Energy Procurement Advice in the current climate

[geoffcapes1]

Hi all,

I thought I would create this post as help for those who find energy procurement a minefield (it can be if you’re given the wrong advice) and to allay some fears (mainly media driven) about energy prices doubling.

If your renewal is up this year according to the media your bills will double. This is simply not true, when purchasing energy, you don’t look at the price now, you also look at future pricing.

On what we (in the industry) call forward price curves, you wholesale energy prices is made up of an average forward price of the contract.

So if your electricity contract starts today. And the current wholesale price is £200 per MW. You don’t pay £200 per MW for the life of the contract. For a fixed contract you pay the average of the current price. The winter 2026 price, the summer 2027 price and the winter 2027 price (based on a 24 month contract).

Using the £200 example. Let’s make the following assumptions.
Prices.
Current - £200 (we’re almost in Summer 26)
Winter 26 - £100
Summer 27 - £100
Winter 27 - £100

Your wholesale energy prices for a new contract would be £125 (£500 divided by the 4 seasons).
Get a 3 year contract and you’ll be paying less.

Therefore, if your energy contracts are up soon. There’s no need to panic about prices doubling. You just need to look at your procurement strategy.

I’d be happy to answer any questions on this or anything energy related. Either on here or you can email me.

 

[Ozzy]

Interestingly, I'm involved in looking into this as the chair of finance for an Academy School Trust, so it has landed on my lap. This is the advice that as been distributed by the DfE to all schools, so would be interested in your take on this;
The bit I have underlined is the most intriguing comment to me..
------

Upcoming energy contract renewals ​

If your school’s energy contract is due for renewal soon, we encourage you to consider moving to a longer-term variable-rate basket, such as the DfE Energy for Schools Service.

There are very few competitive fixed price energy deals currently available. Longer term variable options can provide schools with greater stability, while still ensuring access to competitive public sector pricing.

If your contract renewal is within the next 12 months, please consider:

• Signing up to the DfE Energy for Schools Service, or
• Exploring comparable energy offers available through our partner public sector buying organisations.

 

[geoffcapes1]

Variable rate? So if the war goes on for another 6 months you’ll be paying a fortune. Or you fix right now and have say 3 year contract, where you’ll be paying pretty much the same as you currently do.

The DfE response looks like it’s written by someone who has no knowledge of how energy procurement actually works.

Personally I think that is very bad advice.

I seem to remember the DfE said that after the energy crisis in 2022 they told everyone to do the same. Now that was a monumentally bad decision. I know of one school who were paying 80p+ kWh for 2-3 months.

We saw that one coming, so fixed most of our clients before it happened.

The highlighted part is utter nonsense.
Yesterday we got a client (albeit not a school but a similar profile and consumption) a 3 year contract at 22p.
I’d say that was pretty decent.

Happy to look at your contracts for you and give you some advice based on your renewal dates etc.

 

[Ozzy]

Personally I think that is very bad advice.

I felt the same when I read it, so it is good to get some alternative thoughts. @NickGrogan would also be interested to hear your thoughts for balance.

 

[geoffcapes1]

I felt the same when I read it, so it is good to get some alternative thoughts. @NickGrogan would also be interested to hear your thoughts for balance.

It actually reads almost like they’re trying to push schools into using the Energy for Schools Service.

Preying on the lack of knowledge of how procurement works.

 

[NickGrogan]

Wow, if a broker had written that, I'd be suggesting they are miss selling.

Firstly I can think of just 2 suppliers who are not pricing at the moment - both aimed as SME market who would not quote for a school anyway. Its unlikely you've heard of either of them as they are very small. So to say "very few competitive fixed price energy deals currently available" is simply a lie.

"Longer term variable options can provide schools with greater stability" Variable stability? Thats a new one for me. If they said variable options can lower risk of fixing your contract at the wrong moment, then sure, but the one thing a variable contract does not offer, especially during a war is greater stability.

Digging deeper and ignoring the ad that reads like a scam and the bit on their website where is says brokers are unregulated (not true), what they are offering is a contract starting in April 2027 which is based on buying the power in the 30 months before the contract starts and some after it starts.

This does smooth out the market to some extent, and the price is actually pretty much fixed before the contract starts - you just wont know what you'll be paying until April 2027.

But the buying ahead thing is a double edge sword as the 30 months before April 2027, includes now - the time when prices are volatile and high.

If the war in Iran is resolved before April 2027, then a standard contract buying energy at market rates then, will be cheaper than the basket.

If the war is still going on in 12 months time, we'll all have bigger problems to worry about.

TLDR

Really bad marketing for an OK product, worth considering if you never want to deal with another renewal (it has a 30 month notice period, so once you're in, you're in)

 

[geoffcapes1]

The safest hedge currently is to secure a longer term contract now, regardless of when your contract expires.

Price curves before the war started showed very little in the way of downward movement for at least two years until more LNG becomes available from the USA.

So if you can maintain prices at your current contract rate for 3 years after your contract expires, I’d call that a prudent procurement strategy.

Effectively, energy prices can do what they like for 3+ years as you’re already covered.

 

[NickGrogan]

Not the worst advice. Depends to an extent when your contract is actually due and how important electricity spend actually is. There are plenty of businesses where even a doubling in energy prices wouldn't affect them.

Also remember that "energy" only makes up about 35% of the price you pay - the rest in non commodity charges - to pay for the upgrading of the grid and net zero and those are certainly increasing.

 

[geoffcapes1]

Of course. But most school contracts (in this instance) expire on 30th September.
And further ‘standing charge’ (which I like to call stealth taxes) increases are likely so it makes good business sense.

As for businesses not concerned with their energy price doubling as it won’t affect them, I’d suggest the finance director needs sacking if he or she does nothing about securing better rates when the opportunity arises or protecting the business against increased costs. After all. That’s his or her job!

 

[NickGrogan]

Of course. But most school contracts (in this instance) expire on 30th September.
And further ‘standing charge’ (which I like to call stealth taxes) increases are likely so it makes good business sense.

As for businesses not concerned with their energy price doubling as it won’t affect them, I’d suggest the finance director needs sacking if he or she does nothing about securing better rates when the opportunity arises or protecting the business against increased costs. After all. That’s his or her job!

Depends on energy spend versus other costs, for many companies, large and small, energy is not big enough to "shift the dial" and so rightly is given a low priority.

 

[Ozzy]

and how important electricity spend actually is

The reason this is taking up a lot of us governors' time is that for many schools electric supply accounts for tens, sometimes hundreds, of thousands. One exceptionally large MAT has advised that their energy supply is £10M a year, and a 10% increase on that would be crippling.

For us, a small SAT by comparison, the price fluctuations right now are a teacher's salary, and we're having to make guesses on what the future holds or end up being forced to cut teachers. No government support, of course, as is normal, but the DfE is breathing down all schools' necks, demanding to know what schools are doing to balance the books.

 

[geoffcapes1]

We’ve had those conversations with some of the MAT’s we work with.

They generally take our advice as we have long standing working relationships with them and the trust our advice.

We’ve been pretty good for them so far.

Happy to discuss this in a chat if that helps.

 

[NickGrogan]

The reason this is taking up a lot of us governors' time is that for many schools electric supply accounts for tens, sometimes hundreds, of thousands. One exceptionally large MAT has advised that their energy supply is £10M a year, and a 10% increase on that would be crippling.

For us, a small SAT by comparison, the price fluctuations right now are a teacher's salary, and we're having to make guesses on what the future holds or end up being forced to cut teachers. No government support, of course, as is normal, but the DfE is breathing down all schools' necks, demanding to know what schools are doing to balance the books.

Ozzy, happy to chat about it any time.

In terms of the large MAT - if they are spending that much and budgets are that tight then the upcoming increases in standing charges are going to be a real issue, they are also much harder to reduce is they are based on location and usage.

These will add 10% long before the Iran prices hit them.

MHHS is another issue to consider as this will raise costs too - currently talking to a rather well known school with 93 electricity meters, and no practical way to reduce that.