The UK energy procurement markets opened in 1996 when the markets deregulated. Since then, the task of buying and managing energy contracts has become much more complex; with more supplier contract offers, many green products and lots of risk management options to consider.
In view of the above, it is probably fair to say that it is easier to choose the wrong energy procurement strategy than the right one.
Check If You Understand the Fundamentals
After almost 30 years of procuring energy contracts and managing energy accounts for some of the largest UK business consumers, the main questions I am still asked are:
- Why am I paying more for energy than my competitors?
- When is the best time to procure my next energy contracts?
- Can I reduce the costs within my current energy supply contracts?
- How can I develop an energy procurement strategy in line with my sustainability goals?
The answer to these questions lies in understanding the fundamentals of the energy procurement markets and this will allow you to develop your energy procurement strategy.
Why Are We Paying More For Energy Than My Competitors?
Know Your Supply Contract Options
For almost 15 years, energy suppliers have reserved their best tariffs for the UK’s largest energy-intensive users who represent 1.5% of UK organisations. The introduction of energy buying groups with adequate volume purchasing power now allows smaller and medium consumers to access these more flexible, economical and less risky industrial tariffs that typically provide more than 10% cost benefit against traditional small business fixed tariffs.
This procurement method can also reduce risk by providing a price cap to protect against market volatility and further savings are achieved if the markets fall, so it makes sense to know your options.
When Is the Best Time To Procure My Next Energy Contracts?
Understanding Energy Market Risk Drivers
Knowing what is driving the energy markets can provide a real competitive advantage for procurement professionals. For example, in 2022 during the Energy Crisis, buying your electricity supply contracts on the wrong day could have cost 400% more, and settling pre-Jul 2025 energy contracts on 1st Jan 2025 would have cost you c.25% more than settling today.
Energy contracts can be sourced up to 4 years ahead of delivery, so understanding the futures markets and backwardation opportunities in the market can also offer a significant advantage. For example, those that bought gas long during COVID lockdown in April 2020 were paying c.1p/kWh for gas, for up to 4 years, whilst others paid as much as 25p/kWh throughout that period, for the same commodity!
Despite this and the price diversity in the wholesale energy markets, it is surprising to know that most companies still select a set day or month in the year to settle their electricity and gas supply contract renewals.
Access to reliable market intelligence can help us understand how weather conditions, gas storage, renewable output and geopolitical factors can affect market volatility. These provide key indicators on when to avoid buying or settling your energy contracts. Therefore, understanding the wholesale energy market drivers is imperative to obtaining procurement gains and best value.
Can I Reduce Costs Within My Current Energy Supply Contract?
Avoid Supplier Premiums, Volume Penalties, Hidden Broker Fees and Carbon Taxes
It’s not much fun being stuck on a long-term uncompetitive contract with unfavourable terms that will eat into your business profits. However, those in the know can find many ways to avoid paying more for their energy bills than necessary.
Some suppliers will bundle all the cost components within their invoices, making it difficult to identify if the suppliers have hidden risk premiums or if they have been transparent about broker fees. These can be avoided when opting for transparent contracts.
For large and medium-sized businesses, it is also worth investigating in ways to reduce your carbon taxes and VAT by checking if government exemptions will apply to your manufacturing process or your specific types of business operation, because these can offer free savings.
How Can I Develop An Energy Procurement Strategy In Line With My Sustainability Goals?
Some suppliers will charge hefty penalties if you don’t use the agreed contracted volumes in your energy supply contracts, so choosing the correct supply contract terms in line with your carbon reduction ambitions is important for cost avoidance.
The integration of demand management and a hybrid off grid strategies can also be part of your long-term energy procurement strategy, because this will help combat the increasing year on year network and renewable obligation costs within your bills.
Ten Safety Rules To Consider For Your Energy Procurement Strategy
To ensure a successful energy procurement strategy please consider the following:
- Use a Reputable Energy Consultant: Choose a consultant with extensive industry knowledge, transparency, integrity, and a commitment to client care to help you navigate the complexities of energy market trends and risks.
- Avoid Fixed-Term Contracts in a Downward Market: Signing a fixed-term contract when prices are falling can lock you into higher rates. Instead, consider flexible contracts that allow you to access the optimum wholesale market prices at any time.
- Ensure Transparent Procurement Fees: Make sure procurement fees are transparent and be wary of hidden extra fees (e.g., share-of-savings). Transparent fees help you understand what you are really paying for your energy procurement services.
- Do Not Grant Signing Authority: Do not grant anyone the authority to sign energy contracts on your behalf. Retaining control over contract signing ensures that you have sight of the supplier’s contract terms and you are fully in the driving seat at all times.
- Avoid Restrictive Agreements: Avoid agreements that restrict you from liaising with other brokers. Having the flexibility to benchmark or work with multiple brokers can help you find the best deals.
- Identify Onerous Clauses: Identify and avoid onerous notice clauses or roll-overs in supplier or broker contract terms. These clauses can lock you into unfavourable terms and make it difficult to switch energy suppliers or energy consultants.
- Navigate Credit Checks: Be prepared to navigate energy suppliers’ credit checks and consider avoiding supplier premiums. Understanding the credit requirements of suppliers and your options if you fail credit.
- Expect Comprehensive Reports: Expect a comprehensive report of the competitive tender results, including both fixed and flexible offers. Detailed reports provide transparency and help us make informed decisions.
- Avoid Supplier Risk Premiums: Avoid supplier risk premiums by choosing suppliers with a stable financial standing and a good track record. Reputable suppliers are less likely to impose hidden risk premiums and volume tolerance issues.
- Explore Government Tax Relief And Energy Support Schemes: The UK government has recently announced support schemes for certain businesses sectors to help the UK convert to a greener economy whilst remaining competitive, so it’s worth checking to see if your business qualifies.
How We Can Help
For companies who wish to develop an energy procurement strategy, Valpak are providing a series of interactive Energy Webinars throughout 2025 that will attempt to demystify the complexities of the energy procurement markets.
The Energy Webinars will be delivered by our strategic partners, Energy Bubble, whose management team were pioneers of energy procurement in the UK. They were instrumental in developing the commercial energy broker markets and have promoted the energy supplier’s products since the markets opened, and they are happy to share their tips with you.
Why not join one of our webinars to learn more? Our next one is on 15 July 2025 or simply call 03450 682 572 to discuss any questions you have or access the previous webinar recordings.
