Businesses across the UK are feeling the pinch. A staggering 65% report that volatile energy prices have reduced their ability to compete, forcing 77% to increase their own prices to survive. With the problem far from over, businesses need to rethink their approach to energy procurement. This guide will show you how to develop a strategic plan, turning energy management from a crisis into a competitive advantage.
Analyse your energy consumption
Understanding your business’s energy consumption is the cornerstone of any effective energy procurement strategy. Just like with any financial decision, making informed choices about your energy purchases requires clear data. Here’s how a deep dive into your energy consumption benefits you:
- Cost savings: Identifying areas of high energy use allows you to target your procurement strategy for maximum impact. You can then negotiate with suppliers for better rates on the energy you truly need.
- Sustainability: By pinpointing areas of energy waste, you can implement measures to reduce consumption and shrink your carbon footprint. This aligns well with growing environmental concerns and potential future regulations.
- Informed budgeting: Knowing your historical energy usage patterns helps in forecasting future needs and setting realistic budget expectations when it comes to procurement.
Gathering your energy data
The first step is to gather at least 12 months of historical energy data from all your business locations. This data typically comes in the form of utility bills provided by your current energy supplier.
- Understanding Your Bills: While bill formats may vary slightly depending on your supplier, you’ll typically find the following key information:
- Metering Point Reference Number (MPRN/MPAN): A unique identifier for your business location’s energy supply. For electricity, it’s called a Meter Point Administration Number (MPAN). For gas, it’s the Meter Point Reference Number (MPRN).
- Consumption Units: Electricity is measured in kilowatt-hours (kWh). Gas is measured in kilowatt-hours (kWh) or cubic metres (m³).
- Unit Rates: This is the variable cost per unit of energy consumed (kWh or m³).
- Standing Charges: These are fixed fees charged by your supplier, regardless of how much energy you use.
Additional Data Points:
- Peak Demand: This is the highest level of energy your business used during a specific period. Managing peak demand can have a significant impact on your energy costs with some suppliers.
- Power Factor: This is a technical term referring to the efficiency with which your business converts electricity from the grid for its use. A low power factor can lead to additional charges.
Analysing your data
Once you have your data compiled, you can start to analyse usage patterns. Here are some things to look for:
- Seasonal variations: Does your energy use fluctuate significantly between seasons (e.g., higher in summer due to air conditioning)?
- Time-of-day usage: Does your business have peak usage periods (e.g., during working hours)?
- Trends in consumption: Is your energy use increasing, decreasing or remaining steady over time?
Understanding these patterns will help you develop a more targeted energy procurement strategy and identify potential cost-saving opportunities.
Related reading: 8 Unorthodox (and effective!) business sustainability practices
Define your energy procurement goals
The next step in crafting your energy procurement strategy is defining your key goals. This will guide your approach to the market and ensure you select the most suitable supplier and contract options.
According to the PwC UK Energy Survey 2024, only 37% of organisations have fully adopted measures like reviewing energy procurement strategies. By clearly defining your goals, you’ll be ahead of the curve and positioned to make informed decisions.
Balancing competing priorities
Here are some core considerations, with a focus on striking a balance between common goals:
- Target reduction: What percentage cost reduction are you aiming for compared to your current spending?
- Renewable energy mix: Do you want to incorporate a specific percentage of renewable energy sources like solar or wind power into your energy mix?
- The trade-off: While renewable energy sources often have higher upfront costs, they can offer long-term cost savings and environmental benefits. Consider conducting a cost-benefit analysis to understand the trade-offs involved.
Here’s an example: Let’s say your primary goal is a 10% cost reduction. You might initially consider a purely variable-rate contract offering the lowest unit price. However, this exposes your business to potential future price hikes.
A blended approach, incorporating a fixed-rate contract for a portion of your energy needs and a variable-rate contract for the rest, might offer a better balance between cost savings and price stability.
- Fixed vs. Flexible Contracts: Do you prioritise predictability with fixed-price contracts, or are you comfortable with some price fluctuations in exchange for potentially lower rates with a flexible contract?
- Hedging strategies: For certain contracts, there may be options to “hedge” against price spikes (think of it like an insurance policy for energy prices). Hedging essentially locks in a price for future purchases to avoid market fluctuations, offering budget stability at the cost of some potential savings.
- Risk tolerance: How comfortable are you with potential price volatility? Fixed contracts offer more predictability, while variable contracts can offer lower costs but come with higher risk.
Finding the sweet spot
There’s often no single “best” answer, and the ideal strategy may involve balancing multiple goals. The key is to prioritise based on your business’s specific needs and risk tolerance.
Consider how your energy procurement strategy can support your company’s broader mission and values. If environmental responsibility is a core value, prioritising renewables makes perfect sense. The PwC survey highlights that high energy costs have been a barrier to decarbonisation efforts for 37% of organisations. By defining clear goals around sustainability, you can overcome this hurdle.
By spending time to clearly define your procurement goals from the outset, you’ll be well-positioned to make informed decisions and find the best solution for your business’s unique needs. This will put you on the path to achieving cost savings, sustainability targets and budget stability.
Related reading: How to calculate your business’s carbon footprint
Understanding the UK energy market
Before getting into specific procurement approaches, it’s crucial to understand the energy market dynamics that will influence your decisions. This knowledge will let you make informed choices and secure the best deals for your business.
Gone are the days of a single supplier dominating the energy market. Deregulation has opened the door for competition, allowing businesses to choose their energy suppliers. This freedom requires a proactive approach to energy procurement.
Now, energy prices fluctuate based on a complex interplay of global and regional factors. Here are some key drivers:
- Global events: Geopolitical tensions like the Russo-Ukrainian war, natural disasters impacting energy production and global economic conditions can all affect energy prices.
- Fuel costs: The cost of fossil fuels like natural gas and coal directly impacts electricity prices.
- Weather patterns: Extreme weather events, such as heat waves or cold snaps, can significantly increase energy demand and drive prices up.
- Supply and demand: Basic economic principles apply — limited supply with high demand leads to price increases. Understanding your business’s energy usage patterns allows you to potentially take advantage of off-peak hours when demand (and prices) are lower.
Types of energy procurement contracts
The contract you choose with your energy supplier plays a critical role in managing costs and risks. Here are the main options:
- Fixed-Rate Contracts: These contracts lock in a price for your energy for a set period (typically one to three years). This offers budget predictability but doesn’t allow you to benefit from potential future price drops.
- Variable-Rate Contracts: These contracts fluctuate with the market price of energy. While offering potentially lower costs, they expose you to the risk of price hikes.
- Flexible Contracts: These offer a hybrid approach, combining elements of fixed and variable rates. They may allow for a portion of your energy to be purchased at a fixed rate and the remainder at a variable rate.
The PwC found that only 25% of respondents had fully adopted measures like changing energy use patterns. By understanding the market and the different contract options, you can develop a procurement strategy that optimises your energy use and minimises risks.
Additional considerations
Here are some extra things to consider that can help you further tailor your approach and achieve optimal results.
- Green tariffs: Many suppliers offer tariffs that incorporate a percentage of renewable energy sources. These can help you achieve your sustainability goals.
- Business size: The complexity of the energy market may vary depending on the size of your business. Smaller businesses might find it beneficial to meet with a business energy specialist who can manage the procurement process on their behalf.
Understanding the energy market allows you to make informed decisions and secure the most suitable contracts for your business needs. This will be crucial as you move forward to develop your procurement approach.
Related reading: Why sustainability in business is more than just energy and water
Develop your procurement approach
With a clear understanding of your energy needs, goals and the UK energy market, you’re ready to develop a strategic procurement approach. Here, we’ll explore the different methods for obtaining the most competitive energy deals for your business.
Tendering (request for proposal — RFP)
This is a formal process where you issue a detailed document outlining your energy requirements and inviting potential suppliers to submit bids.
- Benefits: Provides a transparent and competitive bidding process, allowing you to compare multiple offers.
- Considerations: Requires time and resources to develop the RFP and evaluate proposals. May not be suitable for smaller businesses with limited resources.
Direct negotiation
This involves directly contacting energy suppliers and negotiating a contract based on your specific needs.
- Benefits: This can be a quicker and more flexible approach compared to tendering. It allows for a more personalised discussion with potential suppliers to tailor a contract to your specific requirements.
- Considerations: This requires strong negotiation skills and in-depth knowledge of the energy market to secure favourable terms.
Energy brokers
These are specialised companies that act as intermediaries between businesses and energy suppliers. They can manage the entire procurement process on your behalf, including issuing RFPs, negotiating contracts and managing supplier relationships.
- Benefits: This option saves time and resources, particularly for smaller businesses with limited internal expertise. Brokers have access to a wider range of suppliers and can potentially negotiate better deals due to their buying power.
- Considerations: Brokers typically charge fees for their services, which may be a percentage of your energy bill or a flat fee. It’s important to choose a reputable broker with a strong track record.
The PwC survey highlighted that only 37% of organisations have fully adopted measures like reviewing energy procurement strategies. By implementing a structured procurement approach, you can ensure you secure the best possible deals for your business.
Choosing the right approach
The optimal procurement approach will depend on your business size, resources and risk tolerance.
- Large businesses: These may have the resources and expertise to handle a complex tendering process.
- Smaller businesses: These may benefit from the convenience and expertise offered by an energy broker.
Regardless of the method you choose, it’s crucial to:
- Carefully compare all offers: Focus not just on price but also on contract terms, supplier reputation, customer service and the availability of green energy options.
- Seek professional advice: If needed, talk to an energy consultant who can guide you through the procurement process and ensure you secure the most advantageous contract.
By following a strategic procurement approach, you’ll be well-positioned to secure a reliable energy supplier and contract that aligns perfectly with your business goals.
Related reading: Small business energy support: All the resources available to you
Evaluate and select supplier offers
Having shortlisted potential suppliers through your chosen procurement approach, it’s time to meticulously evaluate their offers. This step requires careful analysis to ensure you select the supplier and contract that best aligns with your business’s specific requirements and long-term goals.
Beyond just price
While cost is undoubtedly a major factor, it shouldn’t be the sole deciding element. Here are some key considerations that go beyond just the headline price:
- Contract terms: Scrutinise the details of the proposed contract, paying close attention to:
- Term length: Is the contract duration suitable for your needs? Is there flexibility for early termination if market conditions change significantly?
- Renewal options: What are the terms for renewing the contract at the end of its term? Are there potential automatic price increases?
- Termination fees: What are the penalties for early termination of the contract?
- Exit fees: Are there any fees associated with switching to a different supplier at the end of the contract?
- Supplier reputation: Research the potential supplier’s track record for customer service, reliability and financial stability. Look for online reviews and industry references.
- Green energy options: Does the supplier offer options for incorporating renewable energy sources into your energy mix? If this aligns with your sustainability goals, factor it into your decision.
Making the final decision
Once you’ve thoroughly evaluated all offers, you’ll be ready to make an informed and strategic decision. Don’t hesitate to negotiate with potential suppliers to refine contract terms and secure the best possible deal for your business. Always compare the offers you receive to industry benchmarks or historical prices to gauge their competitiveness.
And don’t be afraid to ask questions if anything about the proposed contract is unclear. A reputable supplier will be happy to address any concerns you may have.
Related reading: How much does an energy audit cost for businesses?
Ongoing monitoring and management
Developing and implementing a strategic energy procurement plan isn’t a one-time event. Ongoing monitoring and management are essential for maximising savings and ensuring your strategy continually aligns with your business’s evolving needs.
Energy prices fluctuate. So, stay informed about market trends, potential policy changes and renewable energy options to identify opportunities to re-negotiate contracts or switch suppliers.
You should also regularly review your energy bills to check for discrepancies and unexpected charges. This helps you stay within budget and identify any potential areas for further energy efficiency savings.
Turn energy strategy into competitive advantage
Developing a strategic approach to energy procurement isn’t just about tackling the complexities of the energy market or lowering immediate costs. It’s about positioning your business to thrive in an ever-evolving landscape where sustainability and cost efficiency go hand-in-hand.
Rising energy costs, market volatility and the growing importance of sustainability demand proactive attention from businesses of all sizes. Data-driven analysis of your energy consumption patterns, combined with clearly defined procurement goals, creates a compelling case for change.
By meticulously evaluating supplier offers and staying vigilant with ongoing monitoring, you take the decisive action needed to optimise your energy strategy.
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Let’s work together to turn your energy strategy into an asset. Get your free quote today and discover how much you can save!
