03 April 2006 | Anusha Bradley
UK companies overspent on energy by £3 billion last year because most bought at the wrong time, according to a survey of FTSE 250 companies.
This is treble the amount overspent the previous year, according to energy consultancy Utilyx, which carried out the study.
Of 101 firms quizzed about their energy contracts, 45 per cent paid up to 35 per cent more for energy in 2005 than in 2004.
Chris Bowden, chief executive of Utilyx, told supplymanagement.com
prices increased when contracts were sought at the same time, pushing up prices, alongside the fact prices were generally higher in the three months before October, which was when most contracts were agreed.
"The £3 billion overspend was not because of the rises in wholesale prices, but the simple and predictable result of buying at the wrong time."
He said buyers waited too long, missing the opportunity to buy gas and electricity at lower prices.
"Buyers are overly optimistic. They think that in a rising market, prices must come down," he said.
Timing was also an issue. Bowden said firms did not have to buy in October, when everyone else did. "When everyone buys at the same time the price will inevitable go up. The basics of supply and demand tell us that."
He said consultants know that "the best time to buy is when the price is right, not when the supply is running out. Yet this dictum was largely ignored last year."
According to the survey, 75 per cent of firms in 2004, bought within three months of their contracts expiring. This increased to 87 per cent last year.
"This is the cause of the £3 billion overspend - quite aside from underlying rises in prices," he said.
Chris Lewis, energy consultant and CIPS energy committee member said there is some logic in spreading the risks by buying energy for next winter now, especially if high prices already on the market for next winter go higher.
But he added: "Buying in advance is bad if the market prices were to fall again. This is predicted to happen from spring 2007, as we get more gas infrastructure for import into the UK."