Posts Tagged ‘energy procurement’

New research has found that as many as 1 in 5 business energy invoices could contain errors costing around £500 million a year.

The most common mistakes are incorrect meter readings and the wrong unit rates being applied, while other mistakes can include duplicate charging, for instance on available capacity, incorrect VAT rates (particularly for schools) or wrong standing charges.

Retail and leisure businesses with complex and changing portfolios, often without automatic meter readers, are subject to the most overcharging.

Most business don’t conduct detailed energy invoice validation, yet common errors could be costing thousands.

The best means of ensuring you haven’t overpaid in the past is to conduct an historic audit, while ongoing validation is important to ensure that mistakes are spotted and rectified as soon as possible.

 

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There are a number of potentially misleading energy-related cold-calling techniques being used these days, often by offshore call centres, that businesses should be aware of to avoid signing contracts that aren’t in your best interests. Some of the more common include:

“I’m calling from your supplier – could you confirm your supply details?”

If the caller really is from your supplier they’ll have your electricity MPAN and gas MPR numbers, consumption and cost data; if they don’t treat with extreme caution as the caller is likely on a fishing expedition to gain your verbal agreement to an energy contract on which they’ll receive a hefty fee.

This only applies to smaller gas and electricity supplies (those on non-half-hourly meters), as contracts for larger gas and half-hourly electricity supplies cannot be agreed by phone.

“Our service is free”

Then ask the caller how they earn their money: if the answer is they get paid by the supplier then either they have an exclusive relationship with that supplier and you’re not getting a full market assessment (and probably paying a premium), or the commission they receive is added to your unit rates. Either way, you’re paying for the service.

“Working on behalf of…”

Beware of anyone who says they’re working on behalf of your supplier / the National Grid / distribution company or similar.

For instance, companies stating they work to support the National Grid by checking available capacity (kVa) on half-hourly electricity supplies are being economical with the truth at best.

Capacity assessments are a legitimate and useful cost saving exercise, but are completely independent of the National Grid – end users need agreement to reduce capacity from their local Distribution Network Operator (DNO) not the National Grid, who also don’t have arrangements with energy consultants to conduct this type of work.

Due diligence required

Ofgem’s initiative to introduce regulation to the energy consultancy/broker market has ended without resolution, so while there are many reputable consultants out there, Ofgem (and suppliers) have limited ability to crack down on the cowboys, putting the onus on businesses to conduct their own checks.

 

 

New analysis from Ofgem shows that energy supplier costs are up by 15% since January 2016, primarily due to an increase in the wholesale gas and electricity markets, driven by a rising oil price and the weakness of the pound post-Brexit.

Despite this increase the Ofgem supplier cost index shows that costs remain below those at the start of 2014, with a sharp rise during the second half of 2016 following two years of falling costs.

While energy costs, particularly electricity, are on the up with further uncertainty likely, it remains a good time to be reviewing all contracts due for renewal in 2017 (if not beyond).

The easiest way to do this is to run an indicative tender to understand your exposure to rising markets and the impact of further increases, and if it makes sense lock-in future contracts now to protect you from further market fluctuations.

 

 

The US Energy Information Administration (EIA) forecast in December that the 2017 oil price would average US$52, similar to current levels though double that of a year ago.

However, Forbes analysis recently found that past EIA forecasts varied from actual prices by 30-35%, and with other expert forecasts also not faring too well, predicting the future price of oil, gas and electricity is a pretty thankless task.

The variety and complexity of factors influencing energy prices mean it is increasingly difficult to provide confident price predictions, from the geo-politics of the Middle East, Opec and Russia to Brexit and Trump, the expansion of renewable energy and supply- and demand-side technological developments such as fracking, battery storage and energy efficiency.

While oil and gas prices may experience see relatively stable 2017, UK electricity prices are all but certain to see an increase:

  • The wholesale electricity element now accounts for less than 50% of your bill, so even if the commodity markets fall prices could still increase on the back of rising non-energy charges
  • These non-energy costs – transportation, distribution, government charges, taxes etc – will increase over the next few years, resulting in higher costs for all

What to do?

  • Understand your risk: what is the impact on your business if prices increase by 5, 10, 15% a year over the next few years?
  • Manage that risk: test the market early, don’t wait until near your renewal time when you could be hit by a price spike – contract when the market is in your favour
  • Focus on efficiency: cut costs and reduce exposure to volatile markets by using less

To no great surprise Ofgem announced that it had abandoned attempts to introduce a code of conduct for energy brokers/consultants, despite several years, numerous consultations and innumerable workshops.

The code was intended to be a set of standards that set a benchmark for high quality consultants acting as intermediaries between non-domestic energy users and suppliers, protecting businesses from unprofessional and misleading tactics. Initial plans from Ofgem indicating that suppliers would only be able to work with consultants who had signed up to the code of practice have now been scrapped.

Ofgem reported that they found inconclusive evidence of consultant malpractice, so has postponed further work on the code and instead said that consultants should take on voluntary principles to treat businesses fairly.

Things to be aware of when working with a consultant…

  • some consultants may represent a single or small group of suppliers rather than the whole market
  • you’re not obliged to accept an offer from a consultant: ensure you understand their services, fees and T&Cs before accepting
  • make sure you’re comparing like-for-like: supplier and consultant price offers may not be presented in the same way, some charges may be pass-though and therefore vary during the contract lifetime, while others are fixed

Questions for your consultant…

  • how many suppliers will be approached for prices?
  • what will you do to help switch supplier?
  • what other services are included during the life of the contract?
  • how do you charge for your services – a direct fee or an indirect commission?

Although Ofgem doesn’t licence consultants, they must comply with consumer protection legislation such as the Business Protection from Misleading Marketing Regulations (BPMMRs) – and since November 2013 Ofgem has the power to apply to the courts for an injunction to prevent breaches of the BPMMRs.

UK energy markets spiked in the immediate aftermath of the Brexit vote, mainly due to the weakness of the pound making fossil fuel imports more expensive. They’ve since fallen back a little though remain up from their Jan-April 2016 lows.

In the next few years a number of issues will impact the price paid on your next energy contracts:

  • Informal discussions between Opec and non-Opec countries may result in some kind of agreement to cut back oil production (many leading producers, including Saudi Arabia and Russia, are suffering from the current low price), which would increase the oil price from its current US$45-50 level, and could in turn would push up gas and electricity prices
  • Exchange rate: if the pound continues to strengthen against the dollar and Euro those increases may be negated, but with the exact nature of Brexit still to be confirmed there remains a significant level of currency uncertainty and risk
  • In the longer-term the market sees wholesale electricity costs falling on the back of reduced demand (due to efficiency improvements) and a greater contribution from renewables
  • However, this possible easing will likely be countered by increases in non-energy chargestransmission, distribution and government charges/taxes (including those subsidising renewables)

Despite recent market fluctuations it remains a good time to be looking at longer term contracts, taking advantage of the relative market lows while minimising the risk from price spikes.

The decision by Chancellor George Osborne to abolish the Carbon Reduction Commitment (CRC) from 2019 received a positive reaction from many of the large businesses who had to comply with the often bureaucratic scheme.

What wasn’t highlighted so clearly was that the £900 million raised by the CRC from businesses required to purchase carbon credits will result in an increase in the Climate Change Levy (CCL) from 2019 to leave the change fiscally neutral.

What this means is that many small and medium businesses will see their CCL costs rise to cover this the scrapping of the CRC. In its current form the CCL raises around £800 million a year, so it’s likely that CCL rates will double by 2019 – good news for those businesses no longer required to comply with the CRC, but not so good for everyone else.

With non-commodity charges, including the CCL, now accounting for over 50% of total electricity costs the recent falls in wholesale energy markets have largely been negated, so if/when the markets start to increase businesses will feel a double-impact.

By April 2019 some forecasts put non-commodity costs alone at over £90 p/MWH, up from around £60 p/MWH now and a current wholesale energy price of around £37 p/MWH. If wholesale prices move back towards the £50 p/MWH mark as anticipated, the overall cost of electricity will hit around £140 p/MWH before the end of the decade.

As ever, the only way to protect your organisation from rising energy and non-energy costs is to use less, so there’s never been a better time to identify wastage and efficiency opportunities.

 

The collapse in the price of oil attracted numerous headlines in the new year, falling to less than US$30 a barrel. Since then however, the market has pushed up by about 19% to nearly US$33, though from such a low base this only equates to a US$5 a barrel increase.

In comparison, oil was trading at around US$60 a barrel this time last year, and over US$100 a barrel 18 months ago.

The post-January oil increase is now being reflected in gas and electricity markets, though again they’re still trading below their recent longer-term trends.

It’s too early to tell whether the price bounce is the beginning of a period of upward price momentum, but it could signal the beginning of a period of relative volatility so needs to be monitored.

The good news is that it remains an excellent time to look at any renewals for 2016.

Energy procurement sounds like it should be a pretty straightforward process, yet there are a number of costly pitfalls that the unwary business can fall into…

1. Don’t wait until you receive your supplier renewal letter: prices fluctuate, so it’s essential to have a long-term strategy that ensures you’re buying when the wholesale energy market is in your favour, not just when your contract terminates.

2. Don’t assume you can get the best price: are you tendering your business to all suppliers, not just the big 6 or your current supplier and a couple of others? With the number of suppliers and complexity of energy products growing all the time, it’s unlikely that most businesses have the time or industry expertise to access the full market and product range, which means you could be missing out on the best product for your business.

3. Don’t forget to monitor your consumption: suppliers price on the basis of predicted demand so its important to understand your energy usage patterns – penalties can be imposed if you use significantly more or less energy than expected (take or pay clauses), so check those T&Cs as well as your consumption. For businesses implementing energy savings programmes it’s also useful to check that your supply capacity is set at the right level – if it isn’t you could be paying for something you’re not using.

4. Don’t just focus on the unit price: a headline unit price might look competitive, but what about the standing charge, and does it exclude charges such as the Feed-in-Tariff and Renewables Obligation, which other suppliers have incorporated into the unit rate? Commercial energy tariffs are complex, made more so by each supplier presenting their prices differently, so it’s crucial to make sure you’re comparing like-for-like.

5. Don’t assume your energy invoices are correct: billing errors are surprisingly common, yet the complexity of energy tariffs can make it difficult to spot, let alone rectify mistakes. Historic audits can uncover past mistakes, while ongoing invoice validation means you’ll only pay what is due.

Record low oil prices pushed electricity and gas prices to new lows during 2015, despite continued conflict in the Middle East.

Whether oil remains at its current level – currently about US$31 a barrel compared to US$55 this time last year – is the key question, with the usual range of predictions as to what happens next.

A slowing Chinese economy and the relaxation of sanctions on Iran are expected to maintain downward pressures during 2016 however, which is good news, though there’s always scope for the unexpected to reverse this. Issues to watch include OPEC reversing its current stance and cutting output, or a renewed flare-up between Ukraine and Russia leading to disruption of supply to Europe.

Commercial electricity prices are increasingly determined by non-energy costs, however, with low carbon policies and investment in transmission and distribution infrastructure now accounting for over 50% of electricity costs. This means that changes in the wholesale markets have less influence than previously, but as these non-energy costs will definitely rise over the next few years even a small increase in wholesale markets will start to see prices pushing higher quite quickly.

What to do?

  • While wholesale prices remain low it continues to be a good time to check renewal options for any contract due to terminate during 2016
  • Fixed or pass-through? When comparing prices make sure you know whether the offer is for a fixed contract (one that includes future increases in charges such as the Feed-in-Tariff) or pass-through (where future increases are passed-through to you)
  • Whenever possible go for the fixed option as it ensures you’re not hit with unexpected charges, while also ensuring that you select the best overall price, as a low-priced pass-through contract may turn out to be more expensive in the long-term