Wholesale energy market prices right now are, shall we say…
When prices are massively inflated the natural response is usually something along the lines of
“I don’t think we should fix just now if the price is rising”
But, is this the best strategy to have for energy procurement, or is it simply an irrational fear-guided decision?
Keep reading to find out.
What are flexible energy contracts?
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 are passed onto customers.
Records are made to be broken
Due to recent events, we felt compelled to talk about energy procurement in a massively inflated market, and how to safeguard your business energy costs.
This isn’t the first time the market has hit ‘record levels’ in either direction, at the end of the day – records are meant to be broken. Although in this case they have well and truly been smashed, we can look back in recent history for some type of insight.
2017 was another very bullish year for European energy markets, from historical lows in March – April 2016 we then saw a huge bull-run that technically hasn’t yet ended. Proceeding this was fice bearish years (prices dropping month after month). In such times, being involved in energy procurement was a breeze. It became rather easy to enjoy the falling prices between 2011 and 2016.
Stakeholders only tend to look at the superficial – are we paying more or less than we previously were? (One of the many reasons why energy procurement is often a thankless job)
When you manage to secure energy savings, you’re the hero.
When you fix your prices at a point that you know is strong when taking into account market movements, many stakeholders don’t have the expertise or interest to understand why it’s a good move – and will see you as the villain.
We all know that buying at 30 when the market rises from 25 to 50 is a heck of a lot better than buying at 40 when the market falls from 50 to 25 – but stakeholders often don’t…
Many energy procurement specialists have probably had to try and make this exact same argument or example over the last few months, and it has likely fallen on deaf ears.
In a best-case scenario, during difficult conversations regarding energy procurement with stakeholders, you would remind them that you operated within the framework of a strong energy procurement strategy and in line with business strategic goals. In a worst-case scenario, the conversation is more of a confrontation with stakeholders who are not able to understand that the wholesale markets move both up and down independently from you as an energy purchaser. This is best described as a complete lack of understanding of what the buyers’ job actually is, and they think that savings should be made regardless of market movements.
The thing with bullish energy markets is that they are entirely unforgiving. Being a little late to put a gas or electricity contract in place (for whatever reason) will immediately cost your business a few euros per MWh. Hesitation can be costly – those that are successful with energy procurement act swiftly and with confidence.
What drives consumer behaviour?
Human psychology is crucial to free markets (or mostly free).
With energy buyers, the standard psychology is certainly biased towards cost reduction. In fact, many businesses and organisations see energy procurement departments as being the people responsible for cutting costs.
There is nothing inherently wrong with this view, but it does have ramifications for the decision-making process of energy buyers. This can be categorised into three separate issues:
- The fear of fixing when markets have risen: If a buyer wants to grab better gas prices, this makes them naturally very hesitant to price fix in a bullish market. Every day they will come to work and see prices that are worse than the day prior. How can they then justify fixing the price now, when yesterday was a much better prospect? This is incredibly damaging in scenarios where the market continues to rise, and the issue compounds itself. Often this practice will be rationalised by thoughts of –
“I’ll wait until the price begins to drop again”
- Fixing too soon in a falling market: When markets are dropping, again the personal psychology of the buyer will act against their best interests. Conversely to the example before, every day the price is better than the previous day and the energy buyer wants to fix it as quickly as possible before the opportunity is lost. If the market continues to drop, fixing too early can be seen as incurring huge losses.
- Not fixing enough at an opportune moment: When markets have already dropped close to or reached historical lows, the buyer has convinced themselves that the prices will continue to drop even lower. This is simply put, greed.
The fear of higher prices can be paralysing, and many in charge of energy procurement may need a small nudge in the back to make difficult decisions.
Be confident in your analysis, reason your decisions, act decisively, and take the good with the bad. In-action is never the answer.
Niccolo Gas – For all your gas products
Many businesses are (astonishingly) still in the dark as to how hiring a business gas specialist could benefit their company. Further to this, many still believe that flexible contracts are inherently ‘risky’.
Well, those businesses who had partnered with a reliable energy supplier like Niccolo Gas on flexible energy contracts will have been left much less exposed to current events than others.
How’s that for risky?
By partnering with Niccolo Gas as your commercial gas customer, you instantly gain extensive industry knowledge and reliable service, access to a range of business gas products that are suited to businesses of all types, dedicated services from one of our local teams.
All of this on top of a huge reduction in your business costs.
Unlike some suppliers, we actually want to talk to you – so get in contact today!
Call us: 0131 610 8868
Email us: firstname.lastname@example.org
Submit a webform: Click Here
We look forward to hearing from you!