TL;DR
The era of simple, long-term energy contracts for manufacturers is over. Due to unprecedented price volatility (amplified since the Ukraine crisis) and the inherent intermittency of the renewable energy transition, Structured Procurement is becoming a strategic necessity.
- Why the shift? The traditional fixed-price model is now too risky and often uncompetitive, driven by volatile market prices and the fluctuating supply from solar/wind.
- Benefits of structured procurement:
- Cost efficiency: Lower service fees and the ability to leverage market dynamics.
- Flexibility: Allows integration of diverse sources, including PPAs and market products.
- Market participation: Empowers companies to actively trade on the spot market and align consumption with low-price periods.
- Roadblocks: This approach requires high operational demands (dedicated staff, sophisticated tools) and faces continuous forecasting challenges (deviation risk).
- The solution: Success depends on utilising digital trading platforms for speed, liquidity, and automation. This approach is typically most beneficial for manufacturing companies with an annual consumption of 10 GWh or more.
The energy landscape is more dynamic than ever, forcing businesses to rethink their procurement strategies. Gone are the days when a simple, long-term full supply contract was sufficient. Today, market volatility and the transition to renewable energy sources demand a more agile and intelligent approach.
In this blog post, we’ll provide insights from our webinar into why structured procurement is gaining traction and what manufacturing companies need to consider.
Contents
The inevitable shift: why structured procurement?
The conversation around structured procurement isn’t new, but recent events have amplified its urgency. “This topic has seen two waves of interest,” explains Alexander J. Henze, Managing Director at ECG Energie Consulting GmbH. “The first following the financial crisis [around 2011-2013] and the second, more recent one, triggered by the energy crisis stemming from the Ukraine war.”
The core drivers behind this paradigm shift are multifaceted:
- Transforming energy mix: Germany’s ambitious energy transition, moving away from fossil fuels and nuclear power towards renewables, introduces inherent volatility. While crucial for sustainability, the intermittent nature of solar and wind power leads to significant fluctuations in electricity generation, directly impacting market prices.
- Unprecedented price volatility: as Henze points out, “Market data shows that electricity prices have become significantly more volatile, with spikes like those seen during the Ukraine crisis. Even after these peaks, average price levels remain higher than pre-crisis and pre-COVID levels.” This unpredictable environment makes traditional fixed-price contracts increasingly risky and often less cost-effective.
Unlocking advantages with a structured approach
For manufacturing businesses grappling with these market realities, structured procurement offers a compelling suite of benefits:
- Cost efficiency: by moving away from rigid fixed-price models, companies can achieve lower service fees and leverage market dynamics to their advantage.
- Diverse energy sourcing: structured procurement facilitates the integration of various energy sources, including conventional energy, standard market products from third parties, and increasingly, green Power Purchase Agreements (PPAs), whether from on-site generation or off-site projects.
- Active market participation: it empowers companies to engage directly with the spot market, enabling them to capitalise on opportune short-term pricing.
- Optimised consumption: companies can align their energy consumption with market prices, shifting demand to periods of lower cost or even leveraging negative prices.
- Mitigating supply risks: in periods of extreme market instability, traditional full-supply contracts may become scarce or prohibitively expensive, making structured procurement a resilient alternative.
Despite its advantages, structured procurement is not without its complexities:
- Operational demands: this approach requires a more active and informed management of energy portfolios, demanding dedicated personnel and sophisticated tools.
- Forecasting challenges: accurately predicting future energy consumption and market prices is a continuous challenge. Predicting the precise consumption in every quarter-hour for the next year is nearly impossible due to production fluctuations, holidays, and unforeseen events. These forecasting errors can lead to expensive spot market purchases or undervalued sales.
- Expertise and tools: success hinges on access to real-time market data, advanced analytics, and skilled energy managers capable of making rapid, data-driven decisions.
- Managing deviations: the inevitable discrepancies between planned and actual consumption require efficient strategies for buying or selling energy on the spot market, which adds layers of financial risk.
Practical considerations for businesses
Executing structured procurement at scale requires more than spreadsheets. Digital energy trading platforms like enmacc deliver the speed, liquidity, and automation necessary for success. enmacc provides the solutions needed to respond to real-time market signals, optimise procurement strategies, and remain compliant with evolving regulations.
For companies considering the transition, it’s also important to consider the scale at which structured procurement becomes truly beneficial. While individual cases vary, companies with an annual energy consumption of approximately 10 GWh or more typically see a compelling return on investment. Below this threshold, the overhead and complexity of managing a structured portfolio might outweigh the potential cost savings.
The crucial point: the shift to structured energy procurement is more than just a trend; it’s a strategic imperative for businesses aiming to maintain competitiveness and resilience in an increasingly volatile and decarbonising energy market. While complexities exist, understanding the nuances and procuring energy on an efficient trading platform can transform these challenges into tangible opportunities.
