Using energy procurement to manage financial crisis
February 1st 2009

In time of economic hardship, it is important that everyone takes every opportunity to deliver value to their household and their organisations says Mark Dickinson,MD, Encore International

Energy prices are something that affect you all, record household gas and electricity bills and petrol prices have had a major impact on our personal lives. The problem is that as individuals it is difficult for you to influence these things directly so, while they may give us concern, it's a problem which requires a political solution and invariably such things take some time to be resolved.

However you can influence how gas, electricity and fuel costs affect your organisation as energy prices for businesses can be influenced commercially rather than politically and if your company is still purchasing its energy in a traditional way then your company could be risking its competitive position, which means that ultimately your jobs could be at risk.

The current markets for oil, gas and electricity have been highly volatile over the last 18 months, with oil prices increasing from $60 per barrel to over $140 per barrel before collapsing to under $40 per barrel last week. UK gas and electricity prices have shown similar levels of volatility and there is a good chance that your organisation has seen its competitive position materially disadvantaged in these market conditions. The question is what can you do about it? Whether you are an employee, finance or procurement professional or a company director you need to take the following simple actions: Find out how much your company will be paying for its gas and electricity in 2009.

The current market price for UK electricity is £49/MWh and if your company is paying more than £35/MWh then your company has missed a commercial opportunity and you need to understand why.

The current market price for UK Gas is 49p/therm and if your company is paying more than 32p/therm then your company has missed a commercial opportunity and you need to understand why.

In the event that you find yourself needing to ask why your costs are higher than the examples above, possibly even higher than the market prices quoted above then you are likely to get the following answers when you do: We have the process under control you don't need to worry about it The markets have been volatile there is nothing we could have done We are a conservative company and don't like taking risks We have an advisor and they tell us the best time to buy and they got it wrong In reality, if the process was under control then your company would have better results.The table (below) shows the benefits that have been delivered to organisations that have been using risk management to manage their energy costs for the last 1 – 3 years; simply look up how much your organisation spends on energy to gain a flavour for the value that could be returned to your company's bottom line. Those savings pay for real jobs and real pensions and should not be taken lightly! If you don't believe your organisation is delivering the types of energy price savings identified in the table then the following supplementary questions may be appropriate for you to ask: How does your company measure the risk it is taking? Given that the energy prices change on a daily basis surely your company is measuring its position on a daily basis and they could quickly tell you how much risk they have taken How did your company react to the recent volatility in energy prices? Whilst prices moved significantly such movement occurred over 375 trading days which means your organisation had 375 opportunities to solve the problem; what action did your company take? If your company is conservative surely it would have avoided a lot of the price volatility; again what action did your company take? If your advisor has not managed to guide you through these challenging market conditions then what was the purpose of the advisor? There are 140 major blue chip companies with recognisable international blue chip brand names, representing $3bn of energy spend that that do not need to answer themselves these questions and they have achieved the results described above.

It's time for your organisation to change its approach to managing energy costs and to do this you will need to encourage your organisation to take the following action: Introduce a robust measurement and control process so that your organisation knows how much risk it is taking with respect to energy costs on a daily basis Introduce a risk management process that allows your company to match its energy portfolio to the amount of risk it wishes to take Introduce a corporate governance process so that the process has the appropriate executive sponsorship Start to manage your energy costs several years into the future Start to manage energy price risk in the way that some of the biggest companies in the world currently do These techniques are not new, some organisations have been using them since 2004, but in the current market conditions they are more important than ever. Your company's future and your job could depend on it.

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