Guest Blog: Wayne Mitchell on energy procurement
Budget control versus procurement protocol
In today’s energy market, the advantages of hedging your supply requirements for the long-term cannot be over-stated. Gone are the days when you could risk signing a contract every few years and agreeing a fixed price each time. Unless you happen to have access to a bottomless purse with no need to forecast future budget requirements (a scenario that certainly doesn’t apply to any of the businesses I work with).
Energy is such a major overhead. Pay too much, and it impacts your profitability and even your competitiveness. And UK energy costs are complex – the commodity element is only part of a much wider range of charges for transportation, system balancing and, of course, a large number of environmental levies.
Taking a long-term view when it comes to buying energy therefore makes the most sense. That way you are better placed to plan for future costs and hedge against price rises.
But what if you work for an organisation that restricts this? One that operates a strict procurement policy which ensures contracts are reviewed and put out to tender every few years to ensure the best price is achieved?
While this model makes perfect sense for many of the purchases businesses need to make, clearly it’s better suited to fixed-price transactions.
But as many businesses now take the view that fixed-price energy contracts carry more risk, how can you take advantage of a flexible hedging strategy to buy energy more effectively (and invariably, cheaply)?
A solution to the problem
Cue Contract Lite. This market-leading product has been designed in response to the challenges faced by a number of the energy-buying teams in the companies we work with. Like many of our products, it has been created to meet a specific customer need which, in a nutshell, is the freedom to take a longer-term view without being tied into a longer-term contract.
Contact Lite allows you to extend a current supply contract to secure a longer-term hedging horizon, but without the usual contract termination restrictions should you decide to move supplier.
Once your standard contract term is fulfilled, a rolling six-month contract then ‘bridges’ to your extended term. If you decide you want to exit, you can ask npower to sell back any volume already purchased to market at current prices. Or you can choose to transfer that volume for the period beyond your exit date to a third party at cost price. (Additional fees apply.)
Benefits to keep everyone happy
The key benefits of Contract Lite include:
• The ability to push out your contract end date by up to 15 years from the point of contract signature, with lighter termination clauses for the period beyond your standard term.
• Reduced exposure to the risks of a rising commodity market in the future.
• An ideal framework to build longer-term strategic relations to maximise, for example, the additional benefits of available energy solutions.
