Purchase Energy
10 Steps to Maximise Savings when Negotiating Energy Contracts
The Australian electricity markets are being gradually converted from tariff based electricity sales to negotiated contracts; this process is complete in the Eastern States and South Australia. The process of negotiating an electricity contract can be complicated and time consuming. The potential savings are high, but achieving these is certainly not automatic; in fact many consumers have experienced large price increases.
Genesis Now has arranged many supply contracts, and offers the following guide to maximising your savings while minimising the time and effort involved, when arranging an electricity supply contract
The following steps are intended to assist you.
If after readings these steps, you have any questions, please contact us.
The 10 Steps
- Consider your energy requirements
- Decide on value added services
- Tender Effectively
- Go long
- Minimize Fixed Charges
- Consider a buying group or broker
- Use Brokers Sensibly
- Reinvest savings
- Monitor Accounts
- Consider separating MDA services
1. Consider your energy requirents
Electricity isn't just electricity these days. Apart from price, you may consider some of the other services which an energy supplier can provide. These could include:
- Electricity consumption (with a breakdown of peak and off-peak electricity for each month)
- Electrical demand (the maximum rate at which electricity is used), if known
2. Decide on value added services
Electricity isn't just electricity these days. Apart from price, you may consider some of the other services which an energy supplier can provide. These could include:
- Customized billing, such as on a set day each month, presenting information useful for your financial accounting, consolidated billing with other sites, etc
- Energy efficiency advice or services
- Lease or hire-purchase of energy efficient equipment
- Energy services contracting (energy efficiency services on a performance payment basis)
- Using Green Power ™ (electricity from environmentally friendly sources such as solar, wind, and small hydro) for all or a portion of your electricity requirements
3. Tender Effectively
Minimise the time you spend communicating with electricity retailer sales representatives by inviting them to respond to your invitation to tender. This will result in much more efficient use of your time than you receiving a proposals of varying formats and pricing structures from many retailers.
To get the best deal, invite tenders from at least six of the electricity retailers with a licence to operate in your location. With knowledge of how competitive each retailer is at the time of tendering, this can be reduced to three tenders.
Businesses should be in control of the tender process.
Invite tenders which will be relatively simple to compare. We have seen tenders with up to 64 different electricity prices, varying according to season, time of day, type of day (weekday, weekend or public holiday).
A request for tender for should state your requirements clearly and logically. The document should contain:
- Business background and operating times
- Consumption details, monthly peak and off-peak consumption over the last two years
- Maximum demand details over the last two years (load profile if available)
- Expected business forecast related to energy consumption
- Required format for presentation of tender response
- Details on any value added services. A priority should be given indicating whether these are essential, desirable or optional
- Firm price or exposure to pool prices, length of contract required (should ask for several scenarios) payment terms and any special billing conditions
- Contract conditions
- Any special conditions of supply
4. Go Long
While you could arrange a one year contract, we recommend that you consider at least a three year contract. The main advantages of going long are:
- You will have to go through the administrative work of arranging a contract less often
- The electricity retailers will try harder to win your business if it means securing sales for three years
- We believe that prices are likely to increase and that it is wise to "lock in" prices by entering a longer contract. (You should make your own judgement on likely energy price movements and decide whether you agree with this assessment)
5. Minimise Fixed Charges
When preparing and invitation to tender, or assessing tenders received, favour offers which are based mainly on energy (consumption) charges. Some customers have fallen into the trap of accepting contracts with very high fixed charges because they have focused on the seemingly attractive low energy prices. While high fixed charges are good for the electricity retailer because it gives them a more stable cash flow, it reduces an electricity consumers ability to reduce their costs by managing the amount of electricity used or managing when it is used.
Electricity should be considered as a variable cost; not a fixed cost. Also see the step Reinvest Savings
6. Consider a buying group or broker
A buying group has the potential to achieve the double benefit of lower electricity prices (because of volume buying) with the benefit of lower administrative effort (by spreading the load over many contracts). The buying group could be based on geographical area, industry type, association or any combination of businesses to give the best outcomes.
Brokers act as an intermediary between the seller and the purchaser and usually charge a fixed fee or a fee based on the savings achieved.
7. Use Brokers Sensibly
A broker may offer two benefits when negotiating an electricity contract:
- Reducing the amount of administrative effort and time which you have to spend
- Achieving lower prices because of specialist knowledge of the industry and increased buying power resulting from representing many electricity consumers
By using brokers sensibly, we mean:
- Ensure the broker has a sound knowledge of the energy industry, rather than a general broker who deals with phone contracts, stationery supplies, and other business requirements.
- Ensure that not also obtaining a fee from the electricity retailer (ie biased to particular retailers)
- Ensure the broker is a registered business with a track record and not just a fly by nighter
- Try to select a broker who can also help you to reduce electricity costs by assisting you to manage maximum electrical demand and to reduce total electricity consumption.
- Have a clear agreement with the broker which includes a proper tender process, viewing tender documents and involvement with selection of the electricity retailer
- Only use a payment method which pays for effort and result. You can reasonably expect to be able to achieve industry-average savings of around 20% by negotiating an electricity contract yourself. Paying a percentage of all of this saving to a broker would result in an unearned gain for the broker. Instead, we recommend a payment consisting of one or more of the following:
- A fixed payment which reflects your avoided administrative effort ($500 - $1,000 depending on complexity)
- A performance bonus based on the savings in excess of the industry average (eg. 25% of the savings)
8. Reinvest Savings
The electricity industry has gone through considerable change and restructuring. Electricity is now viewed as a commodity to be bought and sold However, it not a limitless resource and it can not be stored in reasonable quantities. The electricity price is driven by the market demand; the more the demand the higher the price becomes as the resource runs out We have already seen signs of demand being stretched and therefore prices may have to increase into the future to attract new generators into the market. Any saving achieved now should be reinvested to reduce future consumption and therefore reduce the impact of inevitable price rises in the future. Improving energy efficiency will also have a positive impact on the environment.
9. Monitor Accounts
Once a contract is established the billing accounts should be checked for accuracy and adherence to the contract conditions. It is common for errors to occur in billing accounts and normally these seem to be in the favour of the retailer. (We have found billing anomalies of up to $80,000 for one monthly account. Monitoring the accounts also allows an opportunity to review the trends in consumption and to modify usage patterns.
10. Consider separating MDA services
Your electricity supply contract will include a charge for a Meter Data Agent, normally arranged by the electricity retailer. By separately tendering the supply of this service, you are able to specify value-added data services and to select MDAs and electricity retailers independently. This can be a particular advantage when you next tender electricity supplies, and want to keep a particular MDA but want to obtain the cheapest electricity.