Progressive purchasing lets you purchase ‘blocks’ of electricity at different times, rather than purchasing all your electricity needs at once at a single price. This flexible purchasing approach means you can lock in future pricing at a time that suits you, or when market conditions are right.
These ‘lock-ins’ can also be tailored depending on need. For example, it might work best for your business to purchase individual quarters in the future, or a proportion of an annual load – like 50% of calendar 2022 load – today.
Despite a significant increase in businesses adopting flexible purchasing contracts over the last few years, many are still unaware of the benefits and let perceived myths sway decisions. While this is a move away from traditional purchasing, many of the misconceptions are either non-existent or easy to overcome.
To set the record straight, we’ve dispelled four commonly held myths about progressive purchasing:
MYTH: It’s too risky
As soon as we start talking about locking in pricing in small chunks, people tend to get nervous. The most common comment we get is “oh, but that sounds too risky”, yet this is what you do every time you sign a fixed price contract for the term.
Remember, under the traditional fixed price model, you’re securing a price on any given day for a future term regardless of market movements in the future. There’s absolutely no more risk in splitting these purchases into bite-sized chunks – in fact, risk management principles will tell you that diversifying your decision making is a much more effective method of managing risk.
Of course, as with any sophisticated product, it needs to be managed, but as long as you have robust risk management processes in place, you can enjoy budget certainty while also taking advantage of future market movements.
MYTH: I’m not big or sophisticated enough to do it
Once only available for the big players, progressive purchasing is now being adopted by businesses of all shapes and sizes. Customers with usage as low as 10 GWh per year are now on these sort of agreements, and are getting good results.
MYTH: You can’t have budget certainty
As long as you have robust management of the product in place, budget certainty is all but guaranteed. Here’s why: you can set up a maximum spend for the year, plus manage your lock-in activity to make sure this isn’t exceeded, and you can also work your budget cycle timing into your overall purchasing plan.
For example, if you budget for the subsequent calendar year in August, you only need to make sure your lock-ins for that financial year are completed by the end of that month. This means that when it’s time to do your budget, that following calendar year’s rates are secured, and you can budget as you would do with a traditional fixed price contract.
Purchasing progressively actually allows you to have a constant rolling budget up to three years in advance, which is made up of pricing you’ve locked away combined with the current futures market pricing for periods you haven’t yet locked away.
So, if you’ve chosen a fixed price model for budget certainty, you may want to reassess, especially if your current contract is expiring in the next 6-12 months. This is because there’ll be at least a portion of your next financial year that you’ve either estimated or haven’t quite locked down the budget for yet.
MYTH: It’s too much work to set up
This is an easy myth to debunk. First, you’ll either have an in-house expert or third party managing the contract day-to-day for you. Secondly, it’s relatively quick to set up, with a significant portion of the work done upfront. This involves setting out your business’ risk tolerances and buying plan and triggers; after that, the only time needed is to authorise transactions (lock ins), and even this can be delegated.
Many of the management services are IT based systems, which take in huge amounts of market data each day, and you’ll only ever hear from someone when there’s a need to transact. Once everything is set up and running, our clients typically spend a couple of hours per month managing the contract, which is a small amount of time for a large cost item.
With increasing volatility in the electricity market, it’s never been a better time to invest in a more innovative way of purchasing electricity.