Member Control Panel
Intelligent Energy Procurement
| Intelligent Energy Procurement By Paul Miller, EnergyQuote JHA It’s July 7th 2008 and the world is waking up to a day when Brent oil will hit $147bbl. The US Government have recently introduced sweeping legislation to bail out mortgage facilitators Fannie Mae and Freddie Mac and looking back some may say this peak in oil was the beginning of the end; Lehman Brothers collapse, global recession and near economic catastrophe. It was an interesting time to be a buyer of power and gas!  As recently as 2008 there was still a clear index between gas and oil prices; many analysts, traders and buyers monitored the movement in oil as an indicator for gas prices movements. Also at time, Gas fired generation of UK power was around 36% of the total power provision, so if the oil price increased, gas followed suit and power prices were never far behind. Granted, even if armed with supply and demand fundamentals and all the myriad of technical indicators people use to monitor power and gas movements, history tells us that it’s not that simple. However in 2008 the base load power priced breached £90Mwh leaving many energy buyers the unenviable task of informing their businesses that utility contracts were about to double in price. In normal circumstances what would do you do? In 2008, few buyers considered the possibility that their budget for utilities could be breached so quickly and now they faced a decision to either lock out the remainder immediately in case things got even worse, or track the market and hope for some price and market correction. Within the plastics industry, along with many other manufacturing organisations, the bulk of your energy consumption is linked to the cost of manufacturing process and to a degree, the final delivered cost of your product. Any major deviation from a forecast budget position suddenly becomes an issue of profitability and perhaps more critically, impacts the business’s ability to remain competitive should others in the industry have secured energy at more favourable rates. The majority of energy buyers at this point were simply not fully equipped to make an informed purchasing decision and those that were able, either had to report the exposure to the business or ask for authority to buy at record price levels. The 2008 scenario was just the highlight of what has been a period of major volatility since 2004. The decision making process, the tools and techniques at a buyers disposal and the support available has never been under such scrutiny as it is today. The key for any business is to understand and manage both the price and volume risk. Energy markets are inherently volatile and like all major business decisions analysing the risk and formulating a strategy is recognised as ‘best practice’. A business would not normally invest in a new processing plant or develop a new product without first isolating, considering and understanding any and all identified risk – similarly when you spend hundreds of thousands or even millions on energy why should energy purchasing not follow the same process? As a buyer when you make a decision to buy all or some of your commodity exposure what drives that decision making process? Is it solely price and the business’s budget position? Do you consider operational, market, compliance, credit or other commodity risks? Are you left to justify your decision making process to the board before, during or after the decision has been made? Wouldn’t the process be easier, more efficient and commercially viable if the decisions and the price levels to buy are pre-approved by the business? EnergyQuote JHA has been providing risk based policy and strategy services to global business for over 35 years. These organisations can spend as little as £500k a year to over £500million and include some of the largest brands in the world. The concept is simple; as a business you are unique, the risks you face are unique. By first identifying the risks and goals associated with commodity buying within your business you can create a formal policy on procurement. This policy sets the framework for all future decisions and from the understanding realised by this policy creation, EQJHA can help identify a purchasing strategy which manages and mitigates the risks and helps achieve your goals. This process may engage all levels of the business including the energy manager, the buyer, treasury and the board. Only by engaging with key stakeholders in the business do you identify a corporate view on risk appetite, and once this view is quantified the business can put in place the policy and strategy which enables understanding, accountability and defensibility in all future commodity procurement decisions. Only once a business has this in place, will it be confident that its long term purchasing and risk model is robust enough to navigate through the challenges that awaits the next time oil heads towards $147bbl.  Understanding supplier credit Credit over the last 24 months has become a fundamental factor for suppliers when pricing and providing supply contracts to any organisation. It is now one of the main factors for suppliers failing to provide prices or to demand strict payment terms. Often a business deems credit as its ‘credit worthiness’ and considers that because the companies credit score is good they can get a competitively priced supply contract – this is sadly not the case
Credit insurance can often only be provided/confirmed on the day of execution– sometimes only after a contract has been agreed. How can I help my business get credit? The list below represents the key areas a supplier will request/engage in to resolve a credit issue;
And if I still cannot get credit?
PAUL MILLER EnergyQuote JHA Tel: +44 (0) 207 605 2303 Fax: +44 (0)20 7603 6415 Email: p.miller@energyquote.com Web: www.energyquote.com |
