Energy Procurement

ENERGY PROCUREMENT NAVIGATING THE COMPLEX AND FAST-CHANGING WORLD OF ENERGY PROCUREMENT

Continued volatility in the energy market has brought cost into sharp focus. Buying better is no longer enough, companies must also focus on managing overall consumption. Thanks to tightening legislation, this will need to be achieved in tandem with a net-zero approach. In this article, Jodie Eaton, CEO of Shell Energy UK Limited, gives her advice to help energy managers navigate market complexities and accelerate their decarbonisation strategies.

The cheapest unit of electricity is the one that you don’t use and cutting energy use wherever possible must underpin both your procurement and netzero strategies. Minimising the amount you want to buy should be the priority.

One route that gives a level of certainty in a volatile energy market is power purchase agreements (PPAs). These contracts with renewable electricity generators can help businesses to achieve sustainability goals and lock in long-term pricing for eco-friendly electricity, helping to manage the risk of volatile power markets while generating savings on energy bills.

There are a wide range of PPAs available, which means expert advice is key to choosing the best option for your requirements. Using a third party to manage your PPA also helps. They can handle the power operations and balancing for you, as well as fix and manage the power price along the tenure of the PPA and help you promote the environmental attributes for both reporting purposes and to keep stakeholders up to date on your environmental performance.

If you are looking for certainty, a baseload PPA can be tailored to your demand and attached to an assetspecific Renewable Energy Guarantee of Origin (REGO)1. This gives businesses the reassurance of fixed tenor, fixed volume and fixed price. This type of PPA can be incorporated (sleeved) into a standard flex contract, for example.

Another option is financial flexible PPAs that are supported by asset specific REGOs, which deliver improved price risk management without impacting on the supply contract; and ‘as produced’ PPAs, where the customer takes a generation mix and works with the supplier to develop a solution that matches their risk profile and energy needs.

Securing volume ahead of time, even if you have to pay an upfront margin, is better than volatility, which is likely to be a characteristic of the energy market for the long-term, especially as the supply mix transitions to increased levels of intermittent renewable sources.

Getting a mix that is right for your business is critical, so work with your supplier to nail down contract terms and conditions, as well as hedging support. In this way you can be confident of expert advice to manage future as well as current needs in ways that can make a fundamental difference to energy cost management.

NAVIGATING A CHANGING MARKET

Another reason to work closely with your supplier is that the market is in transition. The Government is clear that it wants big business to innovate and come up with their own solutions within the framework of delivering decarbonisation.

Not only that, but the Government has also just concluded the consultation into its first Review of Electricity Market Arrangements (REMA) for more than 20 years.

Described as potentially ‘the biggest electricity market shake-up in decades’2, the proposals are designed to deliver a step change in the rate of deployment of low carbon technologies, reduce dependence on fossil fuelled generation, encourage flexibility across the system, optimise assets, use pricing to encourage change in consumer use and maintain system security.

POTENTIAL FOR LOCATIONAL PRICING

A key element of proposals considers the potential shift from national pricing to locational pricing. Options include nodal pricing, also known as locational marginal pricing (LMP) that could see the UK moving from one single market to up to circa 750 pricing markets.

A more likely approach is zonal pricing where the network is divided into different zones such as a north/ south split. Each area would have its own single wholesale price for electricity with boundaries reflecting major transmission constraints.

A PARTNERSHIP APPROACH

Having the right expertise available to help optimise energy efficiency, drive procurement performance and guide you through all the upcoming changes will deliver significant benefit.

Working collaboratively with your supplier is crucial to developing a long-term strategy that will keep you in control. To get the most benefit from the relationship you should engage with your selected supplier for as long as possible so that they not only work with you, but also invest in the contract to help you to achieve better returns and support your business’ journey through the energy transition. www.shellenergy.co.uk/business