Energy Procurement: Definition and Processes

What is Energy Procurement?

Energy procurement is the process of acquiring fuel or electricity to power your business operations. 

Energy procurement requires working with energy suppliers and utilities to source an energy contract that will suit the needs of your business. This is one of the most important parts of running your business. If you had signed into a bad contract, this would cost your business greatly due to the energy market’s volatility. 

The objective of energy procurement is the same for you whether it is for your business or your client. It is to ensure that you get the most economically practical energy deal while considering renewable energy sources. 

How Does Energy Procurement Work?

The size of your business can impact what energy procurement works for you. Additionally, the resources that are available to you can greatly impact your energy procurement. 

An energy procurement can work by comparing and working directly with energy suppliers. This will allow you to see the various options on how you can acquire energy for your business. Although it is worth noting that this process is slow due to the time you need to research for the best deals. 

Experts will greatly help your energy procurement process. These experts, such as energy management consultants and brokers can find the best deals for you. The advice of these experts is deeply rooted in research that will keep the entire process transparent.

Many businesses employ or use energy procurement as it is beneficial for them. Here are some entities or organizations that use energy procurement services:

• Schools
• Non-profit organizations
• Small businesses
• Industrial organizations
• Commercial organizations
• Governments

The Energy Procurement Process

Now that you know what the procurement process is, it’s time to learn the seven procurement steps that will help you streamline your procurement process. For starters, you need to know is that the energy procurement process is the same as the normal procurement process.

Step 1 – Sourcing Methodology

The first step in setting up your sourcing methodology is to have a clear assignment of what you want. This assignment serves as a foundation for the sourcing process, ensuring that everyone involved understands what needs to be achieved and how to go about it.

Nonetheless, you also need to secure management commitment and stakeholders’ support in order to push through with what you want to achieve.

After you have a clear picture of your sourcing goals and support from the management, your next step is to form a sourcing team that will help you realize your sourcing goals. Once you have gathered the best people for your team, you will now conduct various analyses.  These analyses include: analyzing the current purchasing situation, analysis of the internal process, financial analysis, contract analysis, market analysis, and portfolio analysis.

Once you are done with your analyses, you must now interpret the conclusions that you have gained from them. The outcome of the analyses will determine your sourcing methodology.

Step 2 – Market Research

Before a procurement manager starts buying supplies, there must be a need for the said supply. It’s the procurement manager’s responsibility to recognize the need for supplies and to develop market research for the said supply.

Market research will help the procurement manager come up with the exact number or amount of the needed supplies. For example, an IT company has around 40 people coming in as new hires and there are only 20 computers for use. 

The procurement manager’s market research must have data and research that will help him/her in making sure he knows everything needed for buying additional computers for the growing company.

Some of the questions that a procurement manager should ask during market research should be the following:

• Does the company have a current supplier?
• Does the company have an alternate supplier in case the original supplier is gone?
• Does the company have an ample budget for procurement?
• Is there a shortage of the material that the company is trying to procure?
• If yes, will this affect our company’s budget allocation for the procurement?
• Is there an alternative if the supply needed is not available?

The market research should also cover sourcing for new available suppliers. Depending on the company or not, sourcing specialists can help the procurement manager identify new sources of supplies. It should also identify key information needed for the next steps such as pricing per supply and brand quality is important and should be included in the research.

Step 3 – Request For Information (RFI)

The third step involves asking for information not just from suppliers, but from the heads of the department or branch that needs the supplies.

Before you create a purchasing order, you will need to come up with the exact number of supplies needed. Information such as the number of available supplies and the pricing per supply are just some that you can ask when making the request.

At this stage, you must also ask yourself the following questions:

• Which department or branch in the company needs the supplies?
• How many supplies are needed?
• How long should supplies last? A month? A year?
• Does the branch already have a reliable supplier?
• Is there an opportunity to look for new suppliers?
• How much budget is allocated for the said supply?
• What quality preferences or other product requirements do I have?

Once the procurement manager has enough data, a purchase request is then sent to higher management for budget approval. This is where company management will then decide how much budget is given to the procurement manager, based on data that was given by the initial market research.

The RFI can be considered a part of the process where you ask for more information from the branch managers, sourcing specialists, and others involved.

Step 4 – Request For Quotation (RFQ)

The request for quotation is part of the procurement process where you ask suppliers for their initial pricing for the supplies needed. Usually done by letter, the procurement manager sends the request while the supplier responds by giving the initial price for the supplies.

For an idea of what to ask the supplier, here are some questions that one can ask:

• Does the supplier have a warehouse for the supplies?
• Where are the supplies located?
• For materials supplied outside of the country, how long will delivery take?
• For materials supplied locally, how long will delivery take?
• How much is the initial price per supply?
• Is there a shortage of the said supplies right now?

Once a reply from the RFQ or request for quotation is received from the supplier, the procurement manager should hold a meeting to discuss the quotes given. 

A detailed analysis for each pricing is considered while the initial market research will give the procurement manager an idea of how much each supply is priced at a market level.

The information from the market research, once again, is invaluable because it will give the procurement manager an edge when proceeding toward the next procurement process.

Step 5 – Negotiation Phase

Perhaps the most challenging yet exciting phase during the procurement process, the negotiation phase is where the procurement manager tries to get or procure the supplies either at a reasonable price or amount. Negotiations can also extend towards the procurement manager offering concessions to the supplier in the hopes of doing more business in the future.

During the negotiation phase, the negotiator should consider asking the following:

• Is there an ample amount of supplies for the order?
• Are there special discounts that the negotiator can take advantage of?
• Who is the contact person for the supplier and the company?

The negotiation phase is also the event where the skills of a professional procurement manager may shine; once successful, this means he/she has proved his/her mettle as a master negotiator!

During the negotiation phase, always make sure to be ready with the information you gathered during the market research phase.

Step 6 – Contracting Phase

The contracting phase is where the procurement manager takes care of all contracts, invoices, receipts, and documents that were signed and are needed during, before, and after the entire procurement process.

During the contracting phase, there are only a few questions involved, but to make the process smooth, the procurement manager should check on the following:

• Were the supplies delivered in good condition?
• Were there any delays with the delivery?
• How can the supplier avoid delays (if they happen) in the future?
• Was payment settled with the supplier?

Most companies employ the use of procurement software to keep all important data and documents stored digitally. For more traditional companies, the procurement manager has to keep track of all receipts and must store them for future reference.

The contracting phase is also important because if there is a need to procure more supplies from the same supplier, all contracts, documents, and receipts can be used for market research once more.

Step 7 – Supplier Relationship Management (SRM)

The final step is supplier relationship management (SRM). After completing all the previous steps, you now focus on assessing and establishing a robust relationship with your chosen supplier, but also with the suppliers who did not receive the contract. 

It is very important to also have a good relationship with them since you need them in further negotiations to make sure that you have an alternative in case you want to switch suppliers

In this phase, active collaboration with your chosen suppliers is also essential to ensure they fulfill their commitments and deliver the agreed-upon goods or services. 

Regular communication, performance evaluations, and feedback exchanges are part of this process, helping to address any concerns, identify areas for enhancement, and foster ongoing growth.

By nurturing these relationships, you can strengthen your supply chain and ensure successful long-term partnerships with your suppliers.

Energy Procurement Services

Here are some energy procurement services that are most often availed by procurement teams from all around the world: 

1. Develop Procurement Strategies

Energy procurement helps you develop procurement strategies that allow you to secure a reliable and cost-effective energy supply without jeopardizing sustainability and price volatility.

2. Evaluate Supply Proposals

Supply proposals are evaluated according to sustainability standards that your procurement team has. This allows you to analyze if the supply proposals can serve to be beneficial for your company as well. 

3. Negotiate Energy Supply Contracts

Once supply proposals are in place and are accepted by your team, the energy supply contracts can be negotiated so that your company can better avail of the services while securing a lesser cost. 

4. Oversee Supplier Billing and Assistance

This makes sure that you do not waste too much money by assisting you in supplier billing. It can also help you negotiate and plan better and reasonable prices with your suppliers. 

5. Design and Develop Energy Procurement Programs

Energy procurement can help you design and develop more energy procurement programs to help with sustainability and cost-effectiveness. It can help you assist in choosing what type of energy source you want to avail from suppliers.