ENERGY COST BUDGETING

For industrial organizations and various types of institutions, budgets and the entire budgeting process play an extremely important role. They serve as a key tool both for internal management needs and, if necessary, for external communication. Internally, budgeting allows managers and employees to accurately track financial flows, identify areas of cost optimization and monitor the effectiveness of ongoing projects. It's also a way to assess the profitability of operations and ensure that all expenses are justified and contribute to the value of the company.

Externally, budgets can serve as a way of presenting an organization's financial stability and credibility to investors, lenders, business partners or regulators. For them, an effectively developed and managed budget provides evidence that the organization has a solid financial foundation, which can make it easier to obtain external financing or build positive business relationships.

In the context of energy procurement, the budgeting process is not significantly different. Although planning energy expenses may seem complicated to newcomers, there are logical steps and guidelines to make the task easier. Following the following tips can make the process simple and even enjoyable.

We probably don't need to remind anyone about the value of controlling energy costs.  Many of us became acutely aware of this, especially at the beginning of the energy crisis caused by the war in Ukraine.

We have already written about how to scrupulously check invoices in our article How to control energy costs in a company.

In another article, however, we presented ways to optimize energy invoices and the possible savings from doing so - Optimizing a company's charges for electricity and natural gas.

In this article, meanwhile, we will take a closer look at issues related to budgeting electricity and natural gas costs.

We will present different approaches to budgeting, consider the impact of the budget on other decisions in the company. In addition, we will give you tips on how to get down to budget development and prepare a checklist for efficient budgeting work.

When budgeting energy costs, it is important to remember that we budget for commodity and supply (distribution/transmission).

Unfortunately, not everyone keeps this in mind and simply assumes some change (increase or decrease) for a single averaged rate covering both commodity and distribution. Such an approach can prove to be quite risky and can ultimately lead to quite a surprise that we have missed our forecasts by a large margin.

Why does this happen? As a rule of thumb, we budget too optimistically, or take prices that are too exorbitant in relation to the actual market situation. When budgeting, we often overlook charges that disappear in the following year, or those that are expected to appear as a new item on the invoice for electricity or gas distribution.

"Give me a price to budget for energy". - is a common question asked of purchasing department buyers by the controlling department in many companies. Most often, this type of question occurs in the last 4th quarter of the year, around October, when the budget for the following year is usually planned. The buyer makes what he believes to be an "expert assessment" and forecasts, for example, a 10% year-on-year increase in the price of energy or natural gas, and the topic is theoretically settled.

In this method, it is very difficult to defend the projected increase or decrease in the price for electricity or gas, since no assumptions are made as to what such a change would result from.

Given the fact that we are budgeting both the price of active energy and the cost of its distribution, it will be important to break down all the elements into factors and estimate or take already known values of the individual price components. Here, too, we can make the mistake of being too optimistic or too pessimistic about future energy prices. Let's remember to adopt sensible safety buffers.

For example, if we assume too narrow a safety corridor for the price of active energy or for gaseous fuel, we will be forced by such a situation to secure 100% of the price in case of a rapid price increase, because the market just went up the day after the budget was set. For this reason, it is advisable to take into account historical changes in the price of a particular component, the inflation rate or other information that comes from the energy and natural gas price market.

When it comes to budgeting for energy, as with other cost categories, you need to be aware of the rules operating in your organization: what decisions will we have to make when energy prices approach our budget level? Are any deviations from the budget acceptable? If we have any buffer, what impact will this have on the operation of our company?

In some companies, energy costs are not budgeted at all. We are talking about situations where practically the entire cost of energy is reflected in changes to the terms of that company's commercial contracts with its contractors. The budget then is only a certain cost estimate, but it does not force certain purchasing decisions when prices approach certain levels.