Energy procurement strategies: Two years later

In a competitive, free market environment, the informed buyer will always stand a better chance of securing the best price than an uninformed buyer. When we surveyed entities in 2012, the findings indicate that most procurement cycles for energy started only six months prior to contract expiration. A combination of a short procurement timeline and little market information made the chances of securing the best pricing for energy difficult at best. Since the wholesale electricity and natural gas markets are extremely dynamic and volatile, it takes a longer-term planning approach to maximize the opportunities to secure and lock down prices during favorable market movements. We typically recommend having a 12- to 24-month outlook prior to current contract expiration, and it was obvious that less than 20 percent of respondents in 2010 used this type of approach.

There was a huge change when comparing this metric in the 2012 survey. There was a significant decrease in the number of entities that delayed their procurement process to the final three months before contract expiration, whereas there was a corresponding increase in those who started their planning more than twelve months out. Graphs 2 and 3 show the planning windows for electricity and natural gas, respectively. Regarding electricity procurement, there was a 15 percent increase in those planning long-term, and for natural gas the increase was 11 percent. This indicates that the educational push to encourage governments to expand their procurement window has been successful.

Professional consultants

The 2010 survey showed a growing trend among governmental entities to use professional consulting firms to assist with the procurement of energy commodities, such as fuel, electricity, and natural gas. Issues regarding market timing, market information and professional insight on energy commodities are all areas where a professional consulting firm assists an entity in securing a more favorable contract than otherwise.

Because of the increasing complexity in already deregulated markets, it was expected that the use of consultants would rise. The results of the 2012 survey confirm the trend. There has been almost a two-fold increase in the use of professional consulting firms to assist governments with the strategic procurement of energy, as Graph 4 indicates. In the case of electricity, the use of consultants grew 13 percent from 19 percent to 32 percent. And in the case of natural gas, consultant utilization grew 10 percent, from 24 percent to 34 percent. Professional consulting firms will almost always implement strategies with longer term planning cycles, and this may also be a direct contributor to the fact that more entities are starting their procurements more that 12 months out.

Conclusion

Differing responses to the NIGP survey from 2010 to 2012 demonstrate that most governments are becoming smarter, more informed energy buyers. Policies are becoming more formalized as familiarity increases within these commodities. The use of intelligence and professional assistance has also continued to grow as the contracting opportunities become more complex and the number of suppliers and products and services continue to grow.

Bob Wooten is director of government accounts for Tradition Energy, where he manages energy procurement for a variety of governmental entities including cities, schools, colleges and universities. He also coordinates Tradition Energy’s involvement through cooperative purchasing programs, in addition to its service offering available through NIGP.

Tina M. Borger is the executive director of finance and administration for NIGP. Prior to joining NIGP in 2007, she was the procurement manager for Loudoun County, Va., located just outside Washington, D.C.