Nicely packaged and flexible; multi-purchase energy contracts are growing in popularity amongst large-consuming businesses. They are well marketed and make for a compelling pitch to financial leaders or business owners.
Multi-purchase energy contracts are a complex method of procuring energy, which allows your business to purchase electricity in “tranches” throughout the year. This mirrors the way energy suppliers work, by purchasing tranches of energy from the wholesale market at beneficial times, then selling those KiloWatt hours on to businesses with a margin.
This approach can lead to major cost efficiencies for businesses when combined with market knowledge and energy purchasing experience. However, “playing the market” is a much higher risk strategy than a fixed product, especially in the volatile marketplace we continue to experience.
The benefits of multi-purchase energy contracts
By definition, a volatile marketplace means prices can reach peaks and troughs and are unpredictable. If your business is able to make a strong prediction of what will happen over the next quarter, six months or year, you know how much energy you should purchase to cover your needs and the cheapest market conditions in which to buy them.
Correctly predicting the “dips”, like a stock trader, can lead to major gains versus purchasing at other moments in time and makes you more agile.
This explanation refers to the “commodity” (wholesale) element of your contract, which is represented by your unit rates on a normal bill.
Additionally, you can fix your “non-commodity” costs too. They are the transmission, taxes and loss charges that show on your bill under titles such as BSUoS, TNUoS, DUoS, RO, FiT and others. These elements are set by energy market players such as District Network Operators (DNOs); the government; and suppliers for varying periods of time.
These movable sliders make your contract essentially a customisable group of variables. It requires constant monitoring of market conditions in each of these areas, which are fed by different mechanisms, from the global marketplace to supplier margins and government legislation.
You should always work with an energy expert, who understands the movements of the marketplace. Even an experienced procurement professional would struggle to deal with the convoluted and often conflicting mechanisms UK business energy.
There are various types of multi-purchase contracts where you may have to make an agreed number of purchases per year, or where you may even be able to sell purchased energy back to the market via “sellback”. Again, this is a complex process which will require an agreement with a supplier.
The risks of multi-purchase energy contracts
Risk is the important word when considering whether multi-purchase energy contracts are right for your business. IE, what is your business’ risk appetite?
Businesses with low cash reserves or a lack of financial facilities leave themselves open to considerable risk if they choose a procurement product of this nature.
Essentially, it is an educated gamble on a variable marketplace. Even in stable times, anyone who has administered a large-consuming business energy purchase knows that there are many factors which can prevent acceptance from a supplier. The more purchases you make, the greater margin for supplier objections around credit, industry type and more. These stances change over time and are influenced by the same factors as other marketplaces.
The most obvious factor with a multi-purchase product is that we live in an unpredictable world, with several wars ongoing and geopolitical instability rife. The situation in Ukraine in particular has a direct impact on energy prices. The results of the US election are also likely to cause more turbulence as security of supply continues to concern governments globally.
If you miss a dip, or go through an extended period of inflated prices such as 2021 to 2023, you could experience considerable business impacts.
With a strong energy partner at your side, multi-purchase contracts can be beneficial, but you must be confident on your strategy from the outset.
Red flags to watch out for
- Any supplier or Third Party Intermediary (TPI) offering guaranteed savings associated with multi-purchase energy contracts are behaving irresponsibly with your business’ risk profile. Nobody can guarantee what prices you will be able to purchase your future tranches of energy for.
- Fixed or flexible commissions. Customers purchasing energy via TPIs should get clarity on the variability of their partner’s commission percentage. With more purchases of energy, there are more opportunities to adjust this.
- We would recommend anyone considering a multi-purchase deal to request a like-for-like projection versus a fixed deal, based on available market projections.
Fixed versus flexible contracts
Where a flexible product offers the chance to purchase a bespoke amount of energy, a fixed contract will provide certainty for an agreed contract term. As stated above, risk appetite will determine the suitability of a flexible product, however the final decision on the right product will likely be influenced by the deciding business’ view of the world.
Those with a bleaker opinion of the near future may predict continued rising costs and a fix at today’s rates as the only choice. Those with a more commercial mindset may see value in the ability to act purposefully at beneficial moments. Businesses who benefit from strong energy account management may be able to achieve real efficiencies with a flexible purchasing strategy; but these can never be guaranteed.
Whichever camp you fall into, the advice of a seasoned energy market professional is essential when considering these product types side-by-side.
Procure Smart offers free, no-obligation consultations on business energy strategy. Speak to us if you would like advice on your business’ profile and which type of contract is most suitable.
