This article by IEC MD Mike Jones first appeared in industry magazine Energy in Buildings and Industry.
Energy purchasing is becoming ever more complex. The sheer number of energy suppliers coupled with fluctuating markets makes it difficult to know when to buy. An energy management plan is the only way to be sure you’re not spending more than necessary.
It may take time and effort to put together, but it will pay dividends in the long run by reducing your organisation’s exposure to energy risk. Mike Jones, MD at Innovative Energy Consultancy, outlines the case for better forward planning.
With energy taking up an increasingly large slice of their budgets, many companies – and SMEs in particular – are hesitating before securing a fixed price supply contract.
The fluctuating market is largely the cause of this indecision.
While prices remain nowhere near their 2008 high, most businesses are struggling to match the price of like-for-like contracts that have come to an end in recent months.
Understandably reluctant to pay more for the same supply, especially in the face of a difficult trading climate, it’s tempting to put off making a decision in the hope that prices will fall.
In some instances this tactic has paid off but in many cases the month-by-month costs have risen, along with the fixed price offers now available.
It’s a vicious circle. Month-by-month purchasing enables you to ‘hedge your bets’ by not committing to higher prices in the short-term. However, in market where prices are rising it’s a dangerous strategy as it can leave you counting the cost at year-end.
Of course, the right purchasing strategy varies from business to business and from time to time. Perhaps the single most important factor in keeping cost down is to have a well thought through energy management plan.
Energy management plan
An energy management plan maps out the role of energy in your business and aids decision-making around purchasing. It helps provide clarity based on current and future needs, and takes into account changes such as increased or reduced production.
An energy management plan usually results in three immediate benefits.
• Firstly, energy consumption goes higher up the agenda – the benefit of greater awareness of the cost of energy to your business can be enormous.
• Secondly, because you start to become more aware of what’s happening in the energy market – the cost of energy, the different suppliers and the varying supplies that are available – you start to understand the best ‘fit’ for your business. Supply terms and conditions can then be negotiated from an informed position.
• And, thirdly, you begin to understand how your business consumes energy, making it possible to manage usage more effectively and reduce consumption where possible.
Why companies don’t plan
How often is energy on the agenda at your board meetings? All too often, the answer is ‘at the end of the year when the contract is due for renewal’. The issue simply gets lost in the crowd of the myriad of other priorities.
Underlying a good purchasing strategy is an ongoing understanding of what’s happening in the energy markets. For SMEs in particular, responsibility for energy purchasing usually lies with the Finance Director and their team. It’s just one of several issues they have to contend with so this ongoing focus on a single issue is often a challenge.
The other problem is caused by the fact that energy management relies upon joined-up thinking between your operational teams and the finance teams – it’s the only way to properly manage consumption and procurement. This requires a cultural shift for most businesses. It takes a concerted effort on both sides to work together to buy the right energy supply, manage the contract, monitor and, where possible, reduce usage. Difficult, unless energy is given sufficient priority at a senior level.
The key ingredients
Energy planning inevitably involves short-term pain for long-term gain. It’s necessary to involve the procurement and operational teams from the outset. As with all well-run projects, roles and responsibilities must be shared and understood.
There are 3 essential ingredients to an effective plan:
1. Understanding of the market
Buying energy on a month-by-month basis with a view to securing a longer-term contract when the conditions are right inevitably means keeping a close eye on the market. As well as analysing your energy use, you must watch wholesale prices and analyse trends to build a clearer picture of what constitutes a good supply deal.
2. Understanding your needs
You need to look at how your organisation uses energy – identifying what causes peaks and troughs in usage as well as understanding the energy intensive aspects of production. This means you can build a clearer picture of the type of supply contract you need, enabling you to negotiate the terms and conditions that suit your business.
It’s wise to appoint a member of staff to absorb the small print – small things like knowing your contract termination date make a significant difference and help you avoid penalties.
In addition, it’s prudent to begin looking for the best fixed-price contract several months before a contract is due to expire. Most suppliers do allow for fixed-price contracts to be secured up to six months before a contract is due to take effect.
3. Monitoring and reducing consumption
Underlying the energy management plan should be a continual effort to reduce consumption.
Suppliers will look at historical performance when offering a price, so it makes sense to take control of energy usage as far as possible. Your energy management plan, if aligned to your business plan and financial forecast, should help you predict peaks and troughs in production, giving you a clearer picture of your energy costs throughout the year.
Developing an effective energy plan certainly requires concerted effort. However, the economic downturn and the challenge in managing rising costs is forcing the issue.
There are many different types of purchasing contracts available. But the development of an energy management plan is the only way to know that you’re taking the right approach, and that the risks of a short-term buying strategy outweigh the benefits.