Aug 15, 2006 -- Datamonitor

 

Almost two thirds of UK large electricity consumers will be negotiating new contracts now, and could face a nasty surprise with some of the highest prices ever for the new contract round. Flexible purchasing options are proving increasingly popular within the I&C market to manage risk, and suppliers will need to adjust to such contracts being the norm rather than the exception.

Many buyers are turning to third party intermediaries (TPIs) to gain some help in navigating the complicated buying options available. EnergyQuote, a TPI with many years' experience in helping companies to negotiate the complexities of the different tariffs available, has seen the popularity of flexible wholesale purchasing contracts increase in recent years.

Rob van Leeuwen, head of European operations for EnergyQuote has warned buyers to ensure that they understand the necessary risk strategies before trying to negotiate in this complicated arena. While potential savings are possible, the wrong strategy could lead to over-exposure.

Buyers tend to sign fixed term contracts based on a tendering exercise with several suppliers in a given week which in the vast majority of cases results in the cheapest supplier winning the contract. Most buyers do not tend to time their negotiations based on underlying wholesale movements, and for those suppliers only luck can helps them secure preferential prices.

A flexible contract allows buyers to purchase their energy requirement in blocks over the duration of their contractual contract, eliminating the risk of buying all the power on a single day when the market could be higher than in the future.

Suppliers, on the other hand, have had to wise up to this new purchasing strategy very quickly to remain competitive as demand for these products increases. To ensure these products work, suppliers have been liaising more closely with their upstream operations, facilitating new billing methods and providing an efficient account management service.

As many new buyers look into the increasingly popular flexible contracts, early signs show that there have been many success stories. There must however be a clear and concise strategy adopted with appropriate risk parameters to ensure the success of these types of products.

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