Energy Procurement Solutions

Contents

• What is Business Energy Procurement?
• Why is business energy so expensive?
• 5 Easy Steps to Energy Procurement
• Understand Your Requirements
• Energy Options
• Non-Energy Options
• Energy Types
• Service and Extras

What is Business Energy Procurement?

Business Energy Procurement is the process of purchasing gas and power on behalf of a commercial user. When done well, it will ensure the contracts secured meet the needs of the business and are at the best value rates.

Businesses with high energy usage directly or indirectly, employ the services of a specialist energy procurement professionals to help them secure gas and power contracts.

Agreeing the wrong contract or buying at the wrong time can be expensive. Conversely, buying well and at the right time will ensure cost savings. For high users, these differences have a significant impact on the bottom line.

But it’s not just high users that engage with energy procurement professionals. SME’s often outsource this responsibility as procuring energy can be complex and time consuming.

There are a myriad of energy suppliers offering varying prices and contract types. Comparing quotes is not simple. Attractive low prices are not always the best fit as they often come with hidden extras buried in the terms and conditions.

A good broker will make sure the quotes obtained are easily comparable, or if they are not, they will explain the difference between quotes. This means consumers can make informed choices. Resulting in no unwanted surprises being received during the contracted period.

With so many options available to business consumers, it’s vital the appointed broker understands the needs, wants, and expectations of each client. On many occasions the client will not be aware of what they need to consider. Both parties working together, will ensure the right procurement strategy is chosen. Purchasing under those requirements will ensure the right fit contract is secured at the best possible rates.

If your business needs advice on building a business energy procurement strategy, contact a member of the Ginger Procurement team, they will gladly give advice on how to get started.

Why is business energy so expensive?

Around 50% of the overall price of business energy procurement is made up of the commodity cost e.g: the cost of the gas or electricity on the open market. The commodity cost is extremely volatile and can be affected by:

• Supply and demand
• Weather
• Oil prices
• Global politics

Supply and demand post-COVID

As the world tries to return to normality after the Covid pandemic, there are huge supply and demand issues. On top of the pandemic, the weather in 2021 was not as predicted as expected. Renewable energy didn’t give the UK enough electricity, so our gas reserves were used. This means we now require more gas than anticipated. This is the same for many countries, adding pressure to demand.

Those countries which heavily invested in nuclear plants, have avoided this crisis as they do not have a high demand for gas.

There are many ways for a business to ensure they avoid purchasing when the commodity is being traded at the peaks of the market. By working with an Energy Procurement Specialist, you can formulate a purchasing strategy, which will suit the requirements of your business and mitigate the risks of market volatility.

5 Easy Steps to Energy Procurement

Step 1: Understand your requirements

It is important to establish what is most valuable to your business. For example you may place certainty over opportunities to achieve a lower overall spend. There are a large variety of supply products available so identifying which one is right for your business is key.

Here are some examples of factors that will help you determine the right product for your business:

Budgeting

• Do you have requirements to set and keep to budgets?

Billing

• Do you need a simple or transparent invoice?
• Who will be seeing the invoices?

Service

• Would you benefit from an account managed service or online self serve access?

Risk Profile

• Is your priority to ensure absolute certainty or would you be prepared to take some risk to achieve the lowest spend?

Step 2: Energy Options

The gas and electricity element of your energy price makes up around 50% of the total cost. The energy market is extremely volatile which means choosing the right energy product option can have a large impact on overall contract costs. There are two broad options, fixed and flexible, and there are pros and cons to each.

Fixed

One decision point and opportunity to fix the energy price for the contract duration.

Ideal for: Customers who highly value certainty and typically their energy demand makes up a small part of their overall annual costs.

Fixed means that the price cannot be amended once the contract is agreed. This will attract the highest price as the risk is all taken by the energy supplier. However, full contractual T&Cs need to be carefully reviewed to avoid surprise costs later down the line.

Benefits

• Price certainty – you know what your prices are for however long you agree
• Simple to manage – once agreed there is a limited amount of administration required
• Peace of mind – a fixed price can give you confidence in budget projections

Flexible

Multiple opportunities to buy and sell energy throughout the contract duration.

Ideal for: Larger consumers who want to avoid the risk of purchasing all their energy on one day and understand the value of spreading their commodity purchasing to achieve a more favourable price.

Flexible purchasing means you can lock in energy prices at intervals of your choice before delivery providing scope for your costs to fall if the market falls over the contract term.

Benefits

• Flexibility – take advantage of favourable market movements
• Spread risk – long term averaging of prices means you could be less susceptible to sudden price changes in the wholesale market
• Greater control & transparency – the ability to actively control your energy price and pay exactly what it cost

Step 3: Non-Energy Options

An energy price is made of more than just gas or electricity. The non-energy charges cover the cost of transporting, balancing, and generating energy. They make up around 50%* of the total price so managing them effectively can either help reduce complexity or provide an opportunity to bring down costs.

Fixed

Ideal for: Customers who value certainty and their energy demand makes up a small part of their overall annual costs.

Costs are forecast by the supplier and remain the same for the duration of the contract. As many of these charges are unknown in advance, suppliers take on the risk of these charges out-turning more or less than the forecast and will add premiums to cover that risk. However, full contractual T&Cs need to be understood to avoid surprise costs later down the line.

Benefits

• Price certainty – you know what your prices are for however long you agree
• Simple to manage – once agreed there is a limited amount of administration required
• Peace of mind – a fixed price can give you confidence in budget projections

Pass Through

Ideal for: Larger consumers who value transparency and are able to benefit by managing consumption patterns.

Costs are passed through at the exact rate at which the supplier is billed by third parties. As many of these costs are unknown in advance, prices change throughout the contract and some charges are subject to reconciliation. You are responsible for the variability of the costs which may be higher or lower than originally forecast.

Benefits

• Transparency – pay exactly what suppliers are charged by third parties
• Flexibility – pick which costs you want to fix or pass through
• Opportunity – ability to reduce costs if you are able to manage consumption patterns

Step 4: Energy Types

Whilst non-renewable supply contracts are available, green contracts are becoming a must have as businesses look to support the transition to a low carbon future. Renewable Energy Guarantee of Origin (REGO) backed products are common across suppliers but understanding the differences between them and which one is right for your business can be difficult.

Products can sometimes be described in terms of ‘greenness’. With ‘light green’ products being seen to provide the least overall environmental benefit and ‘dark green’ being the most beneficial. However, this detail is rarely apparent in supplier marketing material.

Traded ‘green’ certificates – These products are often backed by REGOs that have been traded by the supplier independent of the renewable energy itself. The certificates are usually produced by existing generation assets.

Traded ‘green’ energy – These products are backed by REGOs that have been purchased from a generator along with the renewable electricity. The certificates are usually produced by existing generation assets.

Asset backed ‘green’ energy – These products are available from suppliers who own generation assets and the renewable energy and certificates produced are transferred directly to the supplier.

Additional ‘green’ energy – These products are using customer investment, via renewable premiums, to actively increase the amount of renewable capacity in the UK grid. These products are less common and seen by some as the ‘gold standard’ of renewable products.

What is a REGO?

A REGO is a certificate that is produced when 1 MWh of electricity is generated from a renewable source. These certificates can be used by suppliers to support the renewable mix of electricity that they supply to customers.

They can also be passed to customers for them to use as part of their SECR reporting. All REGOs have an emission factor of 0g/Co . 2 Certificates can only be used once to claim any environmental benefit.

All REGO certificates are of equal value in terms of emissions reporting but many consumers are becoming increasingly concerned about the types of generation their REGOs are coming from.

For example wind and solar are seen as having a better overall impact on the environment than biomass and hydro. Trees need to be cut down and processed to create biomass. Hydro plants use vast amounts of concrete and disrupt the flow of rivers with negative impact on important ecosystems.

Green Gas

Green gas is becoming more common, but the market is much more immature than the renewable electricity market. Renewable Gas Guarantee of Origin (RGGO) work in the same way as REGOs for gas.

The availability of green gas is limited and this makes the certificates very costly. Suppliers often use Carbon Offsets to create carbon neutral products that are more competitively priced.

How is Green gas generated?

Green gas is generated through anaerobic digestion of raw organic materials. These materials may be grown specifically or can come from food waste, manure, and other naturally occurring things.

The organic matter used to create green gas has absorbed carbon dioxide from the atmosphere when grown. Roughly the same amount of CO2 is released when the green gas is burned, therefore it doesn’t break what is known as ‘the carbon balance’. This makes the process almost carbon neutral. A by-product of creating biogas is an agricultural fertiliser which can be used to grow feedstock which adds to the sustainability of the process

Biogas can be used to create heat and electricity via a Combined Heat Power (CHP) generator, or it can be upgraded and used as fuel or pumped directly into the gas network.

What is a Carbon offset?

A Carbon Offset is a way to compensate for emissions by funding an equivalent carbon dioxide saving elsewhere.

Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e). One tonne of carbon offset represents the reduction of one tonne of carbon dioxide or its equivalent in other greenhouse gases.

Offsets can be produced by projects such as:

• Tree planting
• Reducing deforestation
• Building renewable generation assets
• Energy efficiency improvements (e.g. cookstoves Malawi)

Carbon Offsets are valuable tools in the short term for offsetting emissions that are difficult to remove from supply chains. However, the long term efforts to decarbonise rather than offset need to increase, which should become easier as technology develops.

Step 5: Service and Extras

The service level required, and any additional benefits, can help determine which supplier may be a better fit for your business.

Service

There are a range of service levels available which may be determined by the size of your business, or just the choice of supplier. Some offer a full account managed service with a named contact on hand to resolve any issues.

Online management

Access to an online portal can provide quick, easy access to your account allowing you to carry out basic tasks without needing to contact anybody.

Energy dashboards

Software which allows you to view your energy consumption, and supports you in reducing your usage, and therefore your overall energy spend, are often available. This may come at a cost, or sometimes be offered as a free, additional service.

Energy market insights

Reports providing information about both the energy and non-energy costs associated with your contract can keep you in the know about what is going on and how it may affect your energy spend in the future.