Why Gambling on Price Alone Represents a Risky Strategy for Energy Category Managers

Mike Jones, Group Managing Director, Optimum Procurement, shares his views and experience of the challenges facing procurement category managers. In this second in his series he looks at the complex category of energy. 

Once upon a time procurement professionals could usually depend on the seasonality of the energy market when purchasing gas and electricity. Demand for energy was typically lower during the summer months in contrast to winter which would mark the peak times in demand for gas or electrical heating. It didn’t matter which supplier you bought it from, it’s the same gas and electricity after all, just sold at a different price.

Soaring prices however have seen electricity rise by 44 percent and gas by 92 percent in the past five years. Energy usage fluctuates during the course of a day and is influenced by a number of variable factors, including adverse weather conditions, new political regimes, acts of terror and even televised events such as The World Cup. This has made energy markets extremely volatile and subject to short-term fluctuations.

From an organisational perspective we’re all supposed to be reducing our energy use but in many ways have become increasingly reliant on it. Longer shopping hours and more relaxed drinking laws have led to retailers, restaurants and pubs consuming more energy resulting in them having a greater reliance on cloud technologies and data centres to run their business. Being on the wrong tariff for even a day, let alone for the length of a contract, can result in the loss of £1,000s which has made the stakes considerably higher for energy category managers.

Pursuing a “one size fits all” approach is tempting but is no longer a viable long-term strategy as procuring energy comes down to more than just looking at price. Fixed procurement contracts may provide budget certainty and assist financial planning but are not always the best solution. Negotiating the best deal requires category managers meticulously to track the markets and have an implicit understanding of supplier behaviours so that the cost is balanced alongside the likelihood of risk. Timing is crucial. Without this knowledge category managers are taking a big energy gamble and are likely to be made accountable for the bill if their decisions backfire. Flexible trading can be more attractive to some, but not all, organisations. The attractiveness of a flexible contract depends on volumes, appetite for risk and knowledge of the markets. The energy markets must be tracked through live pricing information delivered through the appropriate software.

Clearly price remains relevant but there are also duty of care considerations and risks which must be taken into account when buying energy. The increasing prominence and evolution of environmental legislation, such as the EU Emissions Trading Scheme, has placed businesses under greater financial scrutiny as to the amount of energy they use and similarly if carbon reduction targets are not being met.

A clear understanding of carbon-related legislation and accreditations is critical. Organisations need to be aware of their obligations and associated costs relating to ESOS (Energy Saving Opportunities Scheme), CRC (Carbon Reduction Commitment) and CCL (Climate Change Levy). It is equally important to recognise the potential benefits of compliance, which can also be tied in to a formal energy management system (certified to ISO50001).

Good category managers must embrace duty of care responsibilities by driving lower energy usage for their clients by reducing the volume as well as the price. This means delivering sustainable demand management and carbon reporting solutions whilst being able to differentiate between relationships and commercials to act as the glue to hold procurement and operational departments together. Added value services such as bill analysis and validation and energy audits should also form part of a broader service proposition. The markets can be very complex, with literally thousands of tariff options available across the whole market. It is essential therefore to be able to leverage the right software and technology, to rationalise the options and secure the best available prices to suit your business.

The business energy market is being dominated by mis-selling and uncertainty but no longer needs to be a gamble. By giving their clients full and open access to it category managers can mitigate risk and ensure businesses no longer have to lose substantial sums of money or lose vital revenues to poor commodity purchasing.

Complexity builds further for companies with international footprints. The capability of the toolkit available to global energy category managers is crucial with technology providing an ever-increasing role in ensuring competitive pricing, good account management and legislative compliance.

You can read the first in this series - on Fleet category management - here

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