Image credit: thanks Unsplash.com
In 2008, Oil was $147 a barrel and is now oscillating close to $30; Gas was £1 a therm, and it’s now 28p!
Prompted by the “perfect storm” depressing energy prices right now, clients are looking to fix the fuel element of their costs (about half the bill), locking in well ahead of contract renewals that are as much as 24 months away. Competitive long term supply gas contracts are currently on offer up to 60 months out.
Market timing can be more significant than a shaved penny from shopping around (although we do independent whole of market comparisons for our clients rather well).
Do you run a tight ship? When the market screams “buy” you don’t need to wait for your energy contract renewal, as this example from the Captain’s log shows…
February 2016
An independent school in Essex on two sites had two half-hourly electricity contracts due 1 August 1016 (£164k p.a. net), and gas at 9 meters under contract until October 2017 (£43k p.a. net). In the last two weeks, we completed whole of market tender exercises for both fuels.
- Savings of £118,245 on expenditure of £622,506 (18.9%) over three years compared with their usual approach (and this excludes any additional benefit from timing the market)
- Transparent competitive prices, more suitable product choices and an increase in budget certainty
- Peace of mind and one less thing on the to-do list.
Here’s what we did..
Buying electricity in stormy seas
“We compared tariffs from 11 suppliers on the school’s behalf over 3 different contract lengths. Pricing is hugely volatile at the moment with daily gyrations in oil prices, and you could hear the uncertainty in the voices.
Personal contacts at each supplier ensures that they took the trouble to understand the school’s needs and secured responses in the time frame aiding true comparison. They could be pressed on exactly what was included and excluded from their quotes as it’s not always obvious. A trawl through the detailed T&Cs is a nightmare for clients concerned with attention to detail, and I’m delighted to take away that burden.
Chasing up the offers to refresh prices on the day convenient for the bursar to deal confirmed the opportunity. Wildly differing prices the day before improved and converged somewhat.
Having adjusted all the quotes to ensure we were comparing apples with apples, we shared all our findings and made a recommendation helping the school to choose a 36 months term to end July 2019.
Although budget certainty was more important than outright cost, being able to see all quotes transparently laid out gave them confidence to deal that far ahead, knowing that they were achieving the best prices in the market with significant product differences unaccounted for or hidden broker commissions to distort the assessment.
Choosing a product that fully fixes the non-fuel cost components (which account for about half the bill and seems to rise inexorably year after year) gave added peace of mind.
(Separately, we have already looked at savings opportunities around their Available Capacity, Reactive Power, VAT and CCL, and Meter operator and Data Collection charges. Under our “Mean, Lean and Green” holistic approach, we project managed a proposition for LED lighting with annual energy saving of £22k p.a. and payback around 2 years as the bursar tested the Board’s appetite for spending money to save money for the first time on his watch.)
With expansion plans on the horizon, and wary about exact future needs, I was delighted to be able to negotiate the removal of the 20% volume tolerance from the contract. We don’t want unpleasant surprises of the future turns out differently when looking so far ahead.
Shipshape outcome 1
On the day of the lowest oil price for several years, we secured a £28,352 annual saving (17.3%) for the school for three years compared with an equivalent current offer from their original supplier and broker charges (at 0.35 ppu) in place at the start of the consulting relationship. That’s a projected savings of £85,056 over the contract term (and that’s ignoring any potential market timing benefits).
Now I’m looking forward to overseeing the implementation to ensure there are no hiccoughs when the client changes supplier and that the new tariff is correctly applied. We will be checking every line of the bill going forward all part of the service, making sure that these “potential” savings are realised in practice.
De-risking a gas purchase over the horizon
Following our success with electricity, the school was again very interested in our exploring a longer term contract even though the existing one we manage for them still had 22 months to run.
From monitoring their bills, we already knew that the school’s actual consumption in calendar 2015 was 10% higher than the figures registered in the Transco database. These are adjusted annually after a lag (although you can get this changed in a few weeks). We think it’s a bit rich if there is potential for a penalty for consuming more (or indeed less) than the contracted volume when a supplier won’t contract on the basis of the real numbers. For all but the very largest customers it’s reasonable to think that a broad portfolio will balance itself out. But hey-ho.
Suppliers vary hugely in their willingness or ability to remove this nagging and unpopular contract condition which can weigh disproportionately with clients considering longer term arrangements – the legal contracts seemingly lagging behind sales practice – but we ask very nicely and seek maximum clarity as to policy and get it in writing.
Shipshape outcome 2
After a whole of market exercise with two rounds in which 11 suppliers had been whittled down to 6, one supplier was a clear winner. The most competitive supplier offered a fixed price, fully inclusive contract with no take or pay (volume tolerance penalties) consistent with a peace of mind product commencing October 2017 – £11,991 cheaper than the next best comparable offer over three years.
Interestingly, if we take the average of initial market prices obtained (what might be achieved with random luck?) and add in a typical broker commission of say 0.25 ppu, then we are talking here of projected annual savings of £11,063 p.a. or £33,189 (25.5% ) over the contract term! This is a reasonable counterfactual had we not been on the scene. Of course, it’s quite possible that a mid-term contract extension would never have been considered or a suitable comparable product confidently identified.
They also agreed to include AMR (automatic meter reading) at no extra cost, which we will accept when the time comes. An online portal will help us monitor the bills for the client quietly and diligently in the background and any errors will be sorted out as part of the service.
Keeping up with developments so you don’t have to
Giving up a part these savings to enjoy a proactive professional service for the life of the contract represents good value and can provide a self-funding and cashflow positive way to gain specialist support in these markets, and remove a significant headache.
We routinely meet with energy companies from right across the market. They are keen to explain their product and tariff innovations and to build deeper relationships to benefit our clients. In the last month I’ve personally met with Danish Oil & Natural Gas (formerly Shell) and Total Gas &Power for their latest updates.
• Concerned prices might yet fall further? Products are increasingly available that lock in to fixed prices now, but allow re-negotiation if prices move down during the term.
• Credit score assessment impacting on the number and competitiveness of contract offers? Representation may secure a better price, better terms or a contract at all.
So if you need anything specific in your contracts and find your current purchasing strategy a bit thin on price, service or transparency, as an independent whole of market specialist we might be able to provide a better alternative.
It’s a noisy market place and while we can’t exactly make competitors walk the plank, casually dropping our name can be quite a useful way to get even the most persistent and earnest brokers to stop calling!
Other articles in this series:
Competitive energy supplies when the computer says “No!”
ron.yellon@auditel.co.uk | 01234 865869 | @ronconomics | www.auditel.co.uk/ronyellon
