You are most likely a category buyer responsible for indirect procurement. Energy is unlike other indirect spends, so if you’re not familiar with buying energy or utility sourcing processes, this article will help provide some high-level guidance. Because energy is a commodity, it brings several additional risks and price considerations less prevalent in other areas of the supply chain. Companies can either buy energy directly from energy suppliers or through the services of an energy consultant or broker. Whichever you chose, this article will help you better understand the process of buying energy.
Do you need an advisor to buy energy?
As energy advisors ourselves, you might think our answer to that question would be yes, but actually, that’s not always the case. The organizations we talk to have very experienced, well-qualified procurement specialists. In most cases, they are very capable of sending out an RFP and negotiating responses to obtain an energy supply contract, so why do so many companies use the services of an advisor or broker to help them?
The answer will depend largely on scale, how much energy is required, how many facilities need to be bid-out, how many energy markets need evaluating, and so on. Energy advisors are, by their very nature, active in the energy markets every day rather than once or twice a year, so are more likely to know when to buy, the latest supply contract terms, and how to garner more responses to RFP’s. A good third-party will invest heavily in people, tools, technology, and real-time market data that would not be cost-effective for most companies. In general, the more critical your energy spend, the more it is worth investing in the process to buy it and manage price risk.
What’s the difference between a broker and an energy consultant, which should I choose?
An energy broker is typically going to conduct a one-time procurement exercise. They will shop the market for you either individually or by aggregating your volume with others and placing the contract with the cheapest supplier. They will typically take their fee or commission as a % of the unit rate negotiated, also known as a back-end fee. They will continue to earn that fee on every unit of energy you consume for every year of any contract they place, so using them to secure a three-year supply contract could make them hundreds of thousands of dollars if your volume is large. Because this fee mechanism only works in deregulated / direct access markets, Brokers are very unlikely to compare the competitive supplier rates from the RFP with the local utility rates – which can be cheaper. Brokers are not known for providing ongoing support, reporting, or evaluation of your position.
By contrast, an energy consultant provides a more holistic service. They will look at more supply contract options, compare competitive rates to your local utility rates, and continue to evaluate your positions through detailed analysis and reporting. They should also assess all RFP responses to rates in regulated markets where there are rate options that could save you money. The fee structure is also different. Rather than back-end fees, commercial energy consultants are more likely to be paid a more transparent monthly retainer. As such, they act as an extension of a companies team providing ongoing advice and support on a range of areas, not just procurement.
It is always a good idea to speak to a few advisors to find out who can offer the range of support you need and see who provides more than just fixed-price supply contracts. Canny buyers understand that commodity markets move up and down, so having tools that work in both directions brings enormous value. Vervantis, for example, uses value-at-risk processes for clients that will measure and control the price risk of procurement accurately. In simple terms, if markets go up, more volume is fixed to protect your position. If markets fall, you can unfix and participate in falling prices, transferring extrinsic value to intrinsic in the process. Because everything gets transacted through a physical supply agreement, the process meets standard accounting treatment.
Evaluating Energy Suppliers
Vervantis has a 70 point checklist to evaluate energy suppliers from its quorum of over 180 vendors in North America alone. At the same time, it is unlikely a company would want to evaluate such a large pool it is a good idea to spend some time doing due diligence on suppliers you include in an RFP. Understanding their financial information from Dun & Bradstreet certainly helps, but so too does understanding their company structure, how long they have been in business, the type of clients they have, and whether they have a footprint that matches yours. Get references from their clients, some new and some more established to get a feel of how they are likely to treat you over time. What type of flexibility will they have in their agreements to allow you to add or remove sites or use more or less energy than expected? Suppliers will generally be willing to negotiate some of these areas provided you have an attractive load or brand and a good credit rating.
How do I conduct an energy RFP?
Firstly, try to plan way ahead of your current contract expiration. The closer you buy to expiration, the less option you will have to find a great price. Rather than being able to analyze costs objectively and pick your time, you become a price taker that has to transact, which is never a good position to start negotiations. Look at the exchanges for wholesale energy markets to understand the best time to negotiate. If you don’t have any access, you can view them for free here. Next, do your research on the competitive energy suppliers that can price your requirements. The price you get is only as reasonable as the supplier who provides it. If the supplier fails, so do you, so check their creditworthiness too.
Spend some time thinking about your business. For example, how much is your energy spend as a percentage of your cost base? How quickly can you respond to utility price changes, how will changes affect your product pricing or profitability? How long before customers receive cost changes? Do you need renewable energy, and so on. Thinking through the what-ifs in advance is an excellent place to start building a procurement strategy that will help you manage purchasing risk more effectively. Finally, always compare the price you get from competitive energy suppliers with rates available from your local utility, they could be cheaper.
Make sure you allow plenty of time for your RFP. Energy suppliers will want to gather your usage data from your utility company(s) to make sure they price accurately. If your usage is erratic, that is harder for a supplier to predict, so you can expect to pay a higher price than if you had a more stable load and a flatter consumption profile. Managing usage and demand is something you should address with your facilities or operations team regularly. The process of pulling utility data can take several weeks, so again, do not leave everything to the last minute, or you will significantly reduce your options to get a competitive price.
Finalizing the Agreement
After negotiating all the supply terms and pricing with a supplier, be sure to have all your internal approval and sign-off processes aligned. It helps to brief those who will have signing authority on what is coming and make sure that any procedures or compliance steps are completed and understood in advance. Energy suppliers will typically provide a price with just a few hours validity, so you must have the signing process well nailed down internally.
Finally, when your agreement is in place, do not forget about it. Keep an eye on the energy markets and see how prices are changing in the future. Conduct data analysis to get a better understanding of influencing factors on rate and monitor the impact of changes in this and usage to your budget. It is always a good idea to keep the finance team regularly appraised with position reporting in case they need to make adjustments to the business plan.
If you need help with all or any part of your energy procurement process, we are here to help. Vervantis pride themselves on providing outsourced, on-demand solutions. If you have questions or need more guidance, just drop us a line, and one of our specialists will help. You can contact us here