Buying energy can be confusing. This video and article explain the energy market and different procurement options to help you make an informed decision about your energy purchasing.
How the energy market works
Often you can hear that prices of gas or electricity have gone down but your bills have stayed the same, or worse, increased.
The reason for that is that energy costs are a combination of commodity and non-commodity charges which are influenced by different organisations in the supply chain and volatile market conditions.
So what is a commodity and what is a non-commodity charge?
Commodity costs also known as the wholesale costs are the cost of the raw gas or electricity that is used. These can be heavily influenced by external factors such as fluctuating exchange rates, weather conditions, regional and global supply and demand, and changes to government legislation such as Brexit.
As an example, prices increased sharply last month owing to high demand because of freezing temperatures and a string of power plants being down. This was compounded by low wind levels generating less renewable energy.
Commodity market brokers will trade energy based on all these factors and set the daily kWh wholesale price.
These are third-party charges that cover the running costs of the distribution network and the transmission of gas and electricity. These are variable costs that can change regularly and make up approximately 60% of your energy price. These charges are passed on to you by retail suppliers which is where the term ‘Pass Through’ comes from.
These non-commodity costs include:
· Transmission and distribution
· Government taxes and levies
Transmission and distribution
Raw energy is transmitted into transmission plants to create lower voltage and pressure so that it’s suitable for businesses and homes to use. This is distributed through wires and pipes owned by energy network operators across the UK.
Government taxes and levies
These are additional charges that come from the government or third parties typically to incentivise schemes such as the plan to improve renewable energy technologies.
As we move towards a reduction of carbon emissions by replacing energy from fossil fuels to renewable sources, it will be interesting to see what impact the investment has on non-commodity charges in the future.
Retail energy suppliers will sell the energy and third-party costs on with their additional standard charge, normally set at a daily rate. This charge can vary extensively from supplier to supplier so needs considering when working out the overall cost.
Our changing energy mix
The UK once produced enough energy to be self-sufficient with 91% of energy coming from oil and coal. The discovery of gas beneath the North Sea meant that by 1980 22% of the UK’s energy came from gas. Fast forward to today and the mix of energy has shifted to a steep decline in fossil fuels and a drive towards renewable energy sources such as offshore windfarms, nuclear plants, European interconnectors, and hydrogen technologies to achieve net zero.
The choice in energy suppliers has also boomed over recent years and with it the opportunity to select most or all energy from zero-carbon sources. Whilst this is great news on one hand, on the other it can make selecting the best option for your business even more of a minefield.
Why have an energy contract?
If you don’t have an energy contract in place, you’ll pay your retail supplier a variable rate which is generally more expensive than being on a contract over a set period which is also subject to market volatility. Contracts can also provide budget certainty and mitigate buying energy when the market price is high.
What’s the difference between ‘fixed’ and ‘flexible’ procurement contracts?
Fixed procurement contracts
Fixed-term contracts allow businesses to agree a set price for its gas and electricity for future contracted energy volumes. Both the ‘commodity’ and ‘non-commodity’ costs are fixed which is great for budget forecasting as it protects customers from any rising costs.
100% commodity budget certainty;
Single transaction contract;
1, 2 or 3-year term.
Retail suppliers add a risk premium;
Less control over the price.
The downside is that the non-commodity is charged at a premium because retail suppliers add a forecast risk into the cost for market changes over the agreed term. You could also be buying at a time when the market is high.
Flexible procurement contracts
Flexible contracts allow you to take advantage of the ‘real-time’ energy market and to buy during price dips. You can fix or trade the ‘commodity’ cost in short or long-term periods to spread the risk of your energy purchasing. This product is a good option for high energy users as the potential savings could be significant.
Greater control over fixed contracts;
No retail supplier risk premiums;
Potential increased costs;
More involved purchasing.
Because of the higher associated risk and investment of time required for this type of procurement, it is mostly used by energy users that can afford a dedicated energy purchasing team or consultant to study the market and pick the best time to buy and sell their energy.
Our service to you
Our team are experts in negotiating fixed and flexible energy contracts for businesses, ensuring there are no unnecessary risk premiums included in the contract.
We purchase energy independently, receiving preferential rates from suppliers to provide clients with impartial and competitive prices.
Our award-winning account management service takes any hassle out of buying energy which doesn’t just stop when you sign the contract.
We will also:
Liaise with suppliers on your behalf;
Advise when it’s the right time to buy;
Ensure any queries are managed quickly through our strict supplier service agreements;
Advise early about renewals to ensure best future prices.
As part of our service we can also provide a full energy management service so that you don’t have to shop around for different solutions such as:
Installation of renewable products e.g. solar panels and EV charging points;
But don’t just listen to us, see what our customers have to say here.
Get in touch for an informal chat about your energy today.
0114 327 2645