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Five questions on energy contract negotiation

By Bart Verest

By Bart Verest on 23/08/2017

With experience on negotiating energy contracts across big parts of the world stretching from Scandinavia to Australia, Turkey and Mexico, Bart Verest (International Consultant at E&C Consultants) is the right guy to answer a few of the most common questions on energy contracting, more in particular: negotiating.

As of what level of consumption can you start negotiating an energy contract?

Very small consumers can only make a selection between a choice of standard offers. The larger your consumption, the larger the impact of your negotiations. Needless to say you should always try to negotiate. First of all because suppliers are more open for a custom-made solution. But also because the improvements you manage to negotiate are to be multiplied with a much larger volume, meaning that their financial impact is much larger. Anyhow, as a procurement professional, I want to make the best out of the market by negotiating contracts for all sites, but you should of course diversify your efforts. The type of product that you can negotiate depends on the size of your consumption but also on market maturity. All markets run through a process due to which advanced contract types, such as energy contracts with price management flexibility, are available to smaller and smaller consumers as the years go by. In a pre-mature market like Mexico, only the very large energy consumers can get them. In a very mature and competitive market like Germany, even very small consumers can enjoy the fixing of prices at different moments, but you need to ask yourself if it’s worth the effort.

How much time does it take to negotiate an energy contract?

The basic process that I apply is:

  1. collect data
  2. edit and approve the RFP (Request for Proposals)
  3. collect and analyse offers from a broad range of suppliers (1st round)
  4. negotiate in different rounds with selected suppliers until the best possible offer has been achieved
  5. final legal check-up and signature of the contract.

In the very best case, I can run this process in two weeks. If you need to get your contract faster, I can fast-track by limiting the number of suppliers and ultimately by just discussing a continuation with your current supplier. For a full negotiation two weeks is an absolute minimum. I’ve seen many factors that can cause delay. The main ones are delays in the collection of data, slow delivery of offers by suppliers and lengthy internal procedures for approving a contract. There is also an element of market maturity and business mentality at play here. In some countries, it’s just much harder to get offers. I’ve learned for example that it’s not a good idea to negotiate a contract in Italy in August as everyone is on holidays.

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What items should you keep a close eye on?

There’s a few tricky ones. It occurs that the connection point numbers aren’t mentioned correctly or sometimes a small connection point, such as an office is forgotten so make sure to have an overview of every connection point and its number, regardless of its size.  On top, double-check whether you used the correct legal entities. Needless to say, a contract is invalid if it’s signed with the wrong parties. And to end, a very classic one: the termination clause. Make sure that if you’re current contract has a termination clause, you indeed have terminated the contract. If not, you will sign a new contract while the old one is still running.  

Did you become seasoned in negotiating energy contracts by now?

It never becomes a routine in the sense that energy markets are continuously changing which requires you to stay on top of things. Even in mature markets, energy suppliers keep launching new products and services. I see it as my task to make sure that my clients take the benefit of such innovations. Even in mature markets, with clients that I’ve worked together with for years, I keep making small improvements to their benefit with every contract negotiation. But also on the client’s side, things evolve. More and more clients want to install renewable energy. As this causes a lot of uncertainty for the supplier with regards to consumption, it’s not something they’re always fond of. This can complicate the negotiations, especially if you want them to provide a contract without volume restrictions.  Having negotiated many energy contracts for many different clients helps you to interpret contractual clauses more rapidly and more correctly. Definitely the negotiation of energy contracts in different countries gives you a much better view on what can be achieved.

When do you consider a energy contract negotiation successful?

I’m only happy when I’m sure that we can sign the contract that is the best possible deal available in the market at that moment. And that’s not just from a pricing point of view of course, I look at the full picture with all conditions.

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