Tailored energy procurement can unlock potential operating savings for the food industry

Energy in the form of electricity and gas is as essential to a food company as its staff, machinery and ingredients, which is why securing supply of both commodities at the lowest possible costs is paramount.

Every business has watched the price of electricity and gas rise in recent times and felt unable to combat the rise of both eating into their bottom line. But through careful and tailored procurement of electricity and gas contracts, businesses can be confident that they are managing the risk associated with energy costs.

It may surprise businesses that despite the media coverage of the carbon tax and ‘gold-plating’ of networks, the cost to generate electricity has actually decreased in recent times. This has been caused by many factors including the decrease of the Australian manufacturing sector and the increase of low-cost renewable generation in the form of hydro, wind and solar. The reduction of peak demand has also been a factor in reducing the wholesale price of electricity because electricity at peak times is generated by expensive quick-to-start gas- and diesel-fired generators.

The price of gas on the other hand is showing opposite price signs to electricity, and this is tipped to double in the coming years. This is driven by the sharp increase in investment to export liquefied natural gas (LNG) to Asian markets where a much higher price is paid for LNG. This will cause the domestic price of gas to creep upwards towards parity with these prices. Another determinant for higher prices is the scarcity of supply caused by the earmarking of LNG for export. This has led to many asking for a domestic reserve to be established, although with gas companies able to secure much higher prices internationally, little hope remains for the promotion of domestic sale incentives.

All these factors may see the price per gigajoule increase from between $4 and $5 currently to $10 per gigajoule by 2020. However, there is some hope for large gas users as retailers are now offering longer-term contracts, which provides price security for companies.

In order to minimise the risk of rising gas prices and secure opportunities surrounding lower electricity prices, companies should engage specialists to manage the procurement of electricity and gas contracts. There are several reasons for this.

Firstly, energy markets are complex and are changing constantly. Understanding who to talk to about procuring contracts, how to get in touch with them and what questions to ask can be difficult.

Secondly, the price of electricity and gas changes every hour. Watching the price of commodities and deciding when to buy takes your focus away from managing your business.

Thirdly, energy prices are composed of a number of components including commodity costs, network charges, environmentals, and government and market charges. Being able to compare quotes accurately from energy companies in a like-for-like fashion can be difficult, and understanding what areas can be negotiated is also important in securing best pricing for energy contracts.

T&O Consulting