Buyers 'overreacting' on energy price fluctuations

13 September 2011

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13 September 2011 | Angeline Albert

Energy buyers could cost their organisations money by failing to develop a suitable procurement strategy, a consultant claims.

Russ Priestley, senior partner at utilities consultancy British IndependentUtilities, is expected to tell attendees at The Energy Event, taking place over the next two days in Birmingham, that too many buyers are getting it wrong when it comes to energy purchasing.

Speaking to SM in advance of the presentation, Priestley warned purchasers against “overreacting” to any news of price changes, which he said was a common pitfall that can cost organisations more than if they followed a good strategy.

“When the market jumps up, buyers buy - but at least 50 per cent of those doing so are overreacting,” he said. “They are also locking into a price too late, which ends up costing them more money.”

Priestley said purchasers should avoid the practice of excessive locking and unlocking into energy prices as a general tactic. He said the result only drives up prices for everybody, because it indicates demand to vendors who then push up prices.

He said buyers need to conduct an in-depth technical analysis of market prices, to spot and examine trends, to help them buy at a price below the market average. However, this does not mean following the same purchasing strategy as everybody else.

“Few purchasers do an assessment of the market. Buyers must analyse the strategy of other energy buyers and avoid it in order to out-buy them. Another problem is executives who hear some news about price changes and tell buyers to act.”

He recommended purchasers secure the support of directors for their energy buying strategy, ensure the approach is reviewed against past metrics and assessed by a third-party, and understand how the plan will work in the marketplace before putting it in action.

Colin Cram, managing director of consultancy Marc1 who advises on energy buying, told SM: “Some of what has been said is true. One of the problems energy buyers have is that some are not experts in the market. They have limited oversight of what’s happening. It could sometimes be an issue of it being ‘little more than gambling’.

“It’s a very specialist area. If you don’t have access to the data that tells you what’s happening around the world your strategy won’t work. Most organisations I have come across don’t have the capability to buy effectively.”

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