Energy Procurement — The Ultimate Guide of 2022
You may already have a hint of what energy procurement is. Through the word energy, we can associate it with electricity. This, by now, has given you the idea of where it revolves around. However, energy procurement is more than that.
Reading this article will give you an idea of what it is and how it works. You will know who is involved in energy procurement and how it will become beneficial for your business.
After reading this article, you will now have a deeper understanding of energy procurement. This will allow you to utilize it in your business which will benefit you in the long run. So let’s walk through the circuits of energy procurement and explore its core.
What is Energy Procurement?
You may have already guessed what energy procurement is all about. By associating it with electricity, you now know its focus. 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 will 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:
- Non-profit organizations
- Small businesses
- Industrial organizations
- Commercial organizations
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Importance of Energy Procurement
Having great energy procurement is essential for your business, especially if you want to save money. Energy procurement allows you to have control over whom you will contract to get the energy needed for your business operation. Additionally, you will have control over your business expenditures regarding energy rather than the local utility ordering it to you.
What Makes the Prices Increase?
The world has been enduring the effect of Russia’s invasion of Ukraine. It has disrupted the market and geopolitics of energy as Russia is the largest oil exporter to global markets.
Russia also fuels the European economy through its natural gas. With this, the prices of oil and gas skyrocketed to their highest level making countries reconsider their energy supplies.
The high price of gas and oil has caused a series of effects. Gas prices matter not just for filling up car tanks but also for transportation.
Because the cost of gas increased, the transportation cost will soar which will affect the prices of goods and services. The war has exacerbated the inflation due to the scarcity of supplies as demand rises.
Higher oil prices can greatly affect economic growth. People and companies will spend more on oil and gas which will affect the GDP of each country.
Different Kinds of Energy Contracts
1. Fixed Contract
A fixed contract is a fixed electricity pricing plan that allows you to secure a set price. This contract lasts depending on the duration that is stipulated in it. The duration may be long-term or short-term.
Even if the market fluctuates, the kilowatt-hour stays the same over the term. Although the price per kilowatt-hour can be subject to adjustments due to amendments in law. Commonly, customers use this so that they can budget immediately for the month.
Fixed contracts are beneficial in volatile markets, especially those prices that continue rising. However, if the market prices suddenly drop, you will not benefit from it. This is due to the fact that you are locked to the terms of the contract.
2. Indexed Electricity Pricing
Indexed electricity pricing is the polar opposite of fixed contracts. It is set through the market settlement price. In other words, it is directly determined by the market conditions.
The risk is high when it comes to indexed electricity pricing. But it also yields big savings if it is done perfectly.
3. Block and Index
Block and index strategy combines the elements of both fixed pricing and indexed electricity pricing. There are various ways to blend them that will benefit you. But the best approach to this depends heavily on your business needs and its risk tolerance.
With this strategy, you can decide to do a 50-50 blend to your contract. This means that the 50% is charged at a fixed rate while the other half is charged at an indexed rate. Basically, the terms will be dependent on what you want and what you think will benefit you the most.
Entities Involved in the Energy Procurement Process?
1. Energy Customer
The energy customer is the business or a person who is thinking of purchasing energy. It may hire someone who is an expert in the energy procurement process to develop cost-saving energy procurement strategies.
2. Energy Supplier
Energy suppliers determine your rate and your contract term. It can be a private, wholesale, or retail company that provides energy to customers. Furthermore, you must compare the available options before you choose to get the best plan for your business.
3. Utility Company
Utility companies are the ones who are responsible for distributing energy to their customers. Additionally, it is the one in charge of servicing outages and emergencies.
Some utility companies generate their own electricity to distribute it to their customers. While others contact third parties to purchase energy from independent power producers.
4. Energy Broker
The energy broker serves as an intermediary for customers and producers. Energy brokers negotiate things with your business to find the best match for your needs.
Benefits of Energy Procurement
1. Control over your plan
An efficient energy procurement strategy can help you to have control over the costs and contract terms. With an energy procurement strategy, you can freely choose a term that best suits your business that will benefit you greatly. You can also have control over your billing schedules.
2. Greater reliability
Having an energy procurement strategy gives you an informed forecast that is based on research and reports made by your broker or supplier. This will allow you to track your usage which creates a predictable and consistent energy bill.
3. Energy savings
Searching for great deals in energy procurement will save you money. It can make you secure rates that are low compared to others which will reduce energy costs.
How to Negotiate the Best Deal when Procuring Energy?
1. Compare the market
The market is extremely competitive. With this, suppliers are under pressure to lower their prices to gain new clients.
You should compare the prices across the full range of large and small energy suppliers. This can make you sure that you will get the best deals in the market.
2. Understand your business needs
The energy procurement broker that you will hire can greatly assess your business which will make you understand its needs. With this, you will know how your broker matches your specific needs.
Understanding your business needs allows you to negotiate the best contract that will give you the best energy prices.
3. Engage the market when it offers good value
You should check the prices in the market regularly and not just when your contract is about to expire. If there is pricing that matches your requirements, then you should secure it before it disappears.
Frequently asked questions
1. What does energy procurement mean?
Energy procurement is the process of acquiring energy to power your business operations.
2. Do I need it for my business?
Yes! Especially if you want to save money and have control over your electricity expenditures.
3. How would I know if I am getting a good deal?
You can know it by comparing the prices of suppliers. Additionally, you can work with an energy broker if you want convenience with energy procurement.
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