What is Energy Procurement?

Energy procurement is the process of researching and securing the best energy contract for your business's needs from a third-party energy supplier or local distribution company (LDC).

Although it may seem time-consuming and confusing, energy procurement and energy procurement strategy is crucial and could save your business thousands while increasing energy efficiency.

How Does Energy Procurement Work?

To procure energy, you need to analyse your gas and electricity usage and collaborate with brokers or suppliers to determine which contract or tariff is best for your needs. It can also involve assessing the type of supplier, sustainability targets, and energy types available.

Who Needs Energy Procurement?

Every business, regardless of size or industry, will benefit from an understanding of energy procurement. However, the size and type of business operations will dictate your strategy.

For example, the energy needs of a small retail store that operates from nine to five will differ significantly from those of a factory that runs machinery 24/7. To choose the right energy contract, energy type, and energy tariff, you need to determine your energy requirements and goals.

It is best to speak with a broker or consultant if you have any questions about what your specific business will need, and which is the best financial option.

"2021 was an awakening for most UK business owners, energy was usually a background activity, low on the priority list with little thought given. Heading into 2024, navigating the energy market has become a critical task for businesses, especially after the energy crisis led to a significant market shrinkage. This has made energy prices more volatile and unpredictable than ever. Mastering energy procurement is now essential not just for managing costs, but also for ensuring a reliable supply of energy. As the market continues to tighten, having a strategic approach allows businesses to secure energy at stable prices and embrace renewable sources smoothly, which is crucial for meeting new environmental regulations."

Reece Jensen - Senior Energy Consultant at Direct Business Solutions

How Do Businesses Procure Energy?

To get the best deal for your business energy needs, you should look for a supplier that offers competitive pricing and can meet your requirements. Typically, you can buy energy from one of the following parties:

Supplier: Private, wholesale, or retail energy companies can meet your business's energy demands, and they offer an alternative to utility company pricing.

Broker: Energy brokers and consultants will do the leg work for you. They work to find the best supplier, price, and deal for your specific needs.

Utility Company: Utility companies or LDCs are your default suppliers when you don't choose a supplier. They handle the supply and and distribution and charge a set rate for a fixed term or a market-based rate which can change each month.

Why is an Energy Procurement Strategy Important?

It is a simple principle, but there is more than meets the eye when it comes to energy procurement. For businesses, there are many benefits of energy procurement:

Cost Management: Energy bills can be one of the largest expenses for a business. Procuring energy from the right supplier means you're guaranteed the most competitive rates, reducing energy costs and improving profitability.

Risk Mitigation: Energy markets can be volatile, with prices subject to fluctuations influenced by factors such as geopolitics, weather, and supply and demand. Procurement strategies can help mitigate these risks by locking in favourable rates through contracts or hedging strategies.

Sustainability Goals: Many businesses aim to reduce their carbon footprint and support renewable energy initiatives. Energy procurement allows organisations to source energy from renewable sources or invest in carbon offset programs to meet sustainability objectives.

Operational Continuity: Ensuring a reliable and uninterrupted energy supply is essential for business operations. Procurement activities help businesses plan for future energy needs, especially during times of expansion or relocation.

Types of Business Energy Procurement Contracts

There are various types of energy procurement contracts available for businesses. To make the best decision, it's important to understand the main options.

Fixed contracts 

The contracts keep the energy unit cost or standing charge unchanged throughout the fixed term period, which can last from months to years. While they offer more security and prevent price hikes, you won't benefit from rate drops and fixed rates don't mean your bills will be the same every month.

Blend and Extend 

The types of conteacts are slightly more complex. Your supplier will extend the contract's length to reduce the amount you're paying. The contract rates are blended with the current market rates, meaning you'll pay higher or lower depending on external influences.

You start with a fixed rate energy pricing, and when the contract is extended, you'll pay a new rate for that period, which helps to reduce energy bills and keep the rates steady until the contract ends. These contracts can be helpful for businesses struggling with high energy bills, but there's no guarantee your business will benefit from them.

The Flex Approach/Flexible energy procurement

These are more suitable for larger business operations. It involves buying energy in bulk at wholesale rates for months or years ahead. However, there's a risk of being caught out of contract when unit rates spike.

Pass-through 

Pass-through tariffs swap between fixed, wholesale, unit rates, and other options to give the best deal while considering external factors like National Grid levels, Transmission Network Use of System (TnUoS), and more. They can be a good option for businesses that have a detailed understanding of their energy usage.

Renewable

Renewable energy contracts are the primary option for businesses seeking to meet sustainable energy goals. They involve purchasing renewable energy credits (RECs), which enable companies to offset their electricity consumption by buying the equivalent amount of electricity produced by renewable resources.

Advice For Generating an Energy Procurement Strategy

To effectively manage your business's energy consumption, you need to have a clear understanding of your energy needs. This includes how much energy you currently use and how much you are likely to use in the future. It's important to have an accurate prediction of your energy needs to avoid any unexpected bills.

When budgeting for energy expenses, it's important to be realistic about your costs. You should consider all energy options available to you, including different contracts and tariffs, and negotiate with various suppliers to ensure you get the best rates. Only agree to contracts that are affordable for your business.

Regular monitoring of your energy usage and spending can help you make changes to meet your energy goals. Whether your focus is on improving your carbon footprint or reducing costs, regular monitoring can help you identify opportunities to achieve your energy objectives.

Ready to optimise your energy strategy? Let's get started!

Our team of industry experts have helped thousands of buisness across the UK secure cheaper and uniquly suited contracts which these businesses thrive, and build security.  Our wide range of energy suppliers help us find the perfect contract for you, with cheaper prices and the perfect contract length and type to suit your unique needs. Whether you want to hit your sustainability goals, or reduce your energy costs, we have you covered no matter what kind of business you are.

Learn more about our energy procurement services, or get in touch with our team to discuss your options today!