are the other areas that businesses should consider before they buy?

Alongside current prices, businesses should consider market conditions, as energy prices are typically volatile and can change dramatically from one day to the next. We’re currently recommending that businesses take a flexible approach because prices look set to remain high for some time, for example, but if we thought that market conditions could cause prices to fall in the near future we might recommend a different approach. 

It’s also important for businesses to evaluate their current consumption and review their volume tolerance level before they sign a contract. They need to ensure that their volume tolerance is set at the optimum level or they could risk penalties for breaching the upper or lower thresholds. 

Of course, before any business buys energy they should ensure that it meets their organisation’s requirements when it comes to risk. No purchasing decision is without risk – fixed contracts contain a built-in risk premium, and with flexible contracts, there’s always a risk of buying at the wrong time. However, with a robust risk management strategy in place, every business should be able to buy energy in a way that suits their appetite for risk. 

Finally, businesses should always set a budget and procurement objectives that align with their energy buying strategy. This will give them clear figures and objectives to assess their purchasing decisions against throughout the duration of their contract, so they can make adjustments to their approach, if necessary, in order to achieve their goals.