The engines are revved, flags waved – and they’re off! But any sports fan will know that when it comes to the F1 Grand Prix, it’s not all about the driver.
Even if you’re Sebastian Vettel, you won’t win the race unless your car and the team around you are fit for purpose.
The same goes for energy buying in the I&C Market – now more than ever it’s all about the car and not just the driver, or in this case the trader.
Partly that’s because when you look at an electricity contract now the non-commodity charges can be between 35% and 55% of the contract value. So no matter how well you buy the physical electricity (commodity) and how good your trading strategy is, it’s only part of the jigsaw puzzle.
What are the team tactics?
If you buy energy through a flexible strategy that performs really well don’t break out the champagne on the winner’s podium unless the contract that the strategy sits in is negotiated to maximise the value of those trades. Here are two examples of how the contract can negate the net benefits of your trading strategy.
Firstly, very few consumers or brokers will negotiate or optimise their ‘baseload’ percentage – basically the total of their constant energy use – in a contract. This allows the supplier to push excess ‘peak load’ – the maximum power needs – and ‘residual’ into the contract. Now this results in a higher overall cost because peak load/residual trades at a higher price than baseload.
Ideally the object of any contract should be to negotiate as much baseload into the contract as possible to get a better return on trading margins.
Secondly, contract terms amongst suppliers that previously remained unchanged for many years are now being amended and broadened annually to pass more risk and onerous terms onto suppliers.
Stringent ‘take or pay’ terms and clauses that allow the suppliers to collect environmental charge increases retrospectively still catch many customers out. Caps on trading dates and markets from which prices can be obtained also diminish the customer’s opportunity to boost the benefit from their trading strategies.
Don’t just sign on the dotted line
I believe there is a cultural issue here preventing proper evaluation of supplier terms, as customers become so used to signing off supply contracts annually without giving those terms the attention the contract value warrants.
For instance, how often does any organisation sign off a high value multi-million pound contract without showing the terms to a lawyer? Energy is unique in this respect. Also, often it is difficult for in-house lawyers to assess and understand these terms as the language and mechanisms are very industry specific.
I’m not saying that any of the latter is easy to implement and offer – but it’s the challenge that now faces the I&C TPI/broker/consultant market if they hope to keep their client in pole position from start to finish.
Ben Dhesi is a qualified solicitor and Head of Energy Management at Pulse Commercial Utilities. Pulse were finalists for I&C Most Trusted, Most Innovate and Rising Star at The Energy Live Consultancy Awards.