Of course, it is completely understandable that you do not always have the time or desire to carefully analyse each energy invoice and professionally implement yourself in energy procurement. That's why in this article we'll look at how to effectively manage your energy procurement and which tool is best to choose for this role.
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Why is it important to manage energy costs?
Electricity and natural gas expenses vary depending on the business profile of a particular enterprise. For one company, energy costs will be one of the largest cost items in the entire cost basket of the company. For other companies, the energy expense will be a few percent of total costs. It may seem to us that this is relatively small, but it is still very often a significant amount. Therefore, it is important to implement energy cost management, or more precisely, energy purchase management as well as energy consumption management. By choosing the right tool to manage energy procurement, companies gain confidence that their activities in this area will be both efficient and in line with the company's long-term strategy.
What is important in the energy procurement?
1. Energy buying risk strategy
1.1 Analysis of the organization's energy needs
Analysis of the organization's energy needs is a key element of effective energy procurement management. The task of this analysis is to identify the goals of the organization, the impact of the cost of energy on the bottom line, margins, the price of products offered by the company and the competitive requirements of the market. An in-depth exploration of the company's current and future energy needs, taking into account the specifics of the business, such as the type of industry, size, location of the company, sustainability and climate goals in the short, medium and long term. And let's not forget the energy efficiency of our enterprise.
1.2 Develop an energy buying strategy
Developing a coherent energy procurement strategy is a key component of energy purchasing management and one of the first steps we need to take to achieve satisfactory results. An optimal strategy should include elements relating to typical energy purchasing, as well as issues of sustainability, energy efficiency, consumption reduction, or energy security principles. We recommend holding a strategy workshop that involves key people in the company, i.e. the CEO, the Director of Finance/Controlling, Procurement Director , the Director of Sales. Involving key people already at the strategy building stage will save a lot of time, stress or misunderstandings. During the workshop it is very important to ask many questions about the organization, e.g.:
- What is the amount of energy cost and what is its relation to other costs?
- What is the relationship of the cost of energy to the bottom line/margin?
- What are the relationships with customers confirmed by contractual terms : long or short term?
- Is it possible to pass on the variable cost of energy to the customer?
- Do you raise product prices when energy prices go up to maintain margins?
- Do you lower product prices when energy prices go down to be more competitive?
- What is the budget cycle in your company? Is it, for example, budgeting for 12 months, or is there also a long-term plan of, for example, 2 years?
The strategy should answer the question of what our purchases will look like not only in the next year, but what approach we will follow for the next few or even several years. What specifically will you do when prices rise or fall? With this approach, it is possible not only to predict your energy expenditures, but also to react to changing market conditions. This will allow you to implement energy buying at the most optimal times, providing your organization with stability, predictability and competitiveness.
The energy management tool should take into account the chosen energy risk strategy. The strategy should be easily accessible and understandable, elements of the strategy should be included in calculations, alerts, reports. It is also worth checking how such a strategy would be reflected in market realities. For example, Enerace.online, by providing access to a rich price history, current market trends and visualizing energy costs over the years, enables retrospective analysis, i.e. with full consideration of energy market dynamics.
1.3 Setting goals and planning energy procurement
When setting goals and planning purchases, it is important to realize what a purchasing strategy is and what it definitely is not. The expectation of consumers is to have a strategy that provides the lowest prices and is applicable under all market conditions. However, such an attitude does not guarantee effective decisions. So what is a strategy? It is a general program of company activities aimed at using production potential and resources to achieve the desired goals, says one of the more popular definitions. We always define goals in the context of our company's operations. From experience, we know of plenty of cases where an experienced energy buyer wanted to graft a brilliantly working power purchase strategy from his previous company to his current one. Unfortunately, the results were lamentable because the risk profiles of that company were radically different. A strategy should always be 'tailor-made' for a specific company, taking into account the answers to the many questions I wrote about in the previous section. Keep in mind that a strategy is not an ad hoc tactic, allowing for quick and frequent modifications; it is not a means to realize profits, nor is it a collection of tools for speculating in the energy market.
When planning energy procurement, it is insanely important to involve from the very beginning the right people in the organization (ours, or if it is a multinational company also the decision-makers from the 'parent company'). We wrote more about energy procurement planning in our ebook, if you haven't already read it please feel free to do so, link HERE.
1.4 Risk analysis and management
The elements of risk in the context of energy procurement are many and it is impossible to completely eliminate them. Identification of risks, proper parameterization and the right operating model implemented in the organization can minimize the impact of energy cost volatility on our organization.
We can divide the most important elements of risk into risks in the area of:
Using market analysis and data provided by Enerace.online, organizations are able to identify potential risks and opportunities in the energy market. The energy purchase management application should provide various forms of communication so as not to miss the right moment to take action. It will be important to communicate in various forms such as email (messages, announcements, recommendations, summaries, graphs), push messages in the mobile app or even sms.
The energy management tool should communicate the contract in a clear, accessible and transparent manner, as well as accessible to the right people in the organization. If it's a contract for the purchase of tranches (clicking contract), the app should perform on-the-fly calculations of the simulated price, derived from the price formula agreed upon in the contract with the electricity or natural gas supplier. The simulated price takes into account the tranches already purchased, and the rest of the volume not yet purchased, the application calculates at the current prices available on the market. Then we have full knowledge of:
i) what is my most likely final energy price for the next delivery periods?
ii) what is the year-on-year price/cost jump?
iii) how does the current simulated price compare to the price/cost that was assumed in the budget?
Even the best strategy without the right organizational culture within a company is doomed to failure. Establishing the decision-making and execution process (who actually does the power purchase order/ tranche) is key. We know of many examples where failure to include, for example, the Director of International Purchasing at the outset prevented quick and effective purchasing decisions. For instead of making a tranche purchase at a very favourable market moment or sometimes at a critical moment, there were then questions of "why is now the right time to buy?", "present me with more analysis or I won't make a decision". These are issues that should be discussed in a strategy meeting, not at a time when it is crucial to secure price/volumes in a dynamic market.
The energy procurement tool should take this decision-making process into account; if several people are required to confirm a recommended purchase - these people should be given a simple message with information on the motivation for the recommended purchase and a short time to respond. It is important that decision makers regularly have an overview of the contractual situation, and it is not a matter of implementing the Board of Directors too much into energy procurement, but the general overview/market situation and the current purchasing position/prices/costs of our company's energy. Portfolio reports, sent even weekly as a brief summary to the Board, will be helpful.
(d) Risk profile
Even diagnosing the best opportunity, even the best deal and the best-prepared organization can fail painfully if we are guided by wrong assumptions. If our customer relationships are long-term, the impact of the cost of energy on the bottom line or the entire cost mix small, but nevertheless energy expenses are a very significant expense that we budget for, leaving large volumes open to the volatility of the day-ahead ("spot") market can have lamentable consequences (of course, this doesn't have to be the case, but I present the scenario as one of the risks we need to consider in our discussions). It's as if we travelled safely from point A to B, but it turns out we didn't get where we wanted to go and getting back to our destination can be very expensive. The risk profiles of companies can be very different, and thus the ways of securing the price should be different.
In the context of the results of our actions, the purchasing application should be able to count our 'performance' i.e. how efficient we are in the energy procurement, count the savings/change in cost in different relationships e.g.:
a) In relation to last year's prices.
b) In relation to the budget.
c) In relation to current market prices .
d) In relation to average market prices for the specific period.
e) In relation to the price at the time when the entire volume was not decided to be purchased and you chose clicking contract instead.
In addition, the alert generated when approaching the budget price, or a given year-on-year price spike established in the strategy, will help to take appropriate preventive action, or to take advantage of the opportunity and make savings in the energy procurement
THE MOST EFFECTIVE ENERGY PROCUREMENT MODEL
Source: enerace.online, a tool for evaluating buying opportunities
2. Analysis of prices in European Markets and products comparisons
2.1 Historical data analysis
Integrating the process of collecting, storing and visualizing historical data on energy prices in various European markets is crucial for effective analysis of price trends. An energy procurement tool should depict and analyse prices of electricity, natural gas, CO2, coal, oil or exchange rates in an accessible way. Reference to the history of quotations makes it very easy to understand the current situation against the background of past events.
The Enerace.online tool allows you to compare different markets or commodities with each other to study price correlations or macro trends. Enerace.online makes it very easy to have a conversation and gives immediate answers during a meeting to questions such as "what is the relation of electricity prices in Poland to coal or CO2 prices", or "how does the price of gas in the Netherlands relate to the price of gas in Poland and Germany?” Or "How are energy prices in the Czech Republic with supply for the next four years?” Or "what is the difference between spot prices in 2023 and the prices you could achieve by buying quarterly and monthly products in 2023?” These are valuable clues not only for your energy buying, but also in negotiations with, for example, your business partners.
2.2 Identify trends and respond to changes in energy prices
An energy procurement tool must easily help analyse market data and present the results in the form of a table or graph. Thanks to such summaries, we will identify significant price increases or decreases, catch price bargains or diagnose moments when, according to the strategy, it is worth considering making a purchase.
An important function of such a tool will be to set an alert for a certain level of the wholesale price of electricity or natural gas itself. The system should inform users by sending an email, push or sms message when the indicated price levels appear on the market. This is an important function of the energy purchase system, as it will help us avoid unpleasant disappointments and ensure that we react at the right moment. The market will not "escape" us and the strategy will not be compromised.
Source: enerace.online, a tool for assessing market volatility and looking for threats to change the trend to an upward one
3. Contract management in the application
Purchasing tools like Enerace.online should calculate the simulated price resulting from the purchasing formula agreed with the energy supplier. The simulated price is calculated for each delivery period, i.e. for a year, quarters or months. The energy management tool application must clearly report on purchases already made in graphical and tabular form.
A very useful feature is an overview of the most important aspects of the contract (number of available tranches, available products to purchase). This is especially important when we have multiple contracts to execute, for example, in multiple European countries.
With historical analysis and purchasing formula, the system should be able to identify the best periods for energy contracting as well as highlight the not so best.
4. Market information management
Keeping track of current reports and market news, allows you to stay abreast of market dynamics, as well as capture any changes that may affect prices and the need for purchasing actions. Awareness of current events and trends is crucial to maintaining an organization's operational and financial stability. Subsequently, a deeper interpretation and analysis of this market information and an understanding of how it may affect purchasing strategy becomes essential.
Using Enerace.online's functionality, users can not only track, but also interpret market information, understanding how it affects their energy costs.
5. Energy invoice insight and optimization
5.1 In-depth understanding of energy invoices
A key component of cost management is the ability to analyze and understand energy invoices. The Enerace.online platform can facilitate this process by providing tools and analytics that break down invoices into individual elements, allowing users to fully understand how they are calculated and what elements affect the final costs.
5.2 Identify and analyse cost components
Once invoices are properly decoded, the next step is to deeply identify and analyze individual cost components, such as unit prices, network charges, taxes or other fees. We can then draw conclusions about how each of these components affects the cost and final price, and identify potential areas of savings or price risk. It's also important to know whether an energy invoice simply qualifies for payment, or whether discrepancies need to be resolved first.
5.3 Cost optimization
Understanding and identifying various cost elements is the first step, but the real value comes from actively managing and optimizing these elements. The system should indicate overruns in, for example, reactive energy, ordered power, or inform you that the prices adopted in the tariff deviate from those listed on the invoice.
Choosing an energy procurement tool - what to look for?
Choosing the right tool to monitor energy costs is a key step in optimizing your company's energy expenses. Here are some key features to consider when choosing software in this area:
1. Intuitiveness and ease of use
Remember that when choosing energy cost management tools, you are first and foremost aiming to make your life easier. The best of them are designed in such a way that even people without energy expertise can use them without difficulty. That's why you should pay attention to a tool with an intuitive interface that can be easily operated not only by specialists, but also by others who have access to it.
2. Versatility of analysis
Definitely bet on a versatile tool that offers various analyses - from general overviews of energy consumption to detailed reports on concluded contracts, as well as trend analyses that can be extremely helpful.
The ability to compare consumption and costs over different periods can provide valuable information on potential places to make savings.
The diversity of business operations today means that one-size-fits-all solutions rarely meet the needs of all companies. The tools that stand out from the competition are those that allow users to customize their functionality. Larger companies often require a more advanced set of features, while for smaller companies a simpler interface with basic options is sufficient.
4. Invoice management and archiving
Ideally, the tool allows you to analyse invoices against a ‘shadow invoice”, making it easier to verify that invoice costs are not affected by any errors. Having such solutions in a dedicated tool is much more convenient and efficient than, for example, managing invoices from the level of a regular excel.
5. Notifications and alerts
One of the key elements of effective energy cost management in a company is the ability to react quickly to changing circumstances. In this context, a system of notifications and alerts is invaluable.
The energy management tool should allow the user to set up automatic notifications for situations that require immediate attention.
Advanced notification systems can also inform about changes in energy tariffs, promotions or new supplier offerings, which can be a very valuable feature for companies seeking to optimize costs.
Meet Enerace.online - an effective tool for monitoring energy costs
In the digital age of technology, the key to effective cost management is to use tools that offer advanced analysis and monitoring features. One such tool that stands out from the competition is Enerace.online. It has such features as:
- Automatic data collection and analysis: Enerace.online eliminates the need for manual information entry by automatically collecting and analysing energy contract and market data. This speeds up processes and minimizes the risk of errors.
- Access to historical data: With this feature, users are able to track their purchases against the energy market, enabling them to better understand trends and identify areas for improvement in purchasing activities.
- Report on the current state of the energy purchasing situation: Based on the data collected, Enerace.online generates portfolio reports with recommendations for action.
- Information dashboard: The tool offers a clear dashboard with information on energy prices and costs in relation to previous or future delivery periods, as well as the degree of contracting, i.e. how much has already been purchased for which delivery periods.
- Purchasing performance information: Enerace.online analyses your purchasing efficiency and performance, helping you understand how your purchases compare to the market, or your budget.
- Purchasing recommendations: In addition to analysing your purchasing effectiveness, the platform offers specific purchasing recommendations
- Detailed information about the components of your price: With Enerace.online, you gain insight into exactly what makes up your energy price, enabling better planning and negotiation.
- Price/Trend Alerts: With the notification system, you will always be up-to-date on important price or trend changes.
- Mobile app: For those who are constantly on the go, Enerace.online offers Android and iOS apps. This makes monitoring and managing your energy costs possible from anywhere in the world.
Enerace.online combines all the key functions that every company needs to effectively manage its energy prices while offering modern and intuitive solutions tailored to today's times. Want to learn more? Contact us and we'll show you how much you'll gain by using Enerace.online!
Choosing an energy purchasing tool - summary
In the face of constantly evolving markets and rising energy prices, proactive energy cost management is becoming not so much a choice as a necessity for companies. It is crucial not only to respond to current challenges, but more importantly to identify and minimize future risks and optimize energy procurement.
In this context, being proactive goes beyond current operations - it's about investing in an energy purchasing strategy and tools that will help secure your company's finances and provide you with a competitive advantage.
Enerace.online is an example of a tool that can support your energy purchasing management activities, enabling you to precisely monitor, analyse and optimize the costs associated with it.