As an international energy management and sustainability consultancy, NUS Consulting Group supports large commercial and industrial businesses across the globe with their energy procurement.
We have experience coordinating and collaborating with a vast array of procurement professionals and groups.
Each business views energy procurement and energy risk management as strategic, but approaches implementing their processes differently. In the end, these organisations typically share a common goal โ driving down their annual energy expenditures as low as possible while taking minimal or reasonable pricing risk.
However, across industries and regions, we consistently see the same energy procurement mistakes repeated, often with expensive consequences. Here are the top three.
1. Delaying Energy Procurement Decisions Until the Last Minute
In our experience, there is one common and important mistake that organisations typically make when undertaking their energy procurement. The mistake is delaying decisions regarding their energy future requirements to the last minute.
Some businesses fall into this trap because energy is not viewed as a top priority, and, as a consequence, energy procurement and related decisions are continually pushed into the future as other, more pressing items arise and take precedence. Others fall into this trap because they are unhappy with the current market price. In volatile energy markets, delayed decisions expose organisations to price spikes precisely when flexibility is lowest.
2. Comparing Todayโs Market to Old Contract Prices
Many organisations delay procurement because they compare current market-based pricing offers to outdated supply contract prices โ i.e., their old supply contract.
As a general rule, procurement professionals pride themselves on reducing prices, not increasing them. However, this quality becomes an issue when markets have increased between tenders, making price comparisons to their old contract inevitably unfavorable.
The typical response in this situation is โletโs wait for the market to pull back, reprice the deal, and then close the contract.โ Making decisions by benchmarking against a price that no longer exists is an ineffective procurement strategy. Moreover, there are no guarantees that prices, particularly in a market rising due to fundamental reasons (e.g., rising AI demand), will not continue to climb for the foreseeable future, making the differential even greater.
3. Evaluating Energy Contracts on Price Alone
In practice, when organisations purchase energy, they typically focus on the projected annual cost versus their existing supply contract. While the projected annual cost is undoubtedly an important metric. It is a mistake to use it as the only metric in evaluating supplier offers.
Energy supply contracts are complex documents, typically multipage boilerplate agreements developed by each individual supplier. When comparing supplier offers, the price per commodity unit (or annual cost) is a key basis for comparison; however, several other contractual terms and conditions are also important and can considerably impact overall cost. Some of these terms and conditions include โ consumption tolerance or variance and related penalties, payment terms, security, and the treatment of non-commodity charges.
Conclusion: How to Avoid these Mistakes
Start the procurement process early
Delaying decisions until the last minute is a mistake because it eliminates all optionality and flexibility for a consumer. In effect, the consumer finds itself in a โtake itโ or โtake itโ situation. With time running out, the organisation has no choice but to take whatever price suppliers may offer, because out-of-contract or default rates are generally not a viable option. Inevitably, there will be some instances where waiting to the last minute has yielded a positive result; such outcomes are more a matter of sheer luck than a sound strategy.
Moreover, since many organisations tend to make this mistake, there is often a surge of businesses seeking to finalise energy supply contracts at the last minute (i.e., at year-end or the usual local period when contracts are renewed). To make matters worse, market prices during these periods of high congestion have historically been more expensive.
Review offers based on current market pricing conditions
No one likes to see their energy costs increase. However, using your previous contract rates as the sole basis for comparing current offers is not a sound approach to analysing the results of a market tender. The energy market pricing is constantly changing, driven by economic activity, government regulations, technology, and weather. Nothing stands still, and comparing current pricing to pricing from one or two years ago is not an effective strategy for making decisions. Pricing should be evaluated against a businessโs overall sourcing objectives and an objective assessment of the underlying fundamentals and forecast of the local energy market.
Make sure to review offers for more than just price
Both the energy markets and businesses are constantly evolving and changing. Consequently, it is critical to assess energy supply offers not only on price (or annual cost) but also on other important terms and conditions that may impact overall cost, including consumption requirements and penalties, payment terms, early termination penalties, and other provisions that could add costs in the event of a change in circumstances. Typically, these hidden or unseen potential costs can significantly increase the overall annual cost of a supply contract.
Avoiding these three common mistakes can significantly strengthen your energy procurement strategy and improve long-term cost outcomes. Early planning, informed decision-making, and proactive market engagement offer businesses the best chance to secure competitive rates and reduce exposure to volatile market conditions.
For more information on how NUS Consulting Group can help your organisation develop and implement your energy and risk management strategies, contact us.