In January 2013, Network Rail made history by signing a ten-year electricity supply agreement: the first supply contract ever to extend over such a long period.
Network Rail’s electricity requirements are exceptionally high. They purchase electricity not just for themselves, but also for all the UK’s 24 train operating companies.
In all, they’re responsible for purchasing something like 3.7 terawatt hours a year – just over one percent of the UK’s total consumption. Purchasing electricity in that kind of volume with a regulated revenue model that limits their ability to pass increases to their cost base on to customers, they naturally wanted the ability to limit their exposure to unpredictable wholesale market prices.
But Network Rail aren’t unique in moving towards longer-lasting contracts. The whole market looks to be heading that way. Network Rail’s massive purchasing power and the fact that its business model virtually guarantees it will be around in 10 years just allowed them to leap ahead farther and faster than everyone else.
Our own figures clearly show a shift from short-term to longer-term supply contracts over the last few years.
In 2010, most of the electricity we supplied (59 percent) was through contracts of up to two years. Now, in 2013, 61 percent of our electricity is supplied through contracts longer than two years. And most of this – 42 percent – is supplied through contracts longer than three years.
It’s not hard to see why. Keeping energy expenditure stable and easy to predict over a longer period helps tremendously with budget forecasting and business planning.
Conventional wisdom says its good practice to take advantage of the fierce competition amongst business electricity suppliers and shop around for better deal. But there is a balance to strike between testing the market and establishing a relationship that enables you and your supplier to work together. Such a relationship is key for addressing more substantial longer term challenges than today’s wholesale market place.
It might be some time before we see the majority of large businesses signing contracts anything like as long as ten years. In fact ten years will prove too long a horizon for most businesses. But where giant consumers like Network Rail lead, others are sure to follow. Judging by the shift within our customer base, it seems many already are.
How far ahead does your business plan? Would it consider an electricity contract that’s three, four, five years or more and fits with its longer term business strategy? Or perhaps a better question is, why wouldn’t you?