The Big Picture of Energy Procurement

Energy procurement requires working with energy suppliers and utilities to source an energy contract that will suit the needs of the business.

FREMONT, CA: Energy procurement is a procedure used in the business world to obtain the essential energy resources for a company. This can range from coal and oil to electricity and natural gas. Businesses can acquire the best rates for their needs by engaging with an energy broker. Energy brokers are increasingly being used by businesses to assist with their energy procurement. A third party who aids in securing the greatest energy costs for clients is known as an energy broker. Using an energy broker has several advantages, such as access to a larger selection of providers, a specialist understanding of the energy market, and economies of scale. An energy broker can assist businesses to find the best energy bargain by negotiating on the company’s behalf with various suppliers. This frees up more time to devote to managing the company while also enabling to benefit from the broker's extensive understanding of the energy market. Additionally, energy brokers have connections to a variety of suppliers, to crack the best deal. Finally, by utilising economies of scale, employing an energy broker can also help to save capital. Energy brokers can get their clients to lower costs by combining their resources.

Energy procurement contracts nowadays can be organised in a variety of ways. To choose which contract will best meet the needs for energy procurement, there are no set criteria. The price seen on the power account is influenced by several external factors, including market dynamics and property-specific demand requirements. Because it utilises both sides of the market spectrum, a blended procurement plan, such as the block and index pricing model, frequently offers the greatest benefits. Performance ultimately depends on timing, market factors, the type of contract, and the benchmark for performance assessment. The key ones are as follows:

Fixed contract: The consumer is locked into a specific price for the duration of the contract, which may be long- or short-term, under a completely fixed energy pricing plan. Over the duration, the cost per kilowatt hour remains constant regardless of market changes. Customers often select a fixed pricing plan to reduce the risk of monthly regional price fluctuations and provide budget predictability. It is especially advantageous in a market where price increases are anticipated to continue. However, if market prices decline while the contract is in effect, companies are still bound to pay the higher price and miss out on the lower market rates. Purchasing at the peak of the market when prices are rising runs the risk of missing out on a market decline and price decrease.

Indexed electricity pricing: In contrast to a fully fixed contract, a fully indexed electricity pricing plan is at the other end of the range. Indexed pricing components are passed through to the consumer at the market settlement rates, even though all components of a completely fixed price are locked at a fixed rate. Index pricing typically outperforms fixed pricing depending on timing and duration but at the expense of blowing budgets due to price volatility and exposing the customer to potentially extreme fluctuations in prices month to month.

Block and index: The block and index model, which combines components of fixed pricing with index pricing, is in the middle of the spectrum. Throughout the contract life, fixed price blocks are deftly positioned as a hedge against volatile periods. One can hedge as much or as little by structuring different block sizes for peak, off-peak, or 24/7 time frames. Hedges can also be gradually added in (much like dollar cost averaging) until one reaches a price that is entirely fixed. From the client's perspective, it is simpler to understand and implement hedges that can be placed based on percentages of predicted load, also known as load following block and index, from some suppliers.

To make strategic energy purchases, it is difficult and complex to comprehend and manage all the moving aspects of the energy procurement process. The facility operations should be coordinated with the energy procurement plan, and the energy rate consultant should know how to arrange contracts to optimise demand-supply relationships. Electricity supply contracts that are properly timed and structured can save their parties hundreds of thousands of dollars more on the supply side.