The downside of energy buying groups
by Murray Sheehan
Manufacturers interested in pooled volume discounts can often end up paying more than they would through their own program.
Many manufacturing companies participate in energy associations and buying groups. These groups offer significant benefits, as political and local issues related to energy can more easily be addressed through a unified voice in numbers. There’s also the value of trade, directories and other products and services available through membership.
However, NACC Group has found in Canada at least, these buying groups often fall short on energy procurement. In fact, companies who enter fixed-price associations often significantly over pay, relative to the programs they can source on their own.
While many service providers and suppliers say there’s a volume discount provided to buyers who pool their volumes, the claim is truly misleading and inaccurate. Often, the larger users pay more while the smallest members may benefit when you compare rates each party could secure on their own.
If someone in the pool or group can’t satisfy their purchase commitments, these obligations become the responsibility of the pool. As a result, your company can end up paying for them.
These programs are also cookie-cutter. You have the option to fix, not fix or a hybrid of the two. When companies choose the fixed rate, it’s usually for 100 percent of their historical volume.
That said, no company has the same usage year after year for a five-year period. A mild winter or a season with extended cold periods will result in fluctuations in volume of 15 percent or more. These fluctuations mean additional costs and again, they’re passed on to the pool.
It’s imperative you understand rates change from hour to hour for both electricity and natural gas. Offers to the membership usually try to secure a rate below “x.”
By agreeing, you essentially sign a blank cheque. You have zero transparency on the true market rate; you’ve left the rate up to the supplier, and with fluctuations in the market from day to day being as much as 15 to 20 percent, you’re guaranteed to get a rate well above what you should have paid.
Remember, the best price on the wrong day is still a bad price. Professional service firms quote prices to their clients that may be good for one hour. These commodities trade just like stocks. By the time a price is quoted, it’s already changed.
Finally, we have the padding factor. Each layer between you and the wholesaler is an added cost. There could be as many as four layers in the standard model between you and the wholesaler. It’s always better if you have one layer and are receiving professional advice.
While the intentions of these programs are great, they can easily become a licensed scenario of multiple layers taking advantage of the end user. Corporate objectives aren’t met as no manufacturing company should purchase all of their energy requirements on a given day, no matter the price.
Murray Sheehan is senior director of North American Commodity Consultants Group Inc. in Whitby, Ont. He can be reached at (416) 333-6012 or via email. For more information visit www.naccgroup.com
This article is part of the Financial Management Success Centre, which showcases leading strategies for cost control and preservation of working capital in manufacturing.
