Since the pandemic, energy rates have been, to say the least, volatile. We teamed up with Zenergi, a specialist in this area and a company we share many mutual clients with, to run a webinar to review what is happening in the energy market. Now that it is starting to calm down, we want to be able to help you make the most of the situation and ensure that you have all the information you need to make the best buying decisions.
It is a complex area and we would advise you watch the full webinar – it is an excellent and interesting watch covering all the events that have impacted on energy and what the future may hold. However, here is a summary to give you an overview of what it covered.
If you’re responsible for securing energy contracts or managing energy budgets, the past couple of years have likely been challenging. Ensuring you’re getting the best deal involves purchasing at the right time and for the right amount of energy. Utility costs now represent a significant portion of budgeted costs, and fluctuating market prices make tracking spending difficult. So, what’s happening in the market?
Speculative commodity traders seeking returns on investment contribute to price fluctuations. Additionally, costs are influenced by factors such as temperature, global events, and renewable energy availability.
Clearly, energy is vital but it is likely that your schools are changing. You may be moving away from gas, becoming more energy efficient, choosing electric vehicles. All of these things are going to make a difference to how much you use and when you use it. Having comprehensive knowledge of your school site(s) is crucial when negotiating contracts with suppliers. You need a reliable supplier that will support you for the duration of your contract—a challenging aspect in recent years.
Sustainability considerations are increasingly important for stakeholders, including students, parents, and suppliers. Demonstrating responsible decision-making aligns with broader societal values and is particularly important in the world of education.
Market conditions have fluctuated significantly in the past few years. While prices hit record lows during the pandemic, they subsequently rose to record highs due to economic rebound and supply disruptions. The Russia-Ukraine conflict and disruptions in LNG deliveries further influenced prices.
The graph below is explained in full in the webinar but I’ve replicated it here as it clearly demonstrates those fluctuations.
Suppliers also faced challenges, with many failing in 2021, mainly affecting small to medium enterprises. This instability led to increased caution among suppliers, affecting contract renewals and terms.
The good news is that following a time of intense instability, things have now started to stabilise but this does not mean that the risks aren’t still present in the supply chain. In attrition people are a lot more cautious. Notably, we’ve seen a number of suppliers starting to enforce penalty terms in the contracts, which perhaps they have not done in the past.
This is why it is so important to look at supplier performance and to be aware cheapest may not always be the best, particularly when it comes to billing and general customer service. At Zenergi, they have streamlined their supply base with a focus on suppliers who they are confident can deliver; if they do fall down, they have the right processes in place to resolve the issues. No system is ever perfect but it is important to work in partnership to resolve the problems.
They also look for suppliers that can be flexible and are able to offer different products for different circumstances.
Understanding energy contract options is crucial. Fixed-price contracts offer budget certainty but lack flexibility so it is difficult to take advantage of price fluctuation. Unfortunately, people who renewed in 2022 on a fixed price contract would not have had a good deal given the instability in the market and the subsequent reduction in price.
Flexible contracts, including standalone and basket products, allow for multiple purchasing opportunities, risk management, and bespoke strategies. However, they may be more complex and offer less budget certainty. They’re definitely not something to be entering into without expert advice and guidance.
For those with contracts expiring soon, early renewal could offer savings given current market conditions. Consideration of contract length and flexibility is essential.
Preparation is key. Gather relevant data and be ready to negotiate terms. A thorough understanding of your energy needs and market conditions will ensure you make informed decisions and secure the best energy deals for your organisation.
The webinar concluded with a great Q&A session with some cracking questions from the attendees as follows:
I recently asked for some prices and suppliers quoted based on volumes that were actually far higher than we need. Why is this the case?
Suppliers should be using the best available data that they have. Therefore, usually with a half hourly meter, it will be the past 12 months’ half hourly data. For gas, typically they’re using the National Grid/ Transco’s rolling annual quantity. Non half hourly is always a bit more difficult to assess. Unless you have automated meter readings then you may not have accurate data. However, you should be questioning the supplier if they have come back and quoted on different quantities because we have seen suppliers enforcing volume tolerance penalties. You do not want to be beholden to this based on assessments that do not reflect your usage.
Do your earnings vary, if a fixed price or a flexible contract is taken
Concerning commission for flexible products versus fixed products, we look at our cost in terms of how much it actually costs us to run, the tender exercise for example. Typically, fixed and flexible contracts are very similar as commission is dependent on your size and your consumption. Therefore, if you are consuming a huge amount of energy, you will not pay as much as someone consuming a lot less.
How do you take a commission? Is it clear and transparent? Do you get Commission from the buyer as well as the supplier?
We’re 100% transparent about commission and you just need to ask your procurement manager who will be able to answer all your questions. If you are classified as a “micro business” regulations mean that the the commission value has to show on the supplier worksheet. If you are not classified as a “micro business” then commission will not be listed on the paperwork but you can speak to your procurement manager and they will be able to let you know exactly what you are being charged on either on a pence per kilowatt hour basis or on a forecast basis if it is an annual charge – and this would be built into the contracted rates.
Just to clarify, we don’t take two sets of commission. So, there will only be one set of agreed commission included in the supply rates. We also have some customers who pay us directly and they will pay a fee.
Concerning flexible contracts, from a school’s point of view, there are three options of Secure, Hybrid and Flex. While Flex might not be appropriate for schools but from the other two options – Hybrid and Secure – which do schools normally choose?
The contract that tracks the market is not, as you might expect, popular with the education sector. Therefore, schools are split between the hybrid strategy and the secure strategy. One point to note with the secure strategy is that is has quite a long lead in time because we purchase a lot of the energy in advance and we want to be able to provide everyone with budget certainty.
The hybrid product is the most popular product and the reason for that is we are very clear and transparent about what trades have been made in that product and why we have made the trades at that particular time. If you are more risk averse then the secure product may be something you are more comfortable with and if you are coming of a fixed term contract for the first time, it is a nice introduction to the flex world where you get the budget certainty but you are not fixed on one particular date, so you still have a degree of variability. In short, you get the best of both worlds.
What is the view on non-commodity charges over the next 12-18 months?
Since non-commodity costs account for around half of the amount of your overall energy bill, understanding these costs is crucial.
Non-commodity components have experienced a significant rise in recent years and this trend is expected to continue. So, this has become an increasingly important question.
Non-commodity charges can be quite complex. So, if you would like further information regarding this we would recommend reviewing our ‘Ultimate Guide To Non Commodity Costs’ (The Ultimate Guide To Non Commodity Costs – What, How and Why? – Zenergi).
If the markets are dropping, why is the recommendation to look at signing contracts early?
There are several reasons to consider reviewing contracts early.
Firstly, the energy market has dropped significantly over the past six months and is very close to the pre-energy crisis levels (the lowest rates in almost 36-months). Therefore, we believe the market is presenting a good opportunity to secure cheap contract rates and will offer savings to most customers who secured in 2022 or 2023. Also, securing early protects you from any near term volatility. At a time when geopolitical tensions are very high, having budget certainty from any potential spikes in the market is desirable.
Why do you recommend a 2-3 year term for flexible agreements?
Zenergi recommends a minimum contract term of 24 months for our flexible agreements. This essentially allows enough time for our energy markets team to reduce the rates over the course of the contract. Time in the market is very valuable on a flexible deal to take advantage of market dips; the longer the contract the more likely it will outperform a fixed deal.
If this is something on your radar please email us team@minervapcs.com or call 01256 467107. We’ll happily discuss your requirements and connect you with the right individual within Zenergi to support you.
