By Benedict De Meulemeester on 3/10/2017
In the last months, we witness a steady increase in demand for global energy procurement consultancy. Many international companies are attempting to centralize their worldwide energy procurement. Two main events are driving this:
Global energy markets are local rather than global.
Is it possible to centralize energy procurement on a global scale?
What benefits should you expect and what are the pitfalls?
And how can you get your company organized?
Benefits of central energy procurement
Centralizing energy efforts has advantages. Usually higher management is looking for added value in the shape of cost savings due to amassing buying power. But that doesn’t work in the global energy markets. Pricing, underlying wholesale energy markets, suppliers, regulations, they are all organized on a local rather than a global basis.
In Europe we make some multi-country natural gas agreements. But for power, the best thing we can get is a collection of contracts from different countries brought together in one folder. In the US, if you have sites in different states, it can be very challenging to find one physical supplier servicing all of them. So no, bringing your MWh’s across the globe together in one tender will not result in a big cost saving.
But it will have benefits:
To illustrate the benefits. Just imagine what happens the next time the gas or electricity markets shoot up and your CFO comes into the office screaming panic over what will happen to your energy budgets. In most companies, this scenario means days and even weeks of people in all corners of the organization scrambling to estimate the impact and find out what has been done already. It can also mean that ill-informed panic decisions are being made which can lead to a disastrous end result in terms of energy pricing.
If you have implemented a good centralized global energy procurement, you will:
As you can see in this example, a well-organized category manager global energy procurement becomes a real captain on board of your company’s ship in the stormy international energy markets. She or he is the in-house super-specialist in energy procurement. And that in itself leads to better performance, more cost savings and risk avoidance. Yes, markets are local, energy regulations are different in each country and often even in different regions of one country. But there are not a million ways of going to Rome. Analysing how energy markets are organized in another country always gives the energy buyer a much deeper insight into her / his own country. And looking at many countries across the globe makes her / him a specialist in detecting risks and opportunities of different market set-ups.
Pitfalls of centralized energy procurement
When you start rolling out global energy buying, you should first ask yourself whether your organization is ready. Clients are often surprised to find out how many of their employees are involved in the energy procurement. As one client told me on the phone this week: “I don’t understand why for buying energy, every plant manager on the planet needs to get involved, while for other categories, they delegate decision power to central procurement”. If you start to centralize, you will have to take away decision-taking power from local buyers, plant managers, maintenance managers, controllers, etc. Worst case, they might refuse and cause obstruction. Many international energy buying projects start with battles with local staff members refusing to give us the information we need to start working.
I often tell clients: “whether you can centralize energy buying or not, depends more on the overall attitude towards centralization in your company than on the energy markets”. If your CEO doesn’t miss an opportunity of telling how important it is to be (physically) close to the markets and is advocating his program for lowering costs by reducing the overhead in the corporate headquarters, it’s probably not the right moment to start up a central energy procurement effort.
As a central energy buyer, you need to have empathy for your local colleagues. If the plant manager is the one that gets the blame when his plant’s P&L is bad due to high energy costs, it is only normal that she / he wants to stay involved. And you should be aware that your mission as central energy buyer will only work if you invested enough in the trust-building to get the local colleagues’ buy-in. Therefore:
A crucial step therefore is the definition of responsibilities. When we set up a central energy procurement strategy, we carve up the energy procurement activity in its different sub-activities: negotiating energy contracts, energy price management activities, setting up energy budgets and checking energy bills and energy data management. For each of these activities, we then define on both a central and a local level who is doing the work, who is taking the decision, who has an advisory role and who needs to be kept informed. With such a matrix, the model can go anywhere from completely local, to local with an advisory role for a central buyer, to a central buyer doing the work but local stakeholders taking certain decisions such as signing the contracts, to full centralization. In any case, defining the responsibilities avoids double work and conflicts when it’s not clear who calls the shots.
I have guided organizations that passed from the 100% local to 100% central model in one step. This can only work if it’s backed up by a deliberate strategy by the top management of the company to completely centralize. If you don’t have that back-up, it’s much wiser as a central energy buyer to move ahead in a step-by-step approach. Take an advisory role to start with, prove yourself and then obtain the transfer of decision-making power. You can do this on a subject-by-subject and/or country by country or region by region basis.
Looking at the different sub-activities of energy sourcing, you should also consider which ones you centralize first in such a step-by-step approach. For some of them, the benefits of centralizing the energy purchase are much clearer and easier and quicker to obtain than for others. Data management is a good example. Everyone will understand the benefits of having a central overview of the energy contracts and how much of the commodity is hedged. Another one is the global energy buying strategy. Even if the decision-making is still on a local level, defining a global energy strategy will make sure that everyone is aiming for the same goals.
Whether the centralization is a success or not, will obviously also depend on the quality of the central energy purchaser(s) and the consultants that are guiding her / him / them. Is that person pragmatic enough to go for a step-by-step approach? Does she / he have enough personality to bring about the change processes that are necessary? Does she / he have enough expertise to make sure that when she / he takes over the decision-making the right decisions are taken? If that first energy contract negotiation is a disaster, the centralization effort might fail right away. I’ve often talked to companies saying that central energy procurement doesn’t work only to find out that it didn’t work for them because the one buying energy on a global level didn’t do a very good job.
When looking at many different markets across the globe, the central energy purchaser needs the intelligence to see both the parallels and the local flavour differences. She / he should avoid getting overwhelmed by the complexity of the details of regulations in the different countries and continue to see the big lines. At the same time, she / he needs to understand that you can’t do things in each country the same way you’re doing them in your home country.
The central energy purchaser will in most cases be recruited in a country that is in an advanced stage of energy market deregulation. This can sometimes cause a misplaced superiority feeling. The trust-building will not really work if you’re some North-American or European that runs across the globe to tell local colleagues and suppliers that their energy markets are crap compared to what you are used to.
Knowledge of an advanced energy market, can help you to define the end goal: “this is how we want to buy energy in markets that are fully deregulated and mature”. Having this in mind will help you to exploit the opportunities in evolving energy markets more rapidly. But you have to accept that some markets are just not ready (yet) for what you want to achieve. That’s the case for underlying market structures such as grid access regulations, wholesale markets but also for the people working at suppliers and inside your own organization.
Diversify your strategy according to energy market maturity
In the development of energy markets, we at E&C distinguish five phases:
Markets should be periodically audited to determine in which phase of this development they are. In your strategy, you can then define approaches that are diversified according to the phase of a market:
Following this phased approach will make sure that you:
Centralization of your global energy purchase can bring important benefits in terms of better control over your global energy spend. It can also drive professionalization of your energy procurement which leads to important cost savings and risk avoidance. However, energy markets are still very diversified across the globe. This necessitates a pragmatic, step-by-step and diversified approach. And what you can achieve will depend on the readiness of your organization and whether you’re capable of matching your ambitions with pragmatism. However, one thing is for sure: you now have the knowledge on how to organize global energy procurement.