ANEXO CENTROS TECNOLÓGICOS DE LA COMUNIDAD DE MADRID

Activity by non-domestic customers in their energy supply contracting is dictated by a number of issues, primarily by the size of the business and the level of energy spend, at an absolute level, and also as a proportion of total costs.

Most larger and many medium non-domestic customers are now more active in their energy procurement in the sense that they will engage professional support if they do not carry out the role themselves. Typically, the larger the organisation and/or the greater the spend on energy, the more resource is put into the procurement process and energy management. Large organisations with a high spend on energy are likely to have at least one energy procurement and management specialist. At the other end of the scale, a small commercial site is unlikely to devote much resource to energy procurement, with the level of energy spend and the potential cost benefits available being thought not to justify it. For these users, perceived market complexity and poor service from suppliers can also act as deterrents to accessing the competitive market.

These factors, along with the type of business, are also important in

influencing the approach to risk that is taken. Large organisations that consume a significant amount of energy, and thus have focused procurement resource, may be more interested in more flexible purchasing and risk-sharing

arrangements than the fixed price annual contract. The level of in-house energy expertise is important here, as awareness of site consumption, demand profiling and utilisation, and an ongoing commitment to the procurement process, are required. Conversely, sites with a low energy spend, whether part of a single or multi site portfolio, tend to prefer fixed prices, as do those working to a strict budgetary regime, for example public sector organisations.

The close link between wholesale and retail pricing, and the operation of the wholesale energy markets as traded commodity markets, means larger

customers are beginning to change the way they buy their energy. Increasingly, these customers are moving away from treating the procurement process as a ‘one-off’ exercise undertaken at a set time each year. Many are now closely tracking market developments and prices, and using this information to decide when and how to strike their contracts. For example, when wholesale electricity prices fell to very low levels in the summer of 2002, some customers entered multi-year contracts, some as far forward as 2006. Others closed their April 2003 renewing contracts at this time, up to six months ahead of then standard timings.

Due to the volatile nature of the wholesale markets and the short validity period of most pricing offers, the procurement process for medium and larger customers can now entail several approaches to the market for offers before customers make their final contracting decision. Also as a result of this, some customers are considering less standard contract lengths, for example, shorter- term contracts when they feel wholesale markets are particularly high.

Conversely, others, sensing a rising market, have entered into longer-term

contracts. Customers are also considering alternative means of procurement, and the use of indexed and flexible pricing products as discussed in the previous Section. At the moment, however, twelve-month, fixed price supply contracts still dominate the non-domestic markets. Even so, these changes are presenting suppliers with many new challenges as they seek to meet customer needs in an efficient manner. As we will see, they are meeting these challenges in a variety of ways and with differing levels of success. Table 5:1 provides an overview of different types of customers and the approach that they may be taking to their energy procurement, both now and looking ahead. For the purposes of the information, multi-site and public sector customers have been grouped because of several shared characteristics.

Table 5:1: Customer Approaches to Energy Procurement Customer

type Observations

Small site • Energy spend low, both at absolute level and as proportion of total costs. Energy procurement of low priority

• Little action taken – may have switched supplier once, for example, as a result of doorstep approach

• If switched, likely to have agreed a long term (2+ years) or rolling contract

• Dual fuel supply possible

Larger

Industrial • Energy intensive site, energy spend high. More active energy procurement /management strategy

• Employee(s) responsible for energy procurement and usage.

• Monitoring markets closely, and taking more flexible approach to timing of negotiations

• Use of market information provider(s) to support activities and perhaps outsourcing of data cleansing, tendering and

negotiation

• Consideration, if not take-up, of indexed gas and, increasingly, electricity – if not energy only plus pass through

• Separate tendering and negotiation of electricity and gas supplies, and likely separate service providers, on 12 month contracts

• Has working relationships with suppliers to minimise costs e.g. notification of load profile changes for balancing.

• Perhaps exploring longer-term relationships e.g. linked to energy management, risk management, carbon abatement

Multi-site, commercial, public sector

• Energy spend may appear high in value terms but could be

low in relative terms. Energy procurement / management activities are more resource intensive due to large number of sites

• Use of market information provider(s) to support activities and perhaps outsourcing of tendering and negotiation

• Longer term (24 months), fixed price contract arrangements, especially for small sites

• Separate tendering and negotiation of electricity and gas supplies, and likely separate service providers. EU procurement processes may apply.

• Service issues a key consideration within the supplier selection process and can influence the decision

• Perhaps exploring longer-term supplier partnerships, based around quality services – accurate and timely billing etc.