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11/13/2017

Energy procurement: Do your homework and save

Major discounts on electricity or gas prices can no longer be negotiated – but comprehensive service packages supplementing energy supplies can. These help inexperienced buyers to optimise their energy purchases.

Anyone can buy energy. This, Matthias Berg is sure of. Because procuring electricity or gas does not differ much from purchasing other service provisions, says the Head of the Innovative Procurement Competence Centre at the German Federal Association for Materials Management, Purchasing and Logistics (Bundesverband Materialwirtschaft, Einkauf und Logistik - BME). "Prices on the energy market are so transparent nowadays, that energy suppliers only differ from their competitors by the service they offer in addition to the electricity or gas supply," Berg explains and adds: "As suppliers can no longer attract customers with prices that are significantly lower than their competitors', they are grateful when they can provide various services in the energy supply field to their business clients."

René Schumann agrees. For the partner and shareholder of the purchasing service provider Kerkhoff Negotiate & Contract GmbH it is quite clear: The greatest savings potential in energy purchasing can be achieved through an optimally designed contract with the supplier. This is worth it. Schumann is also convinced about this: "Most contracts with electricity or gas suppliers favour one side, the supplier, if they are not actively optimised. Meanwhile, companies are giving away saving potentials of five to nine percent."

German companies can't afford this. After all, globally, only in Italy do industry clients pay more for electricity than in Germany, according to figures from the statistics portal Statista. Items such as taxes, levies and the renewable energy surcharge account for 54% of the electricity price, and thus represent the greatest cost block of the electricity price. These are expenses, that offer no productive added value to companies. It's not surprising that more than every fifth SME names high energy prices as one of the greatest threats to the development of their companies, in a recent survey by the consulting firm KPMG.

Nevertheless, every third company still does not optimise its energy procurement but rather relies on expensive fixed price contracts, the German Chamber of Commerce and Industry reports. Matthias Berg from BME does not understand this: "Especially since buyers can make use of their negotiation expertise with energy suppliers precisely where they differ from their competitors – in the agreement of service provisions, which the supplier needs to provide beyond the scope of the energy supply." These services in particular, ensure savings in energy procurement. "For example, buyers are better off even with a tranche model than with a fixed price contract, should they be so busy with work that they forget to order a tranche in a billing period", says BME expert Berg. After all, they could agree that a tranche is set automatically, even when they don't place the order themselves. Often the price is still cheaper than in a fixed-priced contract that was concluded at the wrong time. In a tranche model, buyers also don't need to spend hours every day watching the price developments on the electricity and gas markets. "They can commit their supplier or service provider to let them know when the time is good to order the next tranche," recommends Tim Romswinkel, Energy Consultant at Kerkhoff Negotiate & Contract. Alternatively, they can agree that the supplier provides them with reliable market reports and forecasts, so they can determine the best time to buy.

In order to purchase on electricity and gas markets at the right time and at good prices, one needs to have knowledge about the market. "If, in the initial phase, you negotiate a contract with an energy consulting company or supplier with a corresponding service level, the cooperation will teach you what you need to later manage your own energy purchasing," Berg recommends. "In doing so, I can even oblige my contractual partner to supply the data and technical knowledge that I need to optimise my demand profile," adds Kerkhoff partner Schumann. For example, on request, the current energy supplier should be able to provide information about the load profile of a company. "Receiving advice from a long-term supplier, also has the advantage, that the supplier knows exactly, how the company's production runs, when there where peak consumptions and when in the past it ran the risk of taking more or less energy than agreed which resulted in paying surcharges", says BME expert Berg.

Purchasers need this information to put their demand out for tender. Because the more information they can provide to potential energy suppliers in a tender, the more precisely the supplier can assess how well the new customer's supply profile fits into its balancing group. On this virtual energy account, suppliers balance their customers' needs with the amount of gas or electricity they generate or purchase. The closer the balance is to zero, the cheaper suppliers can offer their energy. This means, the more accurately buyers can document that their company ideally fits in the balancing group of the supplier, the more savings potentials they can achieve.

Contract models for energy purchasing

Fixed-price model
In this model, you pay the price applicable at the time of the conclusion of the contract for energy that you require during the contract term.
Advantage: You have absolute planning security and you virtually don't have to do any work.
Disadvantage: Should prices drop, you have purchased at a too high price.

Indexed procurement
Here, the price is based on the ongoing prices for electricity or gas during the contract term. The result is an average price.
Advantage:Your price risk is lower than in the fixed-price model with the same low amount of work involved.
Disadvantage:  You don't save more than the favourable price development offers.

Tranche model

In this variant, you order the required energy in a specified number of tranches. You determine the point in time. For each tranche you pay the price applicable at the time of ordering. You can order various sizes of tranches.
Advantage: You price risk is significantly lower than for other contract variants.
Disadvantage:  You are dependent on reliable price forecasts and need to continuously monitor the energy markets.

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