How do consumers buy electricity and gas?
The end of 2023 is approaching. Many companies are already budgeting costs for next year. Discussions are underway about whether this is a good time to buy energy. So how should companies contract to be sure they are doing it right?
Analysing decisions of our clients, approaches to energy purchases vary, while they always coincide with their long-term energy procurement strategy. So there is no single best strategy. Each company builds the best approach for itself. Of course, the implementation of the strategy can be difficult, i.e. at the time the strategy is approved, the company already knows that it is late with purchases, that it should have bought a year or two earlier, and, for example, the next year or two will be difficult. On the other hand, the best fruits will be reaped later, because the strategy will already be in full effect.
1. Verify the current purchasing situation - where am I now? Is my contract running out? Is the market running away? Is the market falling significantly? What is my budget? What is the current ratio of energy cost to margin generated?
2. Strategy. If you don't know where you want to go, it doesn't matter which way you go.... Lewis Carrol, Alice in Wonderland. So spot, forward, PPA, self-consumption. If there is no good buying strategy every year/month or quarter you will be meeting with Top Management and discussing 'what's next for buying.', 'who to listen to in the market', 'we need more expensive analysis'. Lack of strategy will be very tiring for you as an energy buyer and for your top management as well.
3. Tendering of the contract for the next year/years (follows from the strategy the length of this contract and its parameters i.e. what I want to achieve, what products are ‘must have’, how many tranches, size of them, PPA issues, etc.).
4. Good monitoring and management of your purchasing. Energy procurement tools , tactics will be very helpful here as well as a scheme of approval of tranche purchases in a company (organizational issues of who is responsible for what). Very often companies give to consultant like Enerace the authorization to execute purchases which, after a quick 'ok' from the client and verification, relieves them of the need to formally notify the tranche (form/to whom, by what time, etc.).
But does this approach work in reality? Let's see examples of companies that operate based on these simple principles:
The purchase for 2023 was implemented based on a clicking contract and an annual product. The implementation of purchases began in 2020 and ended in 2021. Thus, the wholesale price of electricity was below 65 EUR/MWh (or 300 PLN/MWh).
Purchases were made based on the company's strategy and risk assessment, among other things, using tools to take advantage of opportunities (in 2020) and as to the customer's maximum budget assumptions and contracts with customers (prices in 2021 were rising, and remember that from the perspective of a wholesale prices that time, they were among the highest ever, yet the company decided to make purchases because it coincided with their long-term strategy to mitigate risks in the market).
Source: enerace.online, a tool for evaluating buying opportunities
Gradual purchase of natural gas in 2022 and 2023 for 2023 based on quarterly, monthly tranches and leaving an uncommitted position for the average spot price.
Keep in mind that the client's goal was not to speculate on the market 'it's bound to fall', but to respond to the current market situation and the margin generated (buying in annual tranches for 2023 would have involved the company not being able to cover gas costs based on its revenues). Knowledge of revenue contracts and just the margins generated by the company was important in the decisions. So securing prices for Y+3 and Y+2 was not an option.
Source: enerace.online, a tool for assessing market volatility and looking for threats to change the trend to an upward one
How to evaluate the market? Both historical data on the quotation of futures or spot products in various markets in Europe and around the world, but also a cool assessment of fundamental factors comes to the rescue. Cool, therefore, without unnecessary fiddling with the quantification of given events and predictions of 'what will probably happen'.
Evaluation should always be multifaceted. I.e. not only checking the market, but also our current buying situation against its strategy. Because what does it mean that 'currently there is a buying opportunity', 'currently there is a threat to our budget'. This we should evaluate based on 'how much I have already bought', 'what is my price taking into account the tranches already made and the prices at which I can contract the rest of the open position' and what we agreed on when we created the strategy document.
The word 'objectivity' is very helpful in evaluation. We leave aside what someone thinks might happen. We leave aside all sorts of slogans or myths like 'spot is always the cheapest', 'at the end of the month prices always fall and are the lowest', 'my salesman always gives me good/or bad advice', 'prices must fall after all', 'I always buy at the end of the year, now I don't have time to deal with energy purchases'.
I've had many conversations with potential customers who quickly quipped 'now I don't have time to talk about energy purchases, and if we do, we should deal with another area such as distribution or costs exemptions because we have stabilized energy prices'. Unfortunately, very often after a year or two it turned out that this person was no longer in the company due to the disastrous results of contracting just electricity or gas.
In energy purchases, it is important to be systematic and up-to-date. If energy purchasing for you is your daily bread and main occupation then ask yourself a few questions: do I have very good access to data? Do I have an energy purchasing strategy in place at the company and my Top Management accepted it? Do I use purchasing tools that show me data I can trust?
If you are not involved in energy purchasing, the question is whether you can find much more time for it - because that, for example, in one or the other year you manage to buy cheaply does not mean that this situation will be repeated every year. The question is whether it's worth it to stabilize this area and 'buy' yourself a sacred peace of mind.
Want to know what buying models will work best for your company? Tell us about your situation - I invite you to a short Telco in Teams HERE.
We recommend a free energy buying guide for energy buyers - please leave your name and business email address, we will send it immediately HERE.
How to arrange energy procurement and how to be efficient? How to save money on energy buying? How to avoid big jumps in cost year-on-year? Among other things, we want to answer these questions in this guide.
Author: Bartosz Palusiński