THE 5 Cardinal Sins of Energy Procurement.
In an open and widely accessible market, businesses are encouraged to take energy procurement in their hands. It might seem a complicated process, but we’ve compiled a list of the top five sins of energy procurement to help you on your way.
1. Adopting a short-term strategy.
Thinking short-term may give you a decent result, for now, but it might also cost you dearly when the time to renew your contract arrives. Analysing market conditions as well as your business strategy and designing a short, medium and long-term energy purchasing strategy will put you well ahead of the game. Your best option may be a short-term 3-month contract followed by a long-term agreement. You may even be able to get a deal that will protect you for up to five years, and potentially even be reviewed mid-term depending on your business growth.
2. Assuming you can get the best deal on your own.
Unless you already have a good industry knowledge, you are unlikely to get full access to the market. Energy purchasing can be a very complex process with a number of variables to analyse. If you are an SME, you also have limited exposure to the more competitive and flexible wholesale market.
An easy solution is to join a purchasing group or a trade association who would already have agreements in place. This will provide you with the full benefits of a large purchasing group with significant bargaining power among all energy suppliers. It will also usually mean that all negotiations and contract processing admin will be dealt with on your behalf.
3. Leaving things to the last-minute.
With energy procurement, you may forget about the ‘last minute’ policy. As successful as you may be booking the last minute business flight, you are most likely going to end up paying over the odds for your utilities if you leave it too late.
Furthermore, you might be risking a contract roll over on supplier’s deemed rates which usually equals 20-40% increase of your current costs. Market monitoring and forward buying of up to 24 months in advance can protect you from price increases and allow you to forecast your budget more effectively.
4. Ignoring other factors than unit price.
Surely p/kWh is an important element of your decision-making process, but if you don’t analyse all other costs included in the contract or you don’t accurately compare the rates with the correct consumption split, you may end up with 5-15% higher costs than the best market offer at the time. Admin time should also be factored in as an indirect cost for business.
Price negotiation, like-for-like tariff comparison and contract processing can take hours. Add extremely common billing mistakes to resolve during contract duration, and you might wish you never started the process in the first place. Having a reliable consultant who knows all ins and outs of the industry may mean additional thousands of pounds saved in indirect costs.
5. Regular usage monitoring .
First of all, going out to tender with an inaccurate consumption forecast can lead you into a take-or-pay clause trap. You will be obliged to pay a hefty fine if you fall out of the standard 20% up or down allowance.
Secondly, regular usage monitoring and analysis vs. industry norms allows you to identify anomalies that can unnecessarily cost your business. Some consultants on the market offer bill validation and consumption monitoring services which greatly benefit every single business that takes it on.
MAXIMeyes is an award-winning energy and telecommunication consultancy that provides tailor-made utility solutions. For more information please visit our website or contact our team on 020 8652 7525 or by email.