Archive for August, 2015

Unless you’re tracking the wholesale energy markets daily, understanding the best time to renew an energy contract is extremely difficult – and leaving the renewal process until your current arrangement expires means you could be missing an opportunity for substantial savings.

Energy prices historically are often lower during the summer months, edging higher in the Autumn and Winter, so beginning the renewal process early means you can test the market to assess your options: if they don’t look good or you think the market will fall, then wait a bit and try again.

Just as energy markets can have seasonal variations, the market is also vulnerable to spikes and shocks, anything from volatile relations between Ukraine and Russia, to Euro-zone economic scares and OPEC oil production decisions. Understanding the difference between short-term prices shocks and longer-term trends is therefore vital, something a good energy consultant can advice upon when timing your next contract.

If the market is low, why aren’t my costs?

Despite record lows in the wholesale markets, you may not experience clear savings on your next electricity contract due to the plethora of third-party (or non-energy-charges) which now constitute around 50% of the overall cost of electricity.

These charges include transmission, distribution, taxes such as the Renewable Obligation, Feed-in-Tariff and Climate Change Levy. Two new charges will also add 4-5% to electricity bills by 2020: Contracts for Difference and Capacity Market charges, which are aimed at boosting low-carbon generation.

All inclusive or pass through

Depending on your specific contract terms, third-party charges can be:

  • all-inclusive or fixed so that they’re the same throughout the contract life, meaning you know what you’ll pay. On longer contracts suppliers will include a premium to cover future increases in these costs. These non-energy charges will either be incorporated into your kWh unit rate or itemised separately
  • pass-through: billed to the customer at the rate charged to your supplier, so not included in the unit rate. A pass-through contract avoids the supplier premium of an all-inclusive contract, but means you have the risk of future increases in these charges, along with an element of budget uncertainty.

It’s vital to understand which charges your contract does and does not include, otherwise it’s very hard to compare prices like-for-like, as a seemingly low unit rate may not include third-party charges, resulting in a misleading comparison with all-inclusive rates. Working with a reputable consultant can help avoid these pitfalls.

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Many organisations, understandably, ask several energy consultants/brokers to price their energy contracts to introduce competition and ensure they receive the best price.

What not so many realise is that suppliers asked to quote for a supply by several brokers will give them all the same price: any difference is either down to the level of commission added, or the way the price is presented, for instance, charges such as the Renewables Obligation or Climate Change Levy are excluded, which means you’re not comparing like-with-like.

The end result may still be a good price, but there’s a risk that the lowest price results in the worst service, increasing costs in the longer-term.

A better way to test a prospective (or current) broker is to understand their fee structure, how they’d develop and implement your procurement strategy and what else you receive in terms of additional energy services, and then negotiate the service and fee that works for you. (If they won’t reveal their commission, do the same as you would with any supplier who wants your business but won’t tell you their price.)

While some brokers only provide a basic procurement service, the strong ones will also…

  • Develop a procurement strategy based on an understanding of your business and approach to risk eg fixed or flexible contract
  • Monitor the energy markets to identify the best time to renew, which is usually not just before your renewal date
  • Validate your invoices and resolve supplier queries so you don’t have to
  • Identify energy reduction opportunities and help you realise them
  • Help meet regulatory requirements such as the new Energy Savings Opportunity Scheme (ESOS)

By conducting a through selection process, in the same you would for any professional service, you’ll ensure the correct balance between price and service, while empowering your consultant to negotiate on your behalf with suppliers to obtain the best price.