Rising energy costs – what can you do? Posted at: March 7, 2022 Posted in: All Soaring energy costs are affecting businesses of all sizes, in all sectors. Whilst the price of oil is most often quoted, the wholesale price of gas has increased over 600 per cent year-on-year and electricity is now edging towards 500 per cent higher for the same period, at the time of writing. With wholesale energy markets continuing to spiral, it’s little wonder that businesses need to look for new ways to manage costs. What’s causing prices to rise? The worldwide economic impact of the pandemic, coupled with the Russian invasion of Ukraine, are partly to blame for the price increase. Clearly, the drive towards decarbonisation is having an impact. Gas is seen as a stepping stone to meet net-zero carbon targets as it’s perceived as more favourable when compared to oil and coal. Around 40% of UK electricity power stations are gas-powered which accounts for the fact that electricity prices follow gas. Whilst the UK has invested heavily in renewables, there is still much work to do to make renewable sources as attractive – as reliable – as gas. Despite our windy isle and the opening of some of the world’s largest off-shore developments, demand for energy still far outstrips the supply of renewable-generated power. Strategies to deal with current rising costs “Higher prices are here to stay,” explains Jonny Michael, CEO of JMCL. “It’s time to think smarter about how energy is bought.” Below we highlight two of our recent case studies which illustrate how businesses can deal with the current situation. Case Study 1 – Hedging to mitigate higher prices A common solution to managing costs during a volatile or upward scaling market with large contracts has been to negotiate flexible contracts. Flexible contracts facilitate in-contract price changes. However, as we’ve seen with one new client, flexible contracts are often unwieldy and complicated, they require experience and expert knowledge, all too often making it difficult for a business to realise the financial benefits. A lesser-used but more effective antidote in a rising market is that of ‘hedging’ and this is the strategy we’ve recommended to this multi-site manufacturing client. It’s a relatively simple approach that involves spreading risk by carving up energy contracts (among one or several suppliers) and staggering the end dates. This mitigates the impact of price increases as only a portion of energy costs are affected when a renewal is due. “Hedging staggers price hikes and is a helpful approach in a rising market as it does mean you’re not hit all at once with a significantly higher overall bill. It’s an approach that reduces volatility, averaging out price rises and falls,” says Jonny. “Hedging strategies are much less complex than flexible contracts but because they’re less lucrative for brokers or intermediaries, they’re much less common.” Case Study 2 – Splitting your supplies Another approach that can be beneficial in a rising market is one we implemented some time ago with a long-standing retail client (42 UK outlets) which has proven very successful in addressing recent price hikes. It involved splitting large and small supplies and negotiating multiple contracts. It’s worth noting that supplier departments work off different price books, so it’s usually possible to negotiate more favourable contracts, even with the same supplier, if you know how the suppliers work (as we do) and split your supply accordingly. This has proven the case in this instance, and we’ve saved our client considerable sums. Long-term planning Multi-site businesses will most likely find it easier to implement either of the above strategies, but this approach can also be suitable for single-site businesses. In addition to the two strategies outlined above, we have many more strategies for helping clients. Unlike brokers, we provide independent and objective consultancy advice, and all fees are transparent. We don’t take any fees from suppliers so there’s no conflict of interest when we advise and implement. To realise cost savings, it’s necessary to have a long-term plan. It may take time to set up the contract start dates and to realise the benefits but as Jonny points out, it’s an approach that “pays back in spades over time.” “It’s an approach that pays back in spades over time.” Summary Whilst no-one knows what the long-term future holds, it’s clear that the price of energy is going to be an ongoing headache and businesses need expert advice to put in place long-term plans. To find out whether a hedging strategy, split supply strategy or alternative approach would help your business mitigate the impact of rising prices, please contact Jonny Michael at j.michael@jmclconsulting.com or call 07831 390161.
