Expert energy analysis and insight for UK businesses.
At last month’s Sustainability Live event, I joined Tesco’s James Summerbell, EIC’s Jon Ferris and the EIUG’s Jeremy Nicholson for a discussion about “changing approaches to energy procurement”.
It was pretty clear that energy buying has changed greatly over the last few years. Much more than it looks when we’re in ‘nose to the grindstone’ mode. So take a few minutes with me to look at what this could mean for the skill set of the modern energy buyer.
What’s driving the changes
I lead a team that manages some of EDF Energy’s largest and most complex business customers. This is where many of our most innovative deals are structured and where I see much of the changing approach to energy procurement happening first.
During these last few tough years, as cost control became more important, many businesses intensified their focus on energy spend.
As a result, I would say there is much greater scrutiny of both energy buyers on the client side, and their account managers on the energy retailer side.
On both sides of the desk, we need to show that we’re finding new ways to create value.
For energy buyers, that’s about showing you’re up to speed on how the market is changing, what risks and opportunities these changes present to your business, and working out how the business might respond to them. Efficiently processing tasks, however technical, isn’t enough anymore.
The same is true for their opposite numbers – the account managers in the energy companies. Just providing a good service, however responsive or reliable, isn’t enough anymore.
To stay relevant and in demand, we energy professionals have to broaden the scope of our proposition in a way that meets the ever increasing demands of the market.
So what is changing in energy procurement and why?
Firstly, things are far more complicated than they were five or six years ago when the downturn started.
Back then, we were just getting our heads around the Carbon Reduction Commitment (CRC). How to report your carbon emissions and pay a flat fee per tonne of carbon – that was a big deal. It was biggest new cost in years and intellectually taxing to work out how it worked and what to pay.
But it was just the tip of the approaching energy policy iceberg.
Many more new energy policies, regulations, and market mechanisms have since been proposed, consulted on and come into force.
To help our customers keep up, last summer we published our Business Energyscope. It maps out 32 different policies, regulations and schemes that, as an energy buyer, you’re likely to come across sooner or later.
Number 33 joined the list this month. It was Ofgem’s new Market Making scheme which aims to improve liquidity in the wholesale power market. (Take note if you’re on a flexible contract.)
More cost focus
Secondly, businesses are far more cost conscious in the post-crash economy. The pressure to find new ways to squeeze costs and manage risk from electricity prices is unrelenting.
And energy suppliers are still scarred by the costs from the unexpected large drop in demand in 2009 and 2010. That’s why we now put much greater focus on individual cost stack components (each element of your price) and the associated process, credit and commodity risks in electricity contracts.
I don’t think any of us negotiating electricity contracts see that changing anytime soon. This means a lot for energy buyers and how they identify the right contract features for their type of business.
What it means in practice
We are moving in the right direction. In my area of the market, negotiations now rarely centre on the supplier management fee. Of course it remains an important factor in most customers’ decisions, but it’s not the major focus.
Instead we spend more time working out the right set of specifications or features that will add real value to the customer’s business during the contract.
This is a positive step. It’s much more productive. It leads to a better result for the customer.
It’s really necessary too. As we have become more risk aware, the number of new, innovative and exciting features that can be built into electricity contracts has grown in tandem.
But complicating a contract by adding features simply because they’re novel, creates no value for the customer. There must be a real customer need for each feature because each one adds more cost or complexity – normally both – to the contract. It’s ok to be prudent.
How to pick the right options
So our most advanced customers are telling us that modern energy buying is about working out
1. which risks need to be managed
2. what cost is acceptable in order to manage each risk
3. how managing that risk affects others in your business energy plan
All of this must be decided long before anything is included in the contract. So how long does that take?
Last year, EDF Energy announced its longest ever contract. In fact it was the largest and longest ever struck in the UK. This was our 10 year deal with Network Rail. The procurement process for that contract took the best part of two years. Not only due to the complexity of the contract, but also the number of stakeholders involved.
Offering the means to fix prices beyond the wholesale market’s standard trading horizon takes the discussion into the world of financial instruments. It’s the only way one can fix prices where there is no liquid market. This drives the need to engage more stakeholders. The decision doesn’t rest just with procurement and finance anymore. Treasury teams, and more commonly the engineering functions that manage the demand side, need to be fully engaged and comfortable with the outcome.
We’re working on several other long term deals – typically 5 to 7 years. The lead times are generally around one year from start to finish of the negotiation process.
In fact it’s not really negotiating. It’s deal structuring and it works best when approached with a spirit of collaboration.
Don’t just be an electricity expert
So we have seen a huge change on both sides of the customer/supplier relationship. We will continue to do so.
In the past, good energy buyers and key account managers had a deep working knowledge of the electricity market; the various processes; the unique language of technical terms.
That’s still useful, but it’s not enough.
I think the skills now required include a good understanding of how to identify business risk, an understanding of complex financial instruments, skills to manage diverse stakeholder groups to agree what goes into a contract. That’s what I look for when recruiting and I think these skills are just as useful and necessary for energy buyers to have too.