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All About Energy

Key Strategies for Energy Contract Negotiation

Jared Crane Jan 24, 2018 8:48:39 AM

key-strategies-for-energy-contract-negotiationSometimes companies can spend so much time trying to get the best deal that they are left with few options and higher rates as their energy renewal contract date looms near. Commercial energy brokers know that the best rates occur when you negotiate for energy far into the future, but to get those rates, you have to understand your business’s needs first.

Key Strategy Development for Energy Contracting

Contract negotiation is about understanding what you need and want. Negotiation goes beyond just the price of energy and includes items such as billing terms, add-delete bandwidth, and contract terms such as early termination. You’ll want to start this process early because you have fewer options later. 

Contracts use terms and clauses that are obscure. It is important to understand the language in your contract as the industry does not have a defined set of terms. Start by understanding your energy needs. Clauses in contracts provide for both changes in product delivery and the penalty for usage.

Example: Your company requires more energy for several months in a row and is fined, despite a bandwidth allowance. Those fines are because other clauses in the contract override bandwidth pricing.
By understanding the terms of the contract you gain better footing for negotiating those terms. 

Negotiation Strategies for Larger Companies

Larger customers have more leverage because they have more resources and are large consumers. 

Risk Adverse Companies: The less risk your company can handle, the fewer options it has for negotiating. Most companies are held to the general rate rather than a special energy rate. 

Companies Willing to Accept Some Risk: Energy production is dynamic so if your company can handle some risk you gain more footing for negotiating. 

Examples of products

  • Index - Pricing is tied to the spot market and gives a company more opportunity when price fluctuations occur. Companies that can handle the most risk and who are not so concerned with the monthly or daily billing rate use index pricing. It is useful for negotiating wider bandwidths.
  • Fully Fixed - No fluctuation in energy pricing and your company pays the same for energy regardless of the spot price. Energy deregulation is an event that impacts the spot price of energy.
  • Block and Index - Helps to balance between the budgetary risk and market risk. Part of your energy is purchased at a fixed rate and the rest is purchased based on the spot energy price.

Choosing the right pricing scheme means understanding what your company needs and which terms are important to your business. Those include: 

  • Billing Terms - the length of the billing term determines premiums. Longer terms usually mean higher premiums. 
  • Product type – here are the most common
    • Block and Index - Mixes spot index pricing with fixed pricing. 
    • Heat rate - The efficiency of a power plant to produce energy, hotter means it takes more resources to make one unit of energy and the energy costs more. 
    • Fixed - Negotiated and remains the same even if the spot index price falls or rises. 
    • Index - Fully flexible and based on the spot index price. 
    • Variable - Higher risk as energy prices are very dynamic. The plus is that rates are often discounted and very negotiable.

What Are Your Big Concerns

Concerns address the terms of the contract and are the key points that need negotiating. They include:

  • Add/delete (adding or removing a meter to the contract)
  • Early termination fees
  • Billing terms

All these concerns and many others impact the pricing structure and deliverability of energy to your company. The more you understand what the energy concerns of your company, the better prepared you are to negotiate. 

Factors that Impact Negotiation 

Other factors outside of pricing play a role. Be sure to consider: 

Company Size: How much energy do you use? 

Contract Clause Balancing: Always make sure the terms of the contract balance. Some clauses outweigh other clauses. 

Energy management brokers work with companies of all sizes to address the risk and concerns of each client's energy needs before developing a pricing strategy that fits each company. What are your company's concerns about energy? 

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Topics: Energy Cost, Energy Contract