As the energy industry continues to change significantly, knowledge of the market is vital for universities to manage cost increases. Savills energy team has therefore posed the question: what’s best practice for decision-makers when it comes to procuring energy contracts for their portfolios and obtaining the best value? We’ve undertaken an exercise looking at the costs on a typical university energy bill of a broker compared with the impact of the timing as to when the broker fixes the price.
The results are very interesting. Most energy consultants charge in the range of around £0.001 to £0.005 p/kWh currently. The energy market is highly volatile, with the slightest shift in weather, politics, economics and fundamentals (fuel prices, demand, renewable generation, interconnected capacities, and so on) leading to daily fluctuations.
Power: market prices 2019
We have seen how slight shifts influence wholesale prices along with supplier quotes. Take April 2019 for example: that month saw an increase that led to prices hitting a peak of £55.42 per MWh. Only two weeks before, prices were at their lowest at £47.56 per MWh, that’s a difference of 15.3 per cent.
To put this into perspective: a university’s annual usage of 10,000,000 kWh at £47.56 per MWh would have been £475,600 early in April. Later that month though, at £55.42 per MWh, you would have paid £554,200. That is a dramatic increase of £78,600 on wholesale prices alone; other non-commodities and levies added to the final unit rate can drastically increase the final cost.
Power: market prices 2018
Looking at a larger time span and comparing May 2018 with September 2018, with regard to signing new contracts, 1 May saw prices averaging at £49.26 per MWh, while 10 September was at £64.88 per MWh. The difference, £492,600 on 1 May for 10,000,000 kWh of usage and £648,800 on 10 September, being a potential annual saving of £156,200.
But what happens if we introduce the commission fee into the equation of saving if, for example, Consultant A charges a fee of £0.003 per kWh (£30,000 per annum) and Consultant B a fee of £0.004 per kWh (£40,000 per annum)? If they had got their timing right, in April Consultant A would have saved its university client £48,600 and £126,200 in September. Consultant B, meanwhile, would have yielded lower savings of £38,600 and £116,200 respectively.
Comparison between the two time periods shows the differences two weeks and four months may have on prices and the bottom line. Energy contracts can also be agreed up to three years in advance, so with the help of the consultants and their experience, it is possible for a university to be locked out on a very low unit rate during this time of market volatility.
Many consultants also have better relationships with some suppliers based on the volume of business they place, with the resulting benefits of lower unit rates being offered. This discounted rate is taken off the supplier’s profit margins, and once again, is only offered to portfolios managed by the consultant.
In summary, with brokers’ commissions being relatively similar in range, a university is far more likely to get a better deal using a trusted partner on an pre-agreed benchmark commission rate.
By doing so they benefit from a combination of both the partner’s extensive energy market knowledge as to when is the optimum time to buy, together with the strength of their supplier relationships, rather than running a procurement exercise that doesn’t necessarily achieve the desired aim of best value.