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Energy – A Burning Issue

How Financial Directors can Regain Power Over Rising Energy Costs Impacting Their Organisations’ Profits

Wholesale energy prices have soared in the last six months as high oil prices continue, the Middle East is uncertain and the nuclear disaster in Japan causes concern. The major energy providers have passed these price increases on to their business customers. Many face energy bills which could be 50% higher than they were paying only two years ago.

In June 2011, the FT and The Economist Business Barometer Research found that leaders foresee the biggest risks to their businesses to be rising costs of oil, commodities prices and interest rates. This prompts greater scrutiny of their profit margins and higher expectation for financial directors to perform in challenging times.

In July, after a second major British energy supplier announced double-digit tariff increases, RWE npower reported: ‘Three hundred major and small energy user companies counted energy as a top risk concern, next to sales and legislation, in their Business Energy Index 2011. Only 66 percent said they had a strategy to manage it.’

Sid Cox, Director of B2B, EDF Energy, elucidates: “Price volatility is an enduring characteristic of the UK Electricity Market.  To allow businesses to make better energy procurement decisions, they need information such as daily wholesale prices, forward price curves and daily commodity market reports. “However, most businesses do not have easy access to this kind of information and many are turning to independent cost management consultancies to help them to achieve best value and service – not only with energy but also for the other expenses they incur.”

Auditel is the UK & Ireland’s leading cost,purchase and supplier management consultancy. They were a founder member of the Utilities Intermediaries Association, established to maintain Codes of Practice between members and their clients.  Stephen Heathcock, one of their 200 fully-trained specialists, says:  “One of the best approaches to managing energy costs is being proactive, monitoring market conditions and making purchase decisions at the appropriate time. This is more important than shopping around for the best price come renewal time. Depending on the supply type, some suppliers will quote up to four years in advance of the required start date.  This enables you to secure prices well before the contract end date if market conditions are favourable.

“It is also essential to ensure that energy contracts do not ‘roll over’, locking the end user in for a set period of time at uncompetitive rates. This is a very common issue and requires careful management as some suppliers require up to four months written notice to prevent contracts rolling over.

“When it comes to renewing contracts there are a number of options available to the energy user – speaking to suppliers’ direct, price comparison websites and brokers. All of these avenues will provide a number of options when it comes to pricing. However, it’s difficult to be sure you’ve achieved the best possible deal at the best possible time, as most of these approaches are funded by a set amount of commission which is unrelated to market conditions. For this reason an independent cost management consultancy is probably the best option. They manage the costs on an ongoing monthly basis through bill checking and verification etc. Being involved in the markets day to day, they can assist in making appropriate purchasing decisions without the influence of commissions etc. External consultants can act as an extension of the management team but can be paid purely on a results-driven basis.

“Attempting to manage energy costs internally can be an expensive and inefficient use of time. It is difficult to be sure that best value is achieved. This is where external consultancy can be invaluable. The management, monitoring and tendering of energy contracts is all taken care of! “

Auditel’s Head of Marketing, Laurence Knott, reveals: “While energy might be at the top of a finance director’s list of ‘Things to Do’, Auditel can deal with over eighty different business expenses. Implementing an effective management of business costs could provide organisations with a surprising solution. For example, consider a £100m turnover manufacturing company. With 60% made up of purchased costs and a 3% margin, a procurement improvement program delivering only a conservative 2% saving would net savings of £1.2m – a healthy 40% improvement in EBIT. But, to achieve exactly the same impact through sales growth, you would have to increase sales turnover by the same percentage, a staggering 40% – growing the company to £140m turnover. Try that on your Sales Director on a wintry Monday morning!”

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