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Best energy procurement model for your company

Buying electricity that will give satisfactory results is not a simple task. Especially when the market offers a lot of options one can get lost and choose not necessarily the best solution for our company. SPOT purchase, tranche purchase, purchase based on corporate/virtual PPA models, hybrid? Base and Peak purchasing? Purchase in MW, % or maybe MWh?
Choosing the right model depends on the specific needs and characteristics of the company, as well as its energy requirements. Above all, it should be the result of a well-thought-out and implemented long-term energy procurement strategy. In this article, we will look at the differences between the most commonly chosen energy purchase models, i.e. purchase in tranches expressed in percentages (%) and in megawatts (MW), and discuss in which situations each may be more advantageous.

Energy purchase model in Megawatts

Purchasing energy in the Megawatt model means that a customer purchases a fixed amount of power (in megawatts) each hour, which is delivered for a specified period of time.

 

What does this mean?

  • For example: securing a price for 1 MW of power for 24 hours means consuming 24 MWh of energy.
  • Securing a price for a 5 MW bar for Q1/2025 will mean securing a price for 5 MW in every hour of the day from January 1, 2025 to March 31, 2025 (equivalent to 5 MW * 24h * 90 days = 10,800 MWh of energy in the first quarter of 2025).
  • Any deviation from real energy consumption will be settled at spot (Day-Ahead Market) or balancing market prices. Therefore, it should be assumed that there will always be a portion of energy purchased/settled at SPOT or Balancing Market prices
  • We will always know the final price of energy only after the delivery period (e.g., in February we will know the price for January, etc.).
Energy purchase model in Megawatts

Application of megawatt MW Model

The megawatt MW purchase model can be beneficial for large energy consumers, such as manufacturing companies, or other companies that have stable and predictable energy consumption. As we know, Baseload prices are lower than Peakload prices, thus the energy supplier will not pass on the cost of the consumption profile to us.

 

It should also be noted that when considering purchases based on the corporate/virtual Power Purchase Agreement (c/v PPA) model, it is easier to settle the energy price using MW purchases (we secure the price for a specific amount of energy for a given period).

Megawatt Model - Who is it For?

An example would be a factory producing metal products, whose production line runs continuously. It is worth considering purchasing under the MW model, for the reason that the deviation of real volume against purchased tranches should be small. Consequently, the impact of future unpredictable spot prices on the final price appears to be severely limited, and there is no need to incur the higher cost of a percentage model %.

Buying tranches in Percentage Model (%)

The percentage model of buying energy in tranches involves securing the price of a certain percentage of energy demand over a given period. The customer secures a price not for a specific fixed power in a given period at each hour as in the megawatt MW model, but based on a percentage of its estimated future demand.

 

What does this mean?

  • Even if there is more or less consumption in a given period in the future as planned, the customer has purchased a % de facto of that real consumption
  • Securing a price for 25% of the volume in Q1/2025 means assigning that specific price to 25% of real consumption in January, February and March.
  • If the company planned consumption: January 300 MWh, February 200 MWh, March 100 MWh, and with this estimation secured 25% of the volume, then in the case of real consumption, for example, January 200 MWh, February 100 MWh and March 50 MWh de facto secured the price for the volumes: January: 50 MWh (25% * 200 MWh), February: 25 MWh (25% * 100 MWh), March: 12.5 MWh (25% * 50 MWh).
  • Percentage % purchase means that we can know the price of energy well in advance of delivery (e.g., buying in 2024 for 2027, we can already determine the unchanged price of energy for 2027).
  • Unfortunately, you have to pay more for this approach, because the risk of variable volume is transferred to an energy supplier (who very often secures itself in a contract by providing volume tolerance - that the hedged price will be only if the consumption is within a spread of, for example, +/- 20% of the forecast, otherwise the customer will have to pay additional costs).
Buying tranches in Percentage Model (%)

Use of the Percentage Model (%)

The percentage price hedging model can be advantageous for small and large energy customers for whom budget and price stability/invariance over the contract period is important. Energy suppliers make themselves pay more for this price certainty, as they are responsible for clearing the customer profile.

Percentage Model - For Whom is The Solution?

The percentage model can be a favorable solution for companies with variable or hard-to-predict energy demand. Also, companies for whom stability of budget and energy price is very important will be more inclined to be willing to bear a higher mark-up cost in suppliers’ offers.

A service company whose energy demand depends on the number of employees and seasonal fluctuations in projects may benefit from a percentage energy purchase model. In months when energy demand is higher (for example, due to busy projects), the company will use more energy, but pay a secured price in proportion to its demand. The same will be true in months with lower consumption, the secured price will refer to a portion of their real lower consumption.

The Best Energy Purchase Model for Businesses - summary.

In principle, choosing to offer to purchase energy in tranches whether in megawatts (MW) or percentage tranches (%) offers considerable opportunities to manage purchase risk. In both cases, spreading the risk over time can provide some benefit. However, it is important to keep in mind that the choice of the appropriate energy purchase model depends on the specific needs of the company and the characteristics of the company's energy consumption. The percentage model gives a sense of greater stability in the cost (price) of energy), there is more certainty about the implementation of the energy budget especially with future energy consumption that is difficult to estimate. Unfortunately, for this price stability you have to pay more in relation to the purchase of Megawatt bands. Again, Megawatt purchases give lower mark-ups in the offers of energy suppliers, however, it is more difficult to achieve budget certainty, among other things, by the significant influence of spot prices or balancing market prices on the final final energy price.

 

Choosing the right model can significantly affect a company's operating costs and budget, so it is worth considering your needs carefully before making a decision and making a number of analyses and calculations.

 

Want to know more? See our article on the importance of Fundamental Analysis in the Decision to Purchase Electricity or Gas

Author: Bartosz Palusiński - Energy Procurement Consultant
30-10-2024

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