Purchasing Energy and the Risks Involved in Supply Contracts

July 01, 2018 | Alexandra Degala

The energy market trades and supplies energy for both commercial and personal use. These markets grow rapidly and are considered very complex. Energy markets are fluid and are attached to a variety of factors that can directly and directly affect their performances causing prices and supply to fluctuate.

Individual users demand different needs out of their energy contracts. These demands usually center on their budget and how they use the energy they buy. Businesses in general need to secure enough energy to keep up with demand but, at the same time, keep costs to a minimum through internal energy management practices.

Some choose to pay premium to get consistent pricing which allows them to set a budget. Other consumers constantly scan the market, searching for opportunities to capitalize once a drop in prices happen, and adjust their production accordingly to make the best use of the cheap prices. They significantly then lighten their production once the energy prices show a sharp rise in order to save money.

These prices rise and drop unpredictably so there is no right time when it comes to buying energy. One can only fervently watch for supply and price fluctuations in the markets and take opportunities as they happen, when they happen.

The final energy prices that consumers pay for consists of multiple components including from the cost for production, for transmission, and for providing grid resources.


How did the risks in your supply contracts come to be?
 

Energy price components used to be stable and manageable; easily predictable with the use of financial instruments. Suppliers willingly took wholesale trade risk in exchange for a premium.

These suppliers retailed energy with fixed priced contracts that had its foundation on the ability to buffer potential risks with management and insight. However, the reality has changed for the industry. During the last few years, the energy market evolved into an increasingly complex and competitive entity. These developments introduced risks into the industry which led to a change in contracts offered by suppliers.

A rise in the number of competitors in the energy market and changes in the regulations meant that supplier margins were driven down considerably. The energy market faced disruptions with the fast-paced changes of technology, new regulations, and power distribution.

Advancements in technology meant that along with the emergence of newer power generation methods come the decentralization of the traditional energy generation system. The multidimensional system brings with it a whole shift of transmission and delivery and creates new costs for the operator.

Changes in regulations pressured traditional energy producers with the rise of programs involving renewable resources like wind and solar energy. Along with it came climate-focused regulations and incentives that helped earn renewable energy a significant share in the generation mix. Operators and suppliers were forced to invest more into energy stability. They try to make up for their expenses by passing over balances and charges over to the consumers.

Infrastructures such as transmission lines and power transformers lose reliability as they grow older. Replacing and upgrading them to fit changes in technology, to adhere to regulations, and to be reliable costs a huge amount of money.


What should you look out for?

Alarmed energy suppliers readily pass additional risks to consumers in by increasingly involving certain terms and conditions in their contracts.

In many cases, the slightest differences in a nearly identical energy supply contract offering the same price may end up in significantly different total costs for the consumer.
 

  1. Be cautious of the inclusions on your contract. Scour through the words and understand them carefully. If you feel like you do not understand some terms and conditions, do not hesitate to bring it up and ask for a detailed explanation. It would be a good move to ask for some time before considering if you like what you are being offered. Consult a professional if you feel like it would enlighten you more.
     

  2. If there is a less than firm assurance of consistent energy supply, discuss it with your supplier. The price might be cheaper but remember that repeatedly losing power during production will cost you so much more than you can afford to lose.
     

  3. Short-term agreements should be considered carefully. If you agree on buying energy for one season, insist on a quote on how much a year-round’s supply costs. A short-energy contract usually is far more expensive than a long-term one, see how much more money you are paying for that period and calculate to see if you are being reasonably charged.
     

  4. Estimates should not always be trusted. If they tell you that you will save an estimate of “within ten percent” of your money, bear in mind that it does not mean that they will save you your ten percent. It can also mean that you end up saving only one percent at the worst and ten percent at the best.

 


It is critical that large consumers of energy and their partners thoroughly understand what their contracts entail and negotiate with their suppliers in order to avoid paying overwhelming fees for mediocre service. WeCompete Energy delivers trustworthy services and makes partnerships with reliable energy suppliers. Get the best deals for your business at www.wecompeteenergy.com or contact us directly at contact@wecompeteenergy.com.