As the wholesale energy price has become more changeable, increasingly businesses are moving away from fixed-price, fixed-term contracts to avoid the risk of a badly timed purchase.
If a large energy consumer commits to a fixed-price agreement with a supplier, the timing of the agreement is critical. For example, if a business had committed to a fixed-cost gas contract at some point in 2013, the unit price could vary by up to 30 per cent depending on when in the year the deal was signed. For electricity, prices varied by up to 25 per cent. For a large consumer, this might mean a bottom-line difference of several million pounds.
To minimise this risk, most of the larger energy consumers have become energy traders – buying and selling units of supply in response to market trends in order to minimise their exposure to unfavourable market shifts. Energy intensive businesses will typically employ a dedicated person or team of energy-procurement experts, which will work closely with a number of supply partners to try to secure the most favourable deal.
However, mid-market consumers are also alive to the potential benefits of the more flexible approach their larger counterparts are taking, and the typical relationship between the average medium-sized business and its energy supplier is changing drastically as a result. Many customers now rely on their energy supply partner as much for market information and support as they do for the commodity supply itself.
In just the same way as a customer of an investment bank expects regular updates and intelligent input from their account manager, the same is true of customers buying energy through flexible contract. Energy companies, like fund managers, are looking after a significant investment for their customer, so there is an expectation of absolute transparency. Sadly, this is an expectation that the energy industry has historically failed to meet much too often.
Adding to the challenge for suppliers is the fact that, with the proliferation of instantly available, 24/7 information and services over the internet, customers increasingly – and quite rightly – want this information to be at their fingertips instantly.
A fly on the wall of a board meeting of any large energy supplier in recent years will have seen ‘customer relationship management’ as a central topic for discussion, with the emphasis on how the operation can be performed as efficiently as possible with as little time spent as possible.
However, the customer’s expectation is that they will be able to choose how and when they engage, this is becoming an outdated concept. Instead, customers will increasingly manage their relationships with their suppliers, and the suppliers will need to meet their customers’ expectations or lose business.
Research carried out by Gazprom Energy shows just what a potentially deal-breaking issue this is – a survey found that almost one in five customers had actively switched suppliers as a direct result of billing issues like lack of transparency or inaccuracies.
The survey also asked respondents to rank their priorities by assigning points to those they considered important. On average, customers assigned less than 50 per cent of their points to price, giving slightly more emphasis to a combination of other factors, the most important among which were quality of service and accuracy and simplicity of billing.
What this shows is that, as changes in the market price of energy have become harder to predict – particularly when it comes to gas – the process of buying energy can no longer be purely transactional, and businesses are demanding much more choice and flexibility from suppliers as they look to take control of their spending.
One of the most important requirements for many customers is a degree of forward cost clarity without the cost premium and gamble associated with fixed price, fixed term contracts. Again, the way to achieve this is by buying and selling chunks of energy in advance to meet forecast levels of demand.
Suppliers need to produce tailored products that offer their customers the freedom to do this.
The contract Gazprom Energy has structured for our customer Sheffield Forgemasters is a good example.
The business – a heavy engineering firm that manufactures cast and forged components for energy, engineering and process industry businesses around the globe – frequently bids for work on a fixed price basis that will often be physically delivered months or years down the line. This poses a risk for the business, as the energy cost makes up a large proportion of the manufacturing cost, so a significant jump in energy costs between securing the work and carrying it out will eat directly into the profits, and could mean work is delivered at a loss.
However, because the business has the freedom to buy energy in advance to meet its forecast needs, it can be certain of the energy costs for any given job and build this into the quote.
This way of working is only going to grow more popular as the cost of energy increases and the natural fluctuations in the price market have a more significant bearing on businesses’ profits. As we are already seeing, this will make businesses much more engaged in the process, and they will be looking for a partner that can advise them on the best approach for their business, not just a fixed price with little detail on how it was arrived at.
For many suppliers, making the shift towards this partnership approach represents a major departure from the way that many contracts operate today. Significant investment will be required to ensure they are responding quickly to customer requests, providing clear and insightful communications and being completely transparent about their costs.
With the significant energy price rises that will face consumers in the years ahead, competition for contracts will be fierce and suppliers that don’t give their customers what they need will find themselves losing out.