The Industrial Energy Buyer

           Energy Markets
Energy Buyer

Having met many energy buyers over the years, it’s interesting looking at the change in status and culture of the role. Originally, the buyer would call suppliers in and simply take a price. In fact, if the seller wanted some idea as to the profile of the business, he could have been told that if he wanted the business to go and find out for himself. The buyer would do the minimum amount of work on the basis that the supplier would assure him he had the best price in the market. There might be some table banging at the end for the buyer to feel he had put some effort into the role but not much more than that.

I remember some years ago, waiting my turn to go in and meet the buying team after they had sealed the deal, and rather than enter the building and be seen by the supplier, I sat in my car in the car park. When my time came, I went in. The team was full of self-praise and described how they had almost made the suppliers cry. I described two men I had seen coming out of the building a few minutes earlier and yes, I had described the two suppliers. I then asked why they should have walked out of the building laughing and were still laughing as they drove off. No sign of any tears!

In those days, back in the 1970s and 1980s, it was regarded as a sign of weakness to seek any form of outside help. The buyer was supposed to see it all, and apart from talking to other colleagues in the sector, invariably depended upon what they picked up as being the only factual source of information. I remember the director of one very prominent group telling me that he had been talking to his counterparts in his sector and politely admitting that he had difficulty in believing them, to which I was able to suggest that they were in fact all lying through their teeth and he and his colleagues were the only ones being honest and truthful!

Today, very few industrial buyers will admit that they depend upon their own sources of information and that in a world of continually expanding databases, endless technology, and challenging demands from stakeholders, they have no option but to take on external support to provide them with the resources that they lack. Energy markets are governed by commodity prices, and the buyer that doesn’t have a fixed price in place will need to keep a watching brief on the market and be prepared to act the instant an opportunity or threat arises. Fundamentally, I am talking about a fixed price set for the contract period, perhaps a year or a price set for a short-term within a contract period, with the facility to sell back if required.

As a starting point, the buyer needs to build up a profile of the business, site by site, and for each unit needs to know the precise requirement by utility. A complete address of each unit together with details of all meters on site with identification numbers. Each site will need to be further categorized by size and load factor. Is it domestic, or commercial? Many industrial organisations also have domestic sites within the portfolio that need to be identified as such. From the date that is available, the usage profile can be determined. For a large group perhaps, the buyer will want to break the portfolio down in to smaller portfolios. It may be that some suppliers will mix and match the sites to suit themselves so the buyer should be able to do this too, certainly when not seeking a single source of supply. The better laid out the portfolio, the easier it will be for the supplier to quote, and with less uncertainty over what is being quoted for, the supplier will be more confident about the risk factor and therefore more competitive. This is a simplistic view, but a profile that is clearly laid out is more readily attractive to the supplier, and the keener the supplier is to take it on, the more competitive the price could be.

However, the ultimate focus should not necessarily be based upon price. The more astute buyer will look at the terms and conditions and service level agreement before discussing price, and it is not unheard of for a supplier to be dismissed before the price has been submitted. Can the level of service be provided? If not, there’s no point in seeking a price.

Points to look for include each component of the price. For example, for half-hourly electricity data, there will be 17,520 time slots, and for each of these, the price components need to be identified. What happens at the “clock change” period? How about bank holidays? Are they treated as an extension to the weekend? What are the hidden or ad hoc costs like the old Triad charges? What will be the minimum take or pay for electricity and gas? If the contract volume of gas or electricity is not taken, what volume will be charged, and similarly, if the requirement is exceeded, will a surcharge per unit be imposed? Following on from this, what happens if sites are closed or new ones added in?

There is much to take in on the profile before the buyer decides whether a guaranteed fixed price is required throughout the duration of the contract or whether a supply contract can be taken on and the utility bought in tranches, and even sold back, during the contract period. Personalities play a role in the process too, and the buyer needs to feel that the supplier has his interest at heart and will provide the level of service that the buyer requires as opposed to the level of service churned out to all customers. Review meetings throughout the contract should be determined in advance and so too should the facility for early termination in the event of a dispute.

With contracts almost in place, what facility does the buyer have to check the mass of invoices that will come through either site by site or to a central point? This is the point at which many buyers realise that perhaps a consultant would be worth talking to. The same parameters will apply when talking to a consultant as to when negotiating with energy suppliers. What is the service level to be provided, and can the buyer trust the consultant? The consultant should be the buyer’s representative and be clearly detached from the supplier. Furthermore, the buyer will need to know if there is any financial dialogue between supplier and consultant. Too many consultants are in partnership with suppliers and, therefore, it is important that the buyer understands the supplier’s pricing regime and can determine if there is a line through to the consultant that is not transparent.

It’s a daunting task being a buyer, and success will be determined by getting the base facts, figures, and conditions in place and clearly understood from the outset across all parties to ensure a satisfactory outcome without fear of retribution from stakeholders. What is the best deal? For me it’s the one where both parties are happy to sign and look forward to working with each other over the contract period.

John Hall

John joined Alfa Energy in 2013 as Chairman, where his specific interest is the development of the company’s profile in the areas in which it primarily operates - across the EU and the US. He is Fellow of the Energy Institute, a Member of the Parliamentary Group for Energy Studies, an Associate Member of the Chartered Institute of Purchasing and Supply, and a Member of the Market Research Society. He began his long career in the industry when he set up John Hall Associates in 1973, a company which merged with Energy Quote in 2009 and currently trades as Energy Quote JHA.