Buying of electricity or natural gas in tranches - what is it and is it worth it?
What is purchase of electricity in tranches?
Energy buying in tranches (clicking contract or portfolio management) is based on the fact that the energy consumer does not contract (hedge or secure price) the entire amount of energy needed for a given period (e.g., a year) at one time. Instead, energy is purchased in smaller portions (tranches) at different times.
Each tranche can be purchased at a different price, depending on the energy market situation at the time of purchase. The final price for all energy is a weighted average of the prices of the individual tranches. Such a purchase model requires monitoring the energy market and deciding when to buy subsequent tranches (or leave some portion open to spot market), which makes it more complicated compared to a traditional contract.
Why Consider Buying Energy in Tranches?
Purchasing electricity in tranches has many potential benefits:
- Flexibility and risk diversification:
The electricity or gas market is characterized by high price volatility, depending on many factors, such as energy commodity prices (coal, gas), CO2 prices, supply/demand, climate policy, geopolitical situation or weather conditions. By buying energy in tranches, the customer spreads the risk, avoiding a single purchase at an unfavorable time. As a result, it is possible to hedge energy prices in the budget and average market prices. - Ability to benefit from low prices:
In the event of sharp drops in market prices (e.g., as a result of crises, declines in commodity prices, oversupply), the customer has the ability to secure prices for subsequent tranches at lower prices. Such flexibility is lacking in the traditional purchasing model, where the price is set once for the entire contract.
- Better alignment with budget:
By purchasing energy in tranches, the customer can control spending more precisely and adjust the energy procurement strategy to its budget. This is especially important for companies that need to plan costs well in advance.
Buying Energy in Tranches - Risk Factors.
Despite its many benefits, buying energy in tranches is not without risks. Here are the most important ones:
- Potentially higher costs:
If energy prices in the market keep rising, the average price resulting from buying in tranches could be higher than the price set in advance at one point in time (at the beginning of a rising market). Of course, you can mitigate this risk by buying everything at the beginning of the increases, but still…
- Complexity of the process:
Purchasing energy in tranches requires ongoing monitoring of the market and appropriate portfolio management. This requires advanced knowledge or working with a company that advises on energy procurement like Enerace, which generates additional costs.
- Uncertainty about the final price:
Unlike buying all energy at one point in time for the next period, securing prices in tranches does not provide upfront certainty about the total cost of energy, which can make financial planning difficult especially if there is no electricity and/or natural gas purchasing strategy implemented in the company.
Purchasing Energy in Tranches - Example.
Imagine a manufacturing company with a projected electricity demand of 10 GWh for 2025. The company's management decides to purchase energy in tranches, wanting to minimize the risk associated with price volatility.
- First tranche:
In January 2024, the company buys 20% of the energy needed (2 GWh) at a price of 450 PLN/MWh. Markets fall further and there is concern about the further direction of price movements.
- Second tranche:
In February 2024, as a result of the drop in commodity and CO2 prices, the price of energy drops to 409 PLN/MWh. The company buys another 30% of demand (3 GWh) at this lower price.
- Third tranche:
In November 2024, prices are at an interesting level, but markets are still gradually rising due to lower RES generation, higher natural gas demand and CO2 price increases. However, the company has to buy the missing 50% (5 GWh) at a price of 430 PLN/MWh because that's what its power purchase strategy says.
The final price for 10 GWh of energy is:
Average price = (20% * 450) + (30% * 409) + (50% * 430) = 427,7 PLN/MWh.
In this case, the average price was 427,7 PLN/MWh, which means that the company avoided the worst-case scenario, which would have been to purchase all energy at the highest price of 450 PLN/MWh.
Is it worth choosing to purchase energy in tranches?
The decision to choose an energy purchase model should be tailored to the specific characteristics of the customer. The following factors are worth considering:
- Organization:
Very often companies do not have qualified energy buyers who devote 100% of their time to managing the purchasing portfolio. Energy is purchased by the Technical Manager or Purchasing Manager, who has the entire cost category under him, not just utilities. Energy purchasing is a big expense and very often it is of interest to the Board of Directors, who expect quick and efficient decisions. Not every organization is prepared to implement energy purchasing in tranches. - Market knowledge:
The success of energy purchase in tranches depends on the adopted energy buying strategy, knowledge of market mechanisms, ongoing monitoring of volatile prices on power exchanges. Lack of time or competence in this area can lead to suboptimal decisions. - Expert support:
Many companies use the services of energy procurement consultants, like Enerace, to help create an energy procurement strategy, suggest energy buying moments, share their knowledge and experience in this area. Such support can significantly increase the efficiency of this approach, but you have to pay the cost of the consulting service.
Want to learn more about energy procurement? Read our article: Energy Consulting What It Is?
Purchasing Electricity in Tranches - Is the Buying Approach Worth Changing?
Clicking contract is a flexible solution that can help companies better manage the risks associated with fluctuations in electricity and gas prices. However, it requires active monitoring of the energy market, the right strategy, energy procurement tools and knowledge. As a result, buying energy in tranches can bring benefits in the form of optimal energy costs, but like any other purchasing model, it also carries the risk of higher expenses in case of unfavorable decisions.
Companies that opt for this purchase model should carefully analyze the market, use decision-support tools and possibly work with experts. Hedging electricity and gas prices using clicking contracts is not only a way to reduce costs, but more importantly a purchasing model that allows greater control over spending in a dynamically changing energy environment.
See for yourself if it's worth buying energy based on the risk management model: enerace.eu/case-study
