Energy Procurement is a tricky business.
Creating a business fundamentally entrenched with risk may not seem like a sensible move, that is something that we do not disagree on.
But we’re still here. As are so many other energy procurement specialists…
Now, we’re not saying we’ve cracked the code on how to avoid all risks from delving into the wholesale energy markets – that would be quite a claim.
We also didn’t just ‘get lucky’.
Energy procurement specialists get it right more often than they get it wrong through carefully curated strategies for energy buying. Nothing makes us prouder than seeing the incredible results our customers regularly achieve.
But time stands still for no one, and the energy procurement industry is no different – development marches on.
Price is no longer the sole metric for success – the push towards a renewable, green future has resulted in stronger demand for sustainable energy procurement.
Flexible Contracts – In a Nutshell
Flexible contracts are a somewhat new contract type that helps to pass on the benefits of the wholesale energy market to consumers, with the price they pay for their energy being dependant on movements in wholesale price.
The profile shape of the customer’s demand (consumption) trend is split into two separate categories. These are the baseload and peak.
The baseload can be thought of as the bulk of demand and is the predictable portion of the customer’s energy. Most businesses will be able to provide very accurate estimations as they have access to much more detailed levels of data. This is usually through combinations of smart meters, sub-meters, and even auditing.
The peak is essentially the spike in demand outside of predictable baseload that nobody foresaw needing. This peak demand makes up the tradeable volume which is able to be traded within flexible contracts.
The wholesale market trades this volume in set blocks, although the match-up between the block and customer profile may not entirely match. As a result of this, customers are able to buy a block of energy that may or may not exceed their total usage. There are actions to resolve any mismatches of demand and purchased volume.
Where the purchased baseload and peak volumes exceed the customers profile the gas can be sold back to the supplier. In addition to this, when purchased baseload and peak volumes fall under actual customer consumption needs, customers are able to ‘top-up’ and purchase extra volume in smaller blocks.
This is where the term ‘flexible’ energy contract really comes from – it allows a much greater degree of freedom to the customer. This is the vector by which the risk and reward of the wholesale market is passed onto customers.
The changing perceptions towards energy procurement
The perception of energy procurement has shifted in recent years – from both customer and consultant points of view.
Historically, there has been resistance and scepticism towards sustainable energy procurement. This resistance can most often be boiled down to a lack of knowledge.
These days – there is not a single customer we deal with, little or large, that doesn’t bring up sustainable energy opportunities. It is clear that we all have our tickets for the sustainability bandwagon (that runs on biofuel, obviously).
Customers and even the general public are beginning to understand that sustainable energy procurement is not just an additional cost, but something that can bring incredible value to a business.
We find that customers aren’t just interested in guarantees of origin, often looking to explore other sustainable solutions. As is often the case, power purchase agreements make a good business case – even in countries that do not currently have subsidies in place.
The inclusion of sustainable energy as part of an energy management line-up still depends on one thing – the needs of the customer. We recognise that businesses in different industries, and different scales, and with operational differences will be chasing different goals to one another. As such, the decision-making process for our customers will take into account different factors. For some, the decision is more heavily influenced by cost, while for others it is regulatory compliance.
An ever-growing number of companies integrate sustainability in their procurement strategies and long-term goals – desiring to be part of initiatives like One Planet Thinking and RE100.
The spectrum of green
Energy procurement boils down to a simple choice for most – stay grey, or go green. This is not to say that ‘going green’ is an absolute, more of a spectrum.
Rome was not built in a day, and a business cannot go green overnight.
The easiest and (usually) cheapest way to start heading towards sustainability is to acquire guarantees of origin (GOs). Guarantees of origin are tracking instruments that label and provide information on electricity, mostly coming from hydro and/or biomass sources
It is wise to approach these guarantees with a little caution. It is common for GOs to be associated with ‘greenwashing’, the practice of putting a deceptive green marketing spin on something to mislead the public into thinking a business is environmentally friendly. This is mainly due to the fact that it is possible that a business could be paying a surcharge for GOs coming from a hydro-plant that has already been in existence for 50 years – meaning the original investment has been paid off already.
Depending on the customer and their auditing needs, there may also be a chance to go for guarantees of origin for locally produced wind or solar. One downside is these GOs often come with a higher price premium, but this is balanced out by the extra green capacity being added to the grid – something the other examples cannot do.
Guarantees of origin are great for those businesses that do not have loads of options to make their energy procurement more sustainable. They are simple to work within budgets and forecasting too, as they are simply a repeating cost on a yearly basis.
The final option covered in this article is power purchase agreements (PPA). On-site or off-site power purchase agreements offer a great alternative that has the bonus of some return on investment. Having a PPA can result in more affordable energy, security of supply, as well as contribute to achieving any sustainability goals.
Consumer Caution – Renewables
Not every option available of sustainable energy procurement is a great one for all customers, that much is common sense. This can be for simple viability concerns, or predicted low-impact results. It always helps to be aware of the businesses current energy procurement situation before taking further steps along the sustainability spectrum.
Using more renewables can seriously affect the energy consumption profile, any current or future electricity contracts, or even have an impact on the non-commodity section of an energy bill.
The solution to this?
It is always sensible to discuss with a/your consultant to add enough flexibility conditions into your contract when launching any tender. This ensures that there will be no hurdles to deploying any renewable solution, either now or in the future.
Of course, not every customer’s portfolio is as complex – but over the course of the current energy transition, it is sensible to expect energy procurement contracts in the near future to be paired with battery agreements, demand side management, guarantees of origin, onsite PPAs, offsite PPAs and cross-border PPAs.
Hungry for more?
If you are curious further about how others outside the UK feel about sustainable energy procurement, then this section may be for you.
Energy procurement is a worldwide industry, it is not limited to just the UK. So, why don’t we hear from our cousins across the pond and what they have to say?
Here is a link to a five-minute read introducing some thoughts from an executive roundtable hosted by the American Council On Renewable Energy (ACORE) discussing corporate leadership in the renewable energy economy.
Forecasting the Future for Renewable Energy Procurement
Energy Procurement Professionals
Unlike some suppliers, we want to talk to you.
We are dedicated to providing up to date resources for our customers to use, which are then uploaded online, accessible for free by our website. We have further articles covering flexible contracts in more detail available for free on our blog, found here:
We know energy procurement is a pretty daunting topic to get to grips with, which is why we have committed so much to creating these online resources.
So, if you would like to find out a little more about us, or even just ask a few questions to one of our energy experts – we would love to speak to you.
You can call us throughout all normal UK office hours on 0131 610 8868, or email us at info@niccolo.co.uk.
It also possible to submit your enquiry through our webform, which can be found here alongside our other contact information.
We look forward to hearing from you!
Google Snippets
What is the difference between energy procurement and sustainable energy procurement?
Traditional energy procurement seeks to maximise any monetary savings, mitigate against risk, and aims to provide enough stability to aid in budgeting and forecasting. Sustainable energy procurement still shoots for these same targets, but with a heavy focus on sourcing renewable energy.
How has energy procurement changed over the years?
There is generally more widespread acceptance from businesses who have now seen how beneficial it can be working with an energy procurement expert. In the past, energy procurement was all about profit margins and cost-saving, but now there is more of a focus on sourcing renewable energy and meeting sustainability goals.
How do you make energy procurement more sustainable?
There is an entire spectrum of ‘green actions’ that businesses can take to make their energy procurement more sustainable. We have outlined a few within this article, such as Guarantees of Origin and Power Purchase Agreements.
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