How do you make sure you are not spending more than what you are earning? The answer to that question is easy: by setting up a budget. Budgeting is a common microeconomic concept that is not all that hard to implement and it’s not just something for people with limited funding. A lot of entrepreneurs, governments and even households apply budgeting. For industrial companies and organisations budgets and budgeting is a way of reporting internally, if needed externally. When done properly it can lead to financial success.
In the world of energy procurement budgeting is no different. However, for those who have never done it before, energy budgeting and for sure when it's a global energy budget, can seem a very daunting task. Luckily, there are some logic steps or guidelines that can help you along the way. If you manage to tick off all the boxes described below you’ll see that it can be a very smooth and even a fun process.
1 - Look at the bigger picture:
An energy budget allows you to proactively estimate electricity and/or natural gas expenses over a specified future period of time. Keep in mind that this is a part of a much larger master financial budget that allows a company to run its business activities in an efficient and effective manner.
2 - Set a deadline for the final budget:
As with everything you need to prepare for internal use, a deadline is key. For comfort sake, you can set the due date a bit earlier. That way you have plenty of time to make the final adjustments, if necessary, before handing in the budget.
3 - Determine the future period of time:
Next to a strict deadline you need to determine the exact period for which you need to a calculate an electricity or natural gas budget. Not every company works in the same way. For some the short-term prevails whereas others look more to the long-term. Depending on the company culture the preferred period of time can be months, quarters or years. Even if the latter period is a company standard, you can still have differences in calendar and fiscal years in companies.
4 - Collect the necessary data and information before making assumptions:
A budgeting process can be split up in a string of assumptions made to determine the expenses for an upcoming period. To make the right assumptions as an energy buyer, you need to have a good idea of what is, has been or will be going on. Collecting the necessary information is crucial and will be determinant for the eventual outcome of the exercise. In general, you can distinguish three major elements with regard to energy budgeting: consumption volume, commodity price and non-commodity price.
First, you’ll need to determine the energy consumption volumes. The easiest way to do so is by looking at the historic energy consumption profile. If nothing significant is going to change you have the ideal basis for your calculations. However, if you know that the volumes will change due to energy efficiency investments, production adjustments or other, you need to integrate that in your volume forecast.
Second, you need to know what the portfolio value and value-at-risk and/or risk-limit situation is. If the energy price is fully hedged then the calculation is much simpler compared to a situation in which you can run into a spot market risk. Similar to the volume deviation you need to take this spot risk into account.
Thirdly, you need to pay special attention to the non-commodity related components. As they are unpredictable and to some extent unmanageable, they have an important impact on the overall budget. You need to draw up all the currently known tariffs and tariff reduction levels for the budgeting period. In the case that new tariffs aren’t official published or decided yet, you need to choose whether you use a historical value or make an estimation of how the government might change the tariff, which brings us to the next tip:
5 - Room for margins:
Dealing with uncertainties makes the task of setting up an energy budget a bit tricky. However, safety margins allow you to manage the situation. They can make your volume or energy price assumptions described in the previous step 4 easier as you can work out a best- and worst-case scenario. A neutral scenario is also an option but in the end, it all depends on the company’s budget culture.
Ask yourself the following question: what is worse, regularly performing better than assumed because of over-estimating or regularly performing worse than assumed because of under-estimating? The answer to this question depends on the corporate culture of the company you work for. Some organisations never apply any margins and take changes as contingencies whereas others tend to have forecasting expectations that might need tempering.
6 - Do the math:
Once you have collected all the necessary data and information, made the right assumptions and determined the safety margin, you can start calculating. By using a good template spreadsheet, this calculation work can be made lighter.
7 - Deliver and confirm:
After completing all the calculations you can finetune the last details and hand in the budget on the pre-set deadline date. To avoid surprises in this phase of the process, you should take this step forward and communicate with the budget’s stakeholder from the very start. Make sure you know their expectations.
8- Monitor the budget:
The final step in the budgeting process is the actual monitoring of the energy budget. Sometimes people tend to forget this last step and assume all is done and dusted as they reached their deadline and everyone was happy with the delivered work. Unfortunately, the process doesn’t end on the deadline day. You need to keep track of the budget versus the actuals once the predetermined future period of time starts. If needed and allowed, revisions, cost forecasts or accrual invoicing can be done based on new collected data (consumption levels, commodity and non-commodity adjustments).