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 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.
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 seen as a top priority and, as a consequence, energy procurement and the decisions relating thereto are continuously 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 price of the market.
Procurement professionals are generally focused on reducing prices, not increasing them. So, when the market has risen since the last time a particular organisation purchased energy, and they compare current prices against their old contract rates, there is typically a reluctance to close a contract. The normal response in this situation is โletโs wait for the market to pull back and then close the contract.โ Comparison to a market that no longer exists is not a substantive or strategic method for assessing prices (even when prices have declined), and there is no guarantee that prices will not continue to climb, making the differential even greater.
In short, delaying the purchase of energy requirements until expiration or imminent expiration of the current supply contract is inadvisable (i.e., a mistake).
Inevitably, there will be some instances where this has yielded a positive result; such outcomes are more a matter of sheer luck than a sound strategy. Delaying decisions until the last minute is a mistake because it eliminates all optionality and flexibility for the consumer. In effect, the consumer finds itself in a โtake itโ situation โ it has no option to โleave it.โ 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.
Moreover, since a large number of 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 are historically more expensive.
At NUS Consulting Group, we advise clients to start energy procurement and risk management early. This approach allows us the opportunity to review pricing and underlying market fundamentals and make an informed decision that aligns with a clientโs overall strategic objectives, or wait and come back to the market at a later date (not contract expiry). While we understand why organisations do this, we advise clients that comparing current market prices against their existing contract price (which may have been negotiated one or more years ago) is not a reliable method for evaluating offers.
People, particularly procurement professionals, prefer price decreases; no one relishes signing a contract with a price increase. However, it is always important to remember that there is no guarantee prices will drop to the levels you want. They might continue to rise further and exacerbate the situation.
For more information on how NUS Consulting Group can help your organisation develop and implement your energy and risk management strategies, contact us.