Energy procurement requires a significantly different process than the procurement of most other goods and services. If you’ve been your organization’s procurement officer for any length of time, this is likely not the first time you’ve heard that. This series on the “Top Energy Procurement Mistakes” seeks to explain why this process is such a different beast.

We’ve already covered two key mistakes: not procuring proactively and missing the most competitive rates. This latest installment will look in more depth at why so many organizations still fail to develop the proper strategy to allow for the procurement of energy.

In many markets around the United States and Canada, electricity and natural gas are deregulated. This means that you, as the consumer, have the ability to evaluate and choose the company you want to actually supply the commodity. With that choice comes the responsibility to develop a procurement process and strategy to ensure you land the best supplier and contract for your needs.

The Mistake: Not Establishing the Best Energy Procurement Strategy for your Organization

Most procurement departments operate according to a fully defined set of processes and procedures. The concern is not necessarily that there is no strategy regarding energy procurement. The concern is that an organization may not be using the right strategy.

Why It Happens: Energy Procurement Tends to be Treated Like Other Procurements

When establishing a strategy or process for energy procurement, many procurement officers make the mistake of trying to match the standard company process used for other contracts for goods and services. This means that they might put more focus on specifications, instead of finding the right time in which to execute.

There is a multitude of factors that go into developing a sound strategy for the procurement of energy for any organization. Here, we will focus on two key elements:

Evaluation of Suppliers: This is not as simple as it first sounds. In most procurements for goods and services, specifications are set that allows for the broadest number of quality suppliers to respond. These specifications are typically centered on both the supplier and the end good itself. If you’re procuring, say, fire trucks, the vast majority of the specifications are geared toward securing a quality fire truck.

In the case of energy, the end goal is the energy commodity itself. This commodity is the same whether you are receiving it from Supplier A or Supplier B. With the commodity being the same, the procurement process then focuses on developing specifications around the supplier. Unfortunately, specifications are often so limiting that you get only one type of supplier or, more commonly, only one type of offering from that supplier. In reality, most suppliers can meet a broad range of specifications (things such as billing terms, swing tolerance, etc.), but excessively limiting specifications can lead to either higher-priced offerings or having suppliers not respond at all. The end results of forcing energy suppliers into a standard evaluation process are fewer suppliers to choose from and less flexibility when it comes to securing the best overall energy supply contract for your organization.

As a general rule, first ensure that you are dealing with quality suppliers (meaning you have established strong criteria regarding financial background, complaint history, and such), and then leave the greatest amount of pricing options open to generate competition leading to the best contract.

Evaluation of Market Conditions: Everything we discussed regarding the evaluation of suppliers doesn’t amount to much if you are not also evaluating market conditions when looking for the optimal window in which to secure the energy supply contract. You could have the very best supplier and the best type of contract lined up and ready to go – but if you execute the contract on a day when prices are not favorable, you just ruined the entire process.

This is why market timing is just as important as forcing strong competition among all qualified suppliers. Market timing means that you know how prices are moving in relation to the contract you are trying to secure. This understanding is based on a solid understanding of past price trends and future expectations for market movement.

There are many tools you can use to ensure that you are finding favorable windows in the market. But this does not mean just monitoring stories and charts on the internet. Many organizations utilize an energy advisory firm to help them stay abreast of market windows and to property time their energy procurement decisions.

How to Fix It: Create a Strategy Consistent with your Organization’s Risk Tolerance and Goals

A strategy is only good if it works for your organization. You must first understand the goals you are trying to achieve, combined with the risk your organization is willing to tolerate when it comes to energy prices. If lower prices are more important than budget stability, your strategy should focus on a more interactive relationship with the market so that you are poised to take advantage of downward movements in the market.

An energy advisor can help you develop and maintain the proper procurement strategy – one that matches the key elements we are discussing here. However, you must then back up to see what process you are using to procure the services of the energy advisor. Suffice it to say that only those advisors with the resources and background to evaluate both suppliers and market conditions will help you secure the best results in the long run.

Conclusion: Let the Strategy Guide your Decisions

Once a proper energy procurement strategy is developed, it truly will guide you through the process and allow your organization to make better-informed, intelligent decisions regarding your energy supply. However, you do not want to be a slave to the strategy. Rather, the strategy needs to be a “living document” that grows and evolves with your organization’s ongoing needs. You may find, over time, that some energy supply choices work well and others do not. You will also almost certainly find that your energy needs change as your organization changes. All of this feedback needs to be included in continual updates to the strategy so that every time you go back out to review energy supply solutions, you are working from an up-to-date strategy that everyone in the organization can support.