Managing Market Volatility: The Case for Flexible Procurement

In today’s landscape of geopolitical uncertainty and market volatility, the ability to implement effective energy procurement strategies has never been more crucial for businesses striving for competitiveness and sustainability.

As businesses look for ways to limit their exposure to volatile energy markets, this article aims to advocate for the adoption of flexible procurement methodologies as a way to enact control and reduce long-term costs.

Understanding Market Volatility

Volatility has been a defining feature of energy markets during recent times.

During the pandemic UK energy prices dropped to their lowest for some years. Electricity prices fell to £45-£50 per MWh (equivalent to 4.5p/kWh – 5p/kWh), and gas prices ranged between 30p-50p/Therm (approximately 1-2p/kWh).

However, as the pandemic eased and the Russo-Ukraine conflict began this scenario quickly changed, giving way to unprecedented highs, erratic fluctuations, and substantial cost escalations, prompting questions about the future trajectory of the market.

Amidst this uncertainty, many businesses were unsure how to react. Do they hold out in anticipation of price decreases or commit to new agreements amid rising costs?

Predicting the future of energy markets is a formidable task, and despite diligent analysis and market assessments, sudden shifts can occur unexpectedly, challenging businesses to adapt swiftly. Negative news or external factors can trigger significant market movements, with prices fluctuating by tens of pounds in a matter of weeks, leaving organizations grappling with uncertainty until stability is restored, if at all.

Recent market data shows that electricity prices hover below £100/MWh, with gas prices around 4p/kWh for summer contracts. However, winter prices remain above £110/MWh, underscoring persistent volatility. The timing of market entry is critical, as a single day's delay can result in substantial cost differentials of up to 2p/kWh compared to previous periods.

The Role of Flexible Procurement

In the face of such market dynamics, complacency has emerged as a prevalent response, with some accepting higher prices under the premise of relative affordability compared to previous years. However, this passive stance raises questions about the wisdom of settling for inflated costs without actively seeking better alternatives.

Fortunately, there are proactive strategies to navigate this uncertain terrain. One such approach involves flexible energy procurement, and while the term 'flexible' may evoke apprehension for some, it offers a pathway to greater control and transparency in energy procurement.

Understanding Flexible Procurement

In the simplest of terms, flexible energy procurement is a method of purchasing energy on the wholesale markets in multiple segments prior to the point it is consumed. This approach allows a business to decide how and when to buy electricity, reducing their vulnerability to price-peaks.

For example, a company can segment its purchasing into chunks (tranches). This allows the business to take advantage of favourable market prices by purchasing energy at different future intervals, such as day-ahead, months, quarters or seasons.

Many businesses have historically disregarded flexible energy contracts as they associate them with high volume thresholds. Yet in recent years efforts have been made to democratise access and enable smaller volume clients to leverage market opportunities previously inaccessible to them.

Whereas a fully-fixed energy contract provides certainty to a business, there’s an associated premium. When a business opts for a fixed price contract, they are typically comparing the prices of supplier margins at that point in time, including any risk premiums and costs of credit along with the commodity and non-commodity costs.

The majority of businesses have always bought this way because it is easier to manage in comparison to a flexible energy contract. It can, however, drive up costs, and if the market is particularly volatile then high volatility premiums are built into prices to cover the time period it takes to make a decision.

Another advantage over fixed term contracts is that flexible energy procurement provides a greater degree of control over purchasing decisions. This stems from the ability to put in place a delivery mechanism to supply gas and electricity, but not necessarily purchase until the market is in a favourable position.

To this end, it usual for businesses to agree flexible contracts long before their supply is required. This is to allow for strategy discussions and for the market to reveal itself. On occasions prices two to three years in the future can be attractive and generate significant cost savings for businesses.

Planning for the Future

As businesses prepare to renew energy contracts, proactive consideration of procurement options is essential. By engaging with experts such as Big Energy Group, businesses can tailor purchasing solutions to their specific needs, safeguarding against future volatility and securing long-term viability.

Next Steps

If you would like to discuss your energy requirements with Big Energy Group, please call +44 (0)1423 225 333 or email hello@bigenergygroup.co.uk. Our experts will work with you to establish the most suitable purchasing solution for your needs.

For more insights on energy procurement strategies and market volatility, visit Big Energy Group's website here.