Future contracting strategies

Future contracting for commercial and industrial electricity users - saving your business money through market timing.

Forward purchasing electricity contracts is not a widespread practice among businesses currently. However, securing electricity agreements early can be an excellent strategy for commercial and industrial users who want to reduce their costs and manage their consumption. Future or forward purchasing can be particularly beneficial for manufacturing businesses where power consumption is substantial.

Conventional behaviour for electricity consumers is to renew their contracts when their agreements are coming to an end. But given how infamously volatile the Australian energy market is, with wholesale prices often fluctuating up to 5c/kWh, in addition to the current global situation affecting supply and demand, future purchasing can be more advantageous to large energy consumers. Adopting this approach helps shield businesses from the unpredictability of Australian energy market prices.

Put simply, the idea is to secure the next contract in advance, when wholesale prices are low. This results in reduced retail rates and, subsequently, a lower total annual spend on energy. To do this successfully, market timing is essential.

Timing the market entails staying on top of developments in the National Energy Market and changes in wholesale prices. Businesses should ‘strike’ – that is, request electricity tenders for their next contract when prices are still relatively low.

But it’s not a cut-and-dried situation; there are many factors that can affect prices like diminished supply due to climate or environmental conditions (such as La Nina or bushfires), prolonged power station outages, and worldwide situations like the war in Ukraine, that can result in a drastic upswing in prices. The ideal scenario would be the opposite: steady power supply, low demand, a less severe climate, and putting a keen eye on movements in the National Energy Market is key.

Case in point, a Melbourne-based plastic moulding company had initially signed on to a contract set to end in December 2022. The agreement was made during a period marred by several longterm power station outages; thus, supply could not keep up with demand and prices were inflated. However, over the interim, power stations came back online and La Niña made for a milder climate; prices dropped to 5c/kWh after reaching 11c at its peak.

Whilst Dolphin Products was still in the middle of their contract in early 2021, Leading Edge Energy reached out to the plastics manufacturer advising them it would be ideal to go to market for their next contract seeing as wholesale electricity prices were exceptionally low.

Dolphin Products signed a forward contract for electricity that would start on January 1st, 2023. Because they were able to secure the contract at the right time due to Leading Edge Energy’s advice, the secured rates for the new contract were significantly lower than the contract they were currently on.

And it was a good thing too as, towards the end of 2022, the world found itself gripped by an energy crisis and prices climbed to record highs. If the plastic manufacturer had chosen to renew their contract only when it was ending, their new contract would have been based on retail rates as high as 15 to 20c/kWh.

But since they went to market much earlier, capitalising on the low wholesale prices at the start of 2021, they were able to secure peak and off-peak rates between 2.5 to 5c/kWh. And aside from securing reduced rates, Dolphin Products found even more advantages to working with Leading Edge Energy.

Given how volatile Australia’s electricity market is, working with an energy broker, like Leading Edge Energy, that’s attuned to the shifts in electricity prices and familiar with the power requirements of commercial and industrial consumers is ideal. Energy brokers can take the reins in collating and analysing offers from energy retailers, give data-driven and experience-based advice, and assist with procurement, all in support of reducing energy costs. Additionally, Leading Edge Energy can also help companies reduce their carbon footprint and make significant energy efficiency improvements to their site, thus leaving clients to focus on activities that can grow their business.

Forward purchasing and timing the market just so can be rewarding but very time-consuming – having an expert handle these can make it more convenient and lead to better results, aka savings. leadingedgeenergy.com.au