The current state of procurement and energy

Tarek Alaruri
COO & Co-Founder
Fairmarkit
5-minute read

Virtually everyone who has reached adulthood possesses a concept of what energy is. In a business sense, the understanding of energy takes on a different form. Nearly every organization has to deal with energy procurement at some level, and the larger the organization is, the more intricate and multifaceted the procurement of energy becomes, especially for organizations requiring several different types of fuel in order to meet their production needs and run their operations.

In the modern era of energy procurement, there are a host of new factors for procurement leaders to consider, including an array of new energy vendors, and an assortment of new fuel varieties that differ in their efficiency rates and energy loads. Each of these fuels may have a suitable place within an organization, and different energy sources may be more suitably supplied to certain buildings, facilities, and equipment options than other sources.

Generally speaking, the decisions about which energy types to use are most commonly made by CFOs at the highest level, and facility managers or supply chain managers at the lower levels. At the same time, the observations and actions of employees at all levels can play a role in the consumption of energy, and will thereby influence the financial resources that organizations are forced to allocate for the procurement of energy sources.

Moreover, there are a multitude of outside factors that influence energy expenses within an organization, and within a well-developed procurement strategy, it is essential for these prominent factors to be accounted for.

Utility vs. private energy

At one point, utility companies were the dominant players within the hierarchy of energy production and distribution, and this is still a common feature of many states where deregulation of the energy industry has been stymied. In other states where deregulation of the industry has occurred, utility companies have been forced to compete with private vendors that frequently offer the same products and services.

Due to this increase in the volume and variety of available energy sources and vendors, energy prices have often been reduced, and more services have been made available to customers. These services include wholesale rates, flexible contract terms, improved financing options and private account representatives. More often than not, private energy providers offer their customers more services and support than utility companies, including customized procurement solutions.

Reducing procurement partners

One of the ways procurement leaders can increase the efficiency of the energy procurement process is by identifying the minimum number of required vendors for handling all of their organization’s energy needs, if such an alternative is suitable for the business. If this solution can be enacted, it can alleviate the burden of having to interact and negotiate with many vendors, can simplify scheduling and processes, and can allow staff members to devote more time to essential tasks.

In fact, minimizing the number of vendors eliminates several contracts, while also vastly lowers the number of individual orders, invoices, and scheduled deliveries the company has to manage. This positively affects the day-to-day activities of everyone from the CFO to fleet and facility managers, all the way to the members of the supply chain management team and the procurement department.

Changes in energy procurement

As previously mentioned, in the last decade there have been substantial changes to the number and variety of available fuels within the energy marketplace. Because not all energy sources produce the same output in terms of potency or efficiency, it is imperative that procurement leaders in energy research their options before making decisions.

This requirement to perform research is particularly important for those organizations that dabble in renewable energy. Not all suppliers offer renewable energy sources, so this option is not always available. Also, the availability of different renewable energy sources can vary by region; some areas specialize in hydroelectricity and solar energy while others have landscapes dotted with wind turbines for the collection of wind energy.

There are organizations that consider reliance on renewable energy sources to be a hallmark of their business, which, in turn, is promoted to customers that believe in the green-energy ambitions of those organizations. Also important is the interplay between renewable and commercial energy sources, and the use of one energy system influences the pricing a business receives when engaging with the opposing system. Furthermore, credits and subsidies from municipal or state government entities for using renewable energy sources can help to offset their elevated purchase price.

Alternatively, there are other ways businesses can cut energy costs and prevent the over reliance on traditional energy systems without placing all of the burden on the acquisition of renewable energy. One clear option is the installation of more energy efficient equipment. Strategies that combine searching for the most competitive pricing with the internal behavioral changes of staff members are among the most efficient means of achieving a money-saving outcome on both the front and back ends.

Determining energy needs

In order to help their organizations determine their energy needs and the associated expenses that go along with fulfilling those needs, procurement leaders should push to have energy audits conducted within their companies. These energy audits will help to determine the energy efficiency of the organization’s commercial buildings and operations by quantifying the energy output of each unit of business, determining where the greatest amount of energy is being lost, and creating countermeasures to decrease the energy footprint of the business.

A well-executed audit will also incorporate a billing evaluation, where hidden fees identified, and where alternative energy-saving methods are suggested and discussed. These audits are often conducted by independent auditors, but some retail suppliers will conduct the audits in exchange for a percentage of the recovered savings as a commission.

Getting the best deal

With so many energy suppliers now inhabiting the marketplace and equipped to provide companies with energy, the burden has shifted to the providers to deliver incentives and discounts to coax businesses into becoming customers. These incentives can take many forms and follow several different models, but there are a few standard incentive packages that most suppliers are familiar with, and that are worth mentioning during a price negotiation.

First, rewards programs award businesses points based on the amount of money they spend on energy products. After those points have accumulated past a specified threshold, they can be redeemed for additional cost reductions or rebates, or may allow customers to graduate to a more favorable pricing structure.

This latter feature is also representative of a bulk pricing discount, which provides customers with better pricing dependent upon their total purchases over a set period of time. The higher the total energy purchases of the customers climb, the greater the discount is that they receive from the supplier. Finally, a payment reward system is also a common option, and negotiating for this incentive will provide your company with some benefit to paying its bills on time, like discounts on future purchases, or an automatic price reduction once the initial contract term expires.

Conclusion

Although the landscape of energy procurement has changed substantially in the last two decades, the majority of those changes have favored the customers. This is especially true to the degree that energy production and consumption have become so specialized that non-energy-industry businesses can now build their preferred use of energy sources directly into their brand promises.

More prevalent, however, are the opportunities organizations now have to control the sourcing and consumption of energy on their own terms. As such, procurement leaders now have all the tools required to measure and optimize energy use, to identify the most appropriate sources of energy for powering their organizations, and to negotiate with vendors to achieve the most favorable pricing terms.



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