Driving cost benefit

A recent survey into the business and governance issues most likely to demand board attention has shown that 48% of corporate directors cited the economic slowdown as one of the major issues threatening their business moving into 2020. In the UK it’s well known that Brexit, plus weak retail, car and housing markets are all adding to the level of economic uncertainty.

To face into these strong head winds often requires clear and decisive action - which should bring about bottom line benefits even if the country does not enter into recessionary times.

In the US, it’s been estimated that reducing energy costs by just $1 is equivalent to increasing sales by $59 and it is business common sense that any cost reductions go straight to the bottom line. While it may seem obvious that when purchasing energy there should be a procurement strategy, some organisations tend to unnecessarily view it as only a one-off, once a year event.

This can be risky, leaving companies exposed to the vagaries of the global wholesale energy market. The graphs below indicate the movement in wholesale energy prices for the month of July this year, and demonstrate the gamble that can come with fixed price energy contracts.

Electricity market July 2019

In July 2019 the market low was 50.62 £/MWh

The market peaked at 57.90 £/MWh

This creates market exposure of 7.28 £/MWh

Based on a customer’s consumption of 8 GWh (with an average annual energy spend of approx. £1.2M) this is a cost difference of £58,240 

Gas market July 2019

In July 2019 the market low was 45.23 p/Therm

The market peaked at 54.43 p/Therm

This creates market exposure of 9.20 p/Therm

Based on a customer’s consumption of 272,972 Therms (8 GWh) this is a cost difference of £25,113 

It doesn’t seem yet to be widely known that energy may not necessarily have to be a once a year purchase, there are other options open to some businesses.

For example, it can be possible to agree a fixed term contract for a specified duration with the opportunity to open the contract up at its mid-point and agree a new rate moving forward for an extended period. This chart, taken from BEIS data tracks power prices for the non-domestic market. This illustrates the point that had a business for example agreed a contract at the peak prices of the end of 2018, having the opportunity to review those prices when they came down later in 2019 would make good financial sense. 

Other eligible businesses may prefer to consider a multi-purchase option, which provides several opportunities to buy energy over a fixed period. This energy can be bought in blocks as a percentage of either the total volume, or in months, quarters or seasons – giving the purchasing company total flexibility to buy when wholesale prices are advantageous.

Regardless of which option is most appropriate for your business, as we enter into uncertain economic times, it makes sense for everyone to look at how they buy energy more strategically and reap the resulting bottom line benefits. As cash flow becomes tighter and profitability more challenging, the importance of understanding the different options available when it comes to purchasing power should not be underestimated.