Is your energy-buying strategy still fit for purpose?

Over the past few years, buying energy has not been for the faint-hearted.

We’ve seen huge market shifts since the end of 2020, from the Covid-19 slump to the Israel/Gaza situation via the Russian/Ukraine conflict, cost of living crisis and more besides.

But where are we now – and how do you, as a business energy consumer, navigate the market to ensure you get the best value?

The impact of reduced liquidity

One of key characteristics we are seeing in the wholesale market is reduced liquidity (a topic of sufficient concern that Ofgem is soon due to report back on a consultation into it).

There have been a number of drivers of this. But the Residential Energy Price Cap and pricing mechanisms under Contracts for Difference (CfD) have been key.

We are now seeing more generators hold onto volume until the last minute, which shifts things closer to the front of the curve, i.e. just before delivery.

More risk for buyers

We’re also seeing more volatility in the market, a shift in the generation picture – with more intermittent wind and less 24/7 fossil-fuel energy – and more reaction to wider geopolitical drivers.

This creates more risk and more complexity for those responsible for business energy procurement, which I appreciate doesn’t sound like good news.

As we approach elections in the US and the UK, these further fuel uncertainty and make investment in energy-related infrastructure more unlikely. All these conditions make it very hard to know how best to manage risk.

Does a fixed price still suit your strategy?

Fixing your energy volume and rate at one point in time, when the market may be volatile, can feel hugely risky. Yet many businesses have avoided a move to flexible hedging precisely because it was felt to be too risky in the past.

Thankfully it’s no longer an ‘either/or’ situation.

Most suppliers now offer more hybrid contract types, for example facilities to build your rate over multiple points, or to factor in a mid-term price review. So it’s worth investigating what options are available.

Review your hedging strategy

If you are already hedging via a fully-flexible purchasing contract, you can’t afford to think devising a strategy is a ‘one-time’ job.

We now recommend you review it regularly – at least annually – to ensure it continues to fit with your business’s energy requirements, including current demand and future forecasts.

You may want to consider the bold step of hedging a proportion of your volume closer to delivery to take advantage of more attractive Day-ahead prices. Many savvy buyers have seen this pay off – although clearly we cannot guarantee future market conditions.

Be realistic about what you want to achieve

The market has certainly dropped recently. So it’s worth revisiting your hedging strategy to see if you can gain a bit more stability and hit your energy budget levels early.

To ensure you are in a position where you can respond to what you see in the market, do make sure you are lined up with your energy supplier in terms of how you can do that. For example, by putting in place triggers to lock in at set prices.

It’s worth remembering that action and inaction are both decisions, and not doing something can be as significant as acting.

Look at options to diversify

As you are no doubt aware, buying energy in the usual way via a purchasing contract isn’t the only way to secure the volume you need and manage price exposure.

So do consider looking at options such as on-site generation, or to procure energy directly from a third-party generator via a Power Purchase Agreement (PPA).

Exploring Demand Side Response (DSR) opportunities is another key consideration. And don’t forget, the market is developing at pace – new opportunities such as battery storage are worth reviewing frequently.

Factor in the non-commodity elements

Finally don’t forget, it’s not all about your commodity costs.

Your non-commodity charges are a key – and growing element – in your overall energy price. They already make up in the region of 45% of invoiced electricity prices, and could jump to as much as 60% by Q2 2025.

Your energy supplier should be able to provide an insight into these costs, so do ask for this information to ensure you stay up to date. If you want to contact the market experts on our Optimisation Desk, you can get in touch via flex.optimisation@npower.com