We don’t know about you, but we are absolutely sick to the back teeth of all this bad news about the energy industry…
We are certainly guilty of adding our voices to the cacophony of panic
Admittedly, it is a crisis. Thousands of loyal workers have lost their jobs, customers face higher prices, and we are all worried about where things are headed.
The world carries on – businesses remain open, lights stay on, and houses are still warm.
So, we think it may be a good idea to offer a helping hand to commercial energy consumers through this crisis.
A changing energy industry
In the last month or so, there has been some serious changes in the UK energy Industry.
Well-established suppliers are going bust in droves, customers are being moved around in bunches, and many are losing their jobs.
If this all sounds like fresh news to you, we have created multiple articles explaining exactly what is going on, who is affected, and where customers are being moved to. If you would like to read this article for some background knowledge, you can do so here.
Because of so many businesses feeling the pinch (not just energy suppliers) we decided to try and impart some of our expertise to you, our customers.
Many commercial businesses have now signed on to ‘flexible contracts’ which, depending on where you get your news from, have either left businesses exposed and vulnerable to the incredible price volatility we have seen recently, or have helped shield them from it.
There is no ‘right’ answer as both are technically true, however, we believe the root cause is partially due to poor energy procurement strategies. So, it only seems prudent that we take some time to re-iterate how businesses can align their overall business strategy with their procurement strategy.
Flexible contracts simplified
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.
Our experience with strategic alignment
We often get asked by our customers the same question time and time again –
“How do we improve our energy buying strategy?”
As a supplier with a wealth of experience in energy buying, expectations are set for us to list off a sales-like list of services (that we just so happen to offer) like:
- Improve your market intelligence gathering and analysis
- Contract negotiation training and tactics
- Implement techniques to mitigate risk
- Grow your data availability and analysis
Although this list will certainly go a long way to improving energy buying strategy, it has so far left out the one thing that we have seen time and time again to be the most important factor.
Strategic Alignment explained
It may seem like a general term, and in some sense it is. To drive home the importance of this topic, we often use the same metaphor.
Picture the Oxford v Cambridge rowing race on a drizzly, overcast day. As British as it gets, really.
When the teams of rowers go head-to-head, they work in complete unison. The timing of rowing strokes is perfectly matched to the other rowers in the team to such a high level of accuracy that it is possible to become quite mesmerised by the entire event.
The crew is joined by the Coxswain, who steers, calls the race plan and strategy, and generally motivates the oarsmen.
This is what good strategic alignment would look like – a well oiled machine with all component parts completing their specific role in syncretism with one another, taking advantage of efficiency benefits and performing to the best of their abilities.
Poor strategic alignment would look quite different.
Picture the two teams but instead of the previous scenario, all of the oarsmen rowing in different directions with individual timings – fouling one another’s strokes. Some are attempting to establish an early-lead, others are saving themselves for a big sprint-finish. The Coxswain bellowing orders that are largely ignored by the crew as they continue to struggle.
Although it would definitely be a spectacle, it wouldn’t be for the right reasons…
This is the effect that poor strategic alignment can have on your business.
The three simple steps towards strategic alignment
It is generally accepted that energy markets are unpredictable – and if it wasn’t before, it certainly is now.
This means that you will never truly know what the market price will be following a price-fix. As such, you can never truly be confident that you are buying or selling at the right moment.
This doesn’t mean that there is no such thing as good energy buying – it just exists within the realms of fixing, unfixing, or not fixing energy prices with a clear strategic goal in mind. Most commonly this strategy comes in the form of minimising the impact of energy costs on profit and loss statements.
With energy procurement, there are lots of stakeholders within an organisation. When we work with central energy buyers, they will in most cases have stakeholders within the central organisation.
This hierarchic line of direct stakeholders stretches all the way through to CFO/CEO (depending on the management structure), those who handle organisational finances (which will include measuring the impact of energy costs on financial reports and profit and loss statements), and to those stakeholders who consume the energy at the bottom of the line (often in the plants or business units).
This isn’t the end of the list for stakeholders, as there are also indirect stakeholders too. These stakeholders rely on the energy procurement information from others to achieve their own specific goals and objectives. For any businesses that can be considered energy-intensive and where energy cost plays a large part in dictating prices, sales departments will have a natural interest in energy procurement.
What effect will the recent wholesale energy market changes have on product price? Only a well strategically-aligned organisation would be able to answer that.
It is imperative to attempt to remove or ease communication barriers between departments/stakeholders. This will help cope with scenarios like this and have all stakeholders pulling in the same direction.
Internal Rules and Evaluation:
One thing that we have discovered through experience of working with large clients, as an organisation grows so too does the complexity of the rules that are used to organise their activities.
As energy procurement for many businesses is an afterthought instead of a priority and because it relevant to so many different departments, it is often tricky to both have a strong successful procurement strategy and to satisfy all of the rules.
The most common rule we encounter that poses an issue is contract-duration rules and guidelines, scuppering any thoughts of signing long-term contracts. How is it possible to achieve long-term energy cost stability without signing a long-term contract?
In short, it’s not really.
The best way to deal with impasses like this is to raise the strategic misalignment, and propose a practical solution to the relevant decision-maker(s). In this scenario, an exception to the general rule against signing long-term contracts for energy procurement seems like a sensible decision.
Niccolo Gas – Flexible Energy Specialists
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: email@example.com
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We look forward to hearing from you!