WHY IS IT DIFFICULT TO COMPLY WITH THE ENERGY BUDGET?

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WHY IS IT DIFFICULT TO COMPLY WITH THE ENERGY BUDGET?

There is always a clear risk of mismatch between expectations and reality according to how a company develops its economic activity and whose results depend (to a greater or lesser extent) on the cost of energy.

Any company with a medium-long term economic strategy must deal with regulatory, technological, macroeconomic changes and always with the aim of overcoming all these uncertainties. The impact of these changes influences the outcome of the organization/project.

Companies often have sophisticated purchasing strategies aimed at their main products or services. However, many times, energy, due to its complexity and lack of knowledge, ends up being a game with wide margins for improvement in its management.

What about energy budgets and purchasing strategy?

To speak of a good purchasing strategy is to ensure that the purchase of energy does not condition the competitiveness of the product or service.

The first answer of a purchasing manager about his objectives for energy, in most cases is: “…to contract the lowest price in the market …” or “…to buy the lowest price than the competitors…”. Unfortunately, for those who understand the sector, these are neither realistic nor achievable targets.

Despite this, every company must make decisions based on realistic objectives and these decisions must be based on an effective purchasing strategy. The following points must be taken into consideration:

  1. Company strategic planning.
  2. Energy needs of the company.
  3. Financial data and budget structure
  4. Knowledge of the relevant markets.

Which purchasing strategy is most suitable for my organization?

The cost of energy depends on 4 parameters from which the company must make decisions:

  1. a) Consumption profile: Invest in efficiency to reduce consumption.
  2. b) Relevant market: Understand the reference, the product and its risks.
  3. c) Supplier negotiation: Search for the best partner for the energy contract.
  4. d) Regulated costs, rates and taxes: Know the regulation structure

The most relevant and uncertain item is “b”. Energy is a commodity and for that reason it depends on a financial market with high levels of volatility and unpredictability. The only way to be not at the mercy of a market that we do not control is to establish active strategies on it.

The negotiation of the contract may bring some additional improvement, but the prices offered by the suppliers depend directly on the state of the reference market. Therefore, to ignore the state of the market is to have no control over the energy cost.

The risk exists yes or yes, but who assumes it?

The definition of the energy purchasing strategy is aimed at the development of the activity, for this it is important to know how to answer the following questions:

  1. Does the company decide on energy costs or is it the market that decides for it?
  2. Does the company have the capacity to withstand the volatility and uncertainty of the cost of energy?
  3. Does the company have any budget constraints?

With the strategy defined and the budget set, you can start searching for the ideal purchase profile, that is, find the modality that best represents your company (market, product, suppliers, etc.).

What is my company risk profile?

In general, we can include all possible company strategies in three types of risk profile:

– Budget risk: Companies that generally cannot be exposed to the vagaries of the market and require active management of the purchase of energy. Focused on budgetary stability and therefore buying in broad time horizons to avoid overexposure to the market situation.

– Market Risk: Companies that can manage the volatility of the market and their exposure to spot market is not a problem because they are able to transmit these variations to their products or services. Any futures purchase supposes a high risk because its main objective is not to move away from the average of market.

– Survival Risk: We could consider it as a mixture of the two previous ones and which aim is to be in market averages but taking advantage of opportunities to hedge in markets and improve their positions. This profile requires constant market monitoring and a higher level of market expertise than the previous ones.

Each one of these profiles has diffent reference market, products and conditions. There are also more suppliers specialized in some products than others, so the risk level could also influence the outcome of contract negotiations.

Once the profile has been defined and the product obtained, the company must face the decision making regarding the market. An eminently financial market with high levels of volatility requires knowing When? How much? How? Where?

In summary, does your company actively manage energy contracts or decide the market for you? Leaving energy costs at the mercy of the market behavior can be very expensive.

Priscila Scheel| Energy Consultant

By | 2019-01-17T10:19:15+00:00 January 17th, 2019|Categories: Featured, M·Blog, Portugal, Spain|Tags: , , |Comments Off on WHY IS IT DIFFICULT TO COMPLY WITH THE ENERGY BUDGET?