Choosing the counterparty from which to buy electricity or gas in future periods is one of the key elements of risk management when hedging energy prices.
Choosing a gas or electricity supplier - what to consider?
Here is a brief guide on how best to prepare for this process in order to make an efficient and best choice of gas or electricity supplier.
CHOICE OF ELECTRICITY AND GAS SUPPLIER BASED ON A STRATEGY
When choosing an electricity or gas supplier, the most important thing is the STRATEGY, because it is from this that the most important terms of the electricity or gas contract should be determined.
The lack of a proper purchasing strategy can lead to a number of problems that will have a negative impact on both you as an energy buyer and on the management as a whole. Here are some of the key consequences of not having a purchasing strategy:
- Lack of direction and consistency: Without a clearly defined strategy, purchasing decisions can be chaotic and inconsistent, leading to inefficiencies and potential financial losses.
- Constant discussions and uncertainty: Every year, month or quarter, it will be necessary to meet with Top Management to discuss what to do next with electricity or gas purchases. Without guidance and strategy, these discussions can be unproductive and frustrating.
- Lack of trust and authority: Without a strategy, your recommendations may be treated with more scepticism and you may find it difficult to maintain authority within the company.
- Need for continuous analysis: In the absence of a strategy, expensive market analyses may need to be ordered on a regular basis, generating additional costs and burden for the company.
- Increased market risk: The lack of a purchasing strategy increases the risk of unfavourable purchasing decisions for gas or electricity, which can lead to higher energy costs and a negative impact on the financial performance of the company as a whole.
- Stress and fatigue: Both you, as an energy buyer, and the Board of Directors will be exposed to additional stress and fatigue due to constant uncertainty and the need to make ad hoc decisions.
To avoid the problems associated with a lack of a purchasing strategy, it is worth developing a comprehensive purchasing strategy that includes detailed boundary conditions that your contractor should meet. Here are the key elements:
- Contract length:
- Determination of the optimal contract duration (e.g. one year, two years, three years).
- Consider flexibility on contract extensions.
- Products available:
- Identification and selection of suitable energy products (electricity, gas, renewables, etc.).
- The inclusion of hedging options, such as futures contracts or the possibility of leaving an open position on spot quotes.
- Number of possible tranches:
- Defining the maximum number of tranches in which energy purchases can be made.
- Defining the minimum and maximum size of each tranche.
- Volume risk issues:
- Definition of a policy on forecasting and volume risk management.
- Guarding against fluctuations in energy consumption through clauses in the contract.
- Contract security:
- Introducing appropriate financial safeguards, such as bank guarantees or deposits.
- Determination of the conditions for termination of the contract and sanctions for non-performance of the obligations contained in the contract.
- Payment terms:
- Setting payment terms.
- Negotiating credit terms and settlement options.
- Sustainability and social responsibility:
- Integrating sustainability and social responsibility aspects into the purchasing strategy.
- Preferring suppliers that use green practices and have a positive impact on society.
Developing a procurement strategy that includes these boundary conditions will allow for a more informed and strategic approach to organising the tender.
PREPARE AN INDICATIVE TENDER PLAN
Now that we have defined the boundary conditions that will guide our choice of vendor, we can prepare an action plan.
It is good to define a timeframe for the tender process so that bidders know when they can expect enquiries and feedback and, above all, the award. A transparent process will improve communication with all those involved in the selection process. It is worth indicating how many stages are planned.
TENDER EVALUATION CRITERIA
It is also a good idea to supplement the request for proposals with evaluation criteria.
In order to make the tendering process transparent and efficient, the request for proposal (RFP) should contain not only detailed requirements for the vendor, but also clear criteria for evaluating the proposals. These criteria will help to objectively and systematically evaluate the proposals received.
Tender evaluation criteria for the purchase of gas and electricity
To avoid the problems associated with a lack of a purchasing strategy, it is worth developing a comprehensive purchasing strategy that includes detailed boundary conditions that your contractor should meet. Here are the key elements:
- Price (50%)
- Proposed price per unit of energy ($/MWh).
- Payment terms.
- Contractual conditions (20%)
- Flexibility in contract terms.
- Ability to adapt conditions to changing needs (e.g. volume changes).
- Financial stability of the bidder (20%)
- Assessment of financial credibility (e.g. financial reports).
- Additional services (5%)
- Service level (e.g. technical support, customer service).
- Sustainability and social responsibility (5%)
- Pro-environmental practices of the bidder.
- Social responsibility initiatives
Example weightings of criteria:
Criterion
Weight (%)
Price
50%
Contractual conditions
20%
Financial sustainability
15%
Additional services
5%
Sustainability and social responsibility
5%
Example evaluation matrix:
Criterion
Maximum number of points
Bidder A
Bidder B
Bidder C
Price
50
Contractual conditions
20
Financial stability of the bidder
20
Additional services
5
Sustainability and social responsibility
5
Total
100
The introduction of clear criteria for evaluating tenders in a request for proposals enables an objective and transparent evaluation of proposals and facilitates the selection of the best supplier. This will make the tender process more structured and efficient.
HISTORICAL DATA AND ESTIMATES
In order for bidders to accurately price the energy consumption profile and offer the best terms, it is important that detailed historical data on the company's energy consumption is available to them. This data should include daily and hourly consumption over the last 12 months. Below I outline how such data can be included in a request for proposal (RFP) and how best to prepare it.
Description of the sections in the RFP: Historical energy consumption data
In order to be able to provide an accurate estimate of the energy consumption profile and to propose the best-fit offer, we are providing detailed data on our company's energy consumption structure over the last 12 months. These data include daily and hourly consumption and are shown in the attached file.
Details to be included in the historical data
Data format:
- Period: Last 12 months.
- Data frequency: Daily/hourly (24 values per day or 15-minute data, i.e. 96 data per day).
- Unit: MWh (megawatt hour) or kWh (kilowatt hour).
- The data should be provided in CSV or Excel file format, which will make it easier for bidders to analyse and process the information.
By including detailed historical data in the request for proposal, bidders will be able to more accurately evaluate our energy consumption profile and provide bids that better meet our needs. This, in turn, will help create more competitive and relevant bids.
Example of request for proposal (RFP) structure
Below is an example of the structure for a request for proposal, together with a breakdown of the various elements of this request.
- Introduction
- Purpose of the enquiry.
- A brief introduction to the project and the importance of the contract.
- Scope of the contract
- Description of the subject of the contract (type of energy, quantity, delivery period).
- Technical specifications and delivery requirements.
- Boundary conditions
- Contract length.
- Products available.
- Number of possible tranches.
- Contract security.
- Volume risk issues.
- Requirements for tenderers
- Eligibility criteria (financial credibility, references, experience).
- Required documents.
- Model cooperation agreement.
- Tender schedule
- Deadlines for key stages of the tender process.
- Tender evaluation criteria
- A detailed description of the evaluation criteria.
- Instructions to tenderers
- Manner and form of bidding.
- Contact to the person responsible for the tender.
By structuring the tender enquiry in this way, the tendering process will be transparent, well-organised and will enable the best energy supplier to be selected, meeting all the requirements contained therein. Fundamental analysis, which we have written about in this article, can also be useful in deciding whether to purchase gas or electricity:
Fundamental analysis - How to use to decide whether to buy electricity or gas.
If you would like to find out more about how a vendor bid can fit into your strategy, please do not hesitate to contact us. Our team is ready to discuss your needs and expectations in detail, provide you with all the necessary information and answer your questions about the tender process. We are open to individual consultations to better understand the specifics of your business and develop the optimal solution for it
With Enerace, you will make the best choice!
Author: Wojciech Nowotnik
