“January brings the snow, which makes your heating demand and energy bills grow!”
January is a time when most businesses receive their largest energy bills, so what can we do about it in 2025?
It’s almost 30 years since the UK gas and electricity markets were deregulated, but the task of procuring energy supply contracts has become more complex than ever; with more suppliers, more products, more carbon taxes and more risks to assess.
There is also a synergy between the energy contracts you procure, what tariffs you choose and how you manage costs for your Energy Saving Opportunities Scheme (ESOS) Action Plans. We will be discussing the latter in more detail in your Energy Webinars going forward.
Step 1. Understand the basics of energy procurement
The main question to ask is: “Does your business or its energy brokers really understand the energy procurement market, to ensure best value from the energy supplies?”
When should my business buy its energy contracts?
Understanding the energy markets
Knowing what is going on in the energy markets can provide a real competitive advantage. For example, in 2022 during the Energy Crisis, buying your electricity supply contracts on the wrong day of the year could have cost four times more, for the same commodity!
Energy contracts can be sourced up to 3 years ahead of delivery, so understanding the future’s markets and backwardation opportunities in the market can also offer a significant advantage. For example, those that bought gas long during COVID lockdown in 2020 where paying c.1p/kWh for gas, for up to 4 years, whilst others paid as much as 25p/ kWh throughout that period, for the same commodity!
Despite this, it is surprising to know that most companies still select a set day or month in the year to settle their electricity and gas supply contract renewals.
Access to reliable market intelligence can help us understand how weather conditions, gas storage, renewable output and geopolitical factors can affect market volatility. These provide key indicators on when to avoid buying or settling your energy contracts. Therefore, understanding the wholesale energy market drivers is the initial step to obtaining procurement gains and best value.
Why are we paying more for energy than others?
Know your supply contract options
For almost 15 years, energy suppliers have reserved their best tariffs for the UK’s largest energy-intensive users who represent 1.5% of UK organisations. The introduction of energy buying groups with adequate volume purchasing power now allows smaller and medium consumers to access these more flexible, economical and less risky tariffs that typically provide more than 10% cost benefit for end users.
This procurement method can also reduce risk by providing a price cap to protect against market volatility and further savings are achieved if the markets fall, so it makes sense to know your options.
How can we avoid unnecessary charges on our bill?
Avoid supplier premiums, volume penalties, hidden broker fees and carbon taxes
Those in the know can find many ways to avoid paying more for their energy bills than necessary. Some suppliers will bundle all of the cost components within their invoices, making it difficult to identify if the suppliers have hidden risk premiums or if they have been transparent about broker fees. These can be avoided when opting for transparent contracts.
Some suppliers will charge hefty penalties if you don’t use the agreed contracted volumes in your energy supply contracts, so choosing the correct supply contract in line with your carbon reduction ambitions or ESOS Action Plans is also important for cost avoidance.
For large and medium-sized businesses, it is also worth investigating ways to reduce your carbon taxes and VAT by checking if government exemptions will apply to your manufacturing process or your specific types of business operation, because these can offer c.10% savings.
Is it easier to get it wrong than right?
Yes, when procuring contracts from an ever-changing, complex, and unregulated industry, it is easier to choose the wrong energy supply contracts for your businesses than the right ones.
It’s not much fun being stuck on a long-term uncompetitive contract with unfavourable terms that will eat into your business profits. So, to ensure a successful energy procurement strategy, keep the following rules in mind.
10 safety rules for energy buyers
- Use a reputable energy consultant: Choose a consultant with extensive industry knowledge, transparency, integrity, and a commitment to client care. A good consultant can provide valuable insights and help navigate the complexities of the energy markets.
- Avoid fixed-term contracts in a downward market: Signing a fixed-term contract when prices are falling can lock you into higher rates. Instead, consider flexible contracts that allow you to access the optimum wholesale market prices at any time.
- Ensure transparent procurement fees: Make sure procurement fees are transparent and be wary of hidden extra fees (e.g., share-of-savings). Transparent fees help you understand what you are really paying for your energy procurement services.
- Do not grant signing authority: Do not grant anyone the authority to sign energy contracts on your behalf. Retaining control over contract signing ensures that you have sight of the supplier’s contract terms and you are fully in the driving seat at all times.
- Avoid restrictive agreements: Avoid agreements that restrict you from liaising with other brokers. Having the flexibility to benchmark or work with multiple brokers can help you find the best deals.
- Identify onerous clauses: Identify and avoid onerous notice clauses or roll-overs in supplier or broker contract terms. These clauses can lock you into unfavourable terms and make it difficult to switch energy suppliers or energy consultants.
- Navigate credit checks: Be prepared to navigate energy suppliers’ credit checks and consider avoiding supplier premiums. Understanding the credit requirements of suppliers and your options if you fail credit.
- Expect comprehensive reports: Expect a comprehensive report of the competitive tender results, including both fixed and flexible offers. Detailed reports provide transparency and help us make informed decisions.
- Compare quotes on a like-for-like basis: Compare all quotes on a like-for-like basis, considering factors such as market index at the time of quoting and day/night usage splits can skew results. Accurate comparisons ensure you are getting a fair assessment.
- Avoid supplier risk premiums: Avoid supplier risk premiums by choosing suppliers with a stable financial standing and a good track record. Reputable suppliers are less likely to impose hidden risk premiums and volume tolerance issues.
How Valpak can help
For companies that wish to demystify the complexities of energy procurement, we are providing a series of interactive Energy Webinars commencing in 2025 that will attempt to condense 30 years of industry expertise into 30 minutes advice.
The Energy Webinars will be delivered by your strategic partners, Energy Bubble, whose management team were pioneers of energy procurement in the UK. They were instrumental in developing the commercial energy broker markets and have promoted the energy supplier’s products since the markets opened, and they are happy to share their tips with you.
The webinar will also discuss how Valpak can offer unique ESOS rebate services, for companies that are looking to align their energy procurement with their ESOS Action Plan.
Why not join one of our webinars? Our next one is on 21 January 2025 or simply call 03450 682 572 to discuss any questions you have.
