Understanding energy procurement in Australia’s National Electricity Market (NEM) is no simple task. With fluctuating energy prices, intricate tariff structures, and a growing need for sustainability, businesses need a thoughtful approach to manage their energy costs effectively. Large enterprises, multi-site operations, and SMEs all face numerous challenges, from determining the optimal time to secure energy contracts to finding the most suitable tariffs for their specific operations.
By understanding the unique market dynamics in Australia, including how to compare business energy prices and make informed decisions on business energy plans, businesses can better manage their energy costs and position themselves for long-term success.
Table of Contents
- 1. What is Energy Procurement
- 2. Understanding the Current Energy Market
- 3. Choosing the Right Energy Contract: Fixed vs. Variable Pricing
- 4. How to Optimise Your Business Energy Rates
- 5. Bulk Energy Purchasing for Businesses
- 6. How to Manage Energy Procurement Risks
- 7. Technology in Energy Procurement and Optimisation
- Secure the Best Energy Outcomes for Your Business
1. What is Energy Procurement?
Energy procurement is the process of sourcing and purchasing energy (electricity or gas) from a supplier at a favourable rate under terms that align with the business’s operational needs. This involves negotiating contracts, understanding how different energy markets work, and timing purchases to ensure the best possible rates.
For businesses with high energy consumption, such as manufacturing, data centres, or multi-site operations, optimising energy procurement can be a key factor in maintaining profitability. The right procurement strategy should aim not only to reduce costs but also to provide a reliable energy supply and protection against price volatility.
How Energy Procurement Impacts Business Operations
Cost Control: Securing the right energy rates can significantly reduce operating expenses. For high-energy-consuming businesses, even a small reduction in rates can lead to substantial annual savings.
Operational Stability: A poorly timed or structured energy contract could expose a business to price hikes during peak periods or market volatility. Proper procurement strategies ensure businesses have reliable energy at predictable costs.
Sustainability Alignment: Many companies are incorporating renewable energy procurement strategies, not just for cost benefits, but also to align with sustainability goals and regulatory requirements.
2. Understanding the Current Energy Market
Energy procurement in Australia involves more than signing a contract with a business energy provider. It requires a detailed understanding of how energy is priced and supplied in the National Electricity Market (NEM), how tariffs work, and how to optimise energy usage patterns to secure cost-effective rates. With energy prices accounting for a significant portion of operational costs, businesses must approach procurement with a focus on both immediate cost control and long-term risk management.
Australia’s energy market is governed by the NEM, which links six eastern and southern states/territories: Queensland, New South Wales, Australian Capital Territory, Victoria, South Australia, and Tasmania. The NEM functions as a wholesale market where electricity prices change every 30 minutes based on real-time demand and supply conditions. Unlike in other countries where energy prices might be more stable, the NEM is particularly sensitive to shifts in weather patterns, fuel costs, and even geopolitical factors.
The NEM’s spot price fluctuates, which means businesses in these regions need to carefully time their energy purchases to avoid periods of high demand (such as hot summer afternoons or cold winter mornings). Spot prices can spike dramatically when demand surges, and this can have a direct impact on the cost of energy for businesses that haven’t locked in favourable contract terms.
Factors Driving Energy Price Volatility
Several factors contribute to energy price fluctuations in the NEM. Understanding these can help businesses better manage their procurement strategies.
Supply and Demand Fluctuations: Supply can be affected by outages at power stations or constraints in transmission infrastructure. At the same time, demand surges during heatwaves, particularly in the summer, when air-conditioning use peaks. Conversely, mild weather can lower demand and lead to cheaper energy.
Fuel Prices: Australia’s energy production is still heavily dependent on fossil fuels, particularly coal and natural gas. The prices of these fuels can be influenced by international markets. For example, when global gas prices rise due to increased export demand, Australian gas prices typically follow suit, driving up electricity costs for local businesses.
Renewable Energy Integration: While Australia is rapidly increasing its renewable energy capacity (such as wind and solar), these sources can be intermittent. Without consistent energy storage solutions, reliance on renewables can sometimes lead to volatility when supply doesn’t meet demand, particularly in regions with less storage infrastructure.
Managing Procurement Timing in the NEM
Timing plays an important role in energy procurement for businesses. Those that closely monitor market trends and spot prices can lock in contracts when prices are lower, avoiding the costly spikes that occur during periods of peak demand. Working with an energy consultant or using energy market forecasting tools can help businesses determine the best time to secure a contract.
Businesses can also employ risk management strategies such as purchasing futures or financial instruments to hedge against potential price hikes. These tools allow companies to "lock in" rates for future energy use, offering some protection from price volatility.
3. Choosing the Right Energy Contract: Fixed vs. Variable Pricing
Businesses operating in the NEM often choose between two primary types of energy contracts: fixed-rate contracts and variable-rate contracts. Each has its own benefits and risks, depending on how the business consumes energy and its tolerance for price fluctuation.
Fixed-Rate Contracts
Fixed-rate contracts lock in a specific energy price for the duration of the contract, offering protection from the market’s volatility. This can be particularly advantageous during periods of high demand when spot prices tend to rise sharply. For businesses that need budget certainty, fixed-rate contracts provide predictability in energy expenses.
Key Considerations:
Budget Stability: Fixed contracts are ideal for businesses that need predictable operational expenses. They allow for consistent monthly or quarterly energy costs.
Market Timing: If fixed contracts are secured during periods of low energy prices, businesses can benefit from cost savings over the long term. However, if prices drop after locking in a contract, businesses miss the opportunity to capitalise on cheaper energy.
Contract Terms: Fixed-rate contracts are typically long-term, making it difficult to renegotiate if market conditions change or the business’s energy needs shift. Businesses should carefully assess their long-term energy usage before committing to a fixed rate.
Variable-Rate Contracts
Variable-rate contracts, also called market or spot-based contracts, fluctuate with the energy market. Prices can drop when demand is low, but they can also increase during peak periods. This option provides flexibility and potential cost savings, especially if the business has the capacity to adjust its energy use according to market signals.
Key Considerations:
Flexibility: Variable rates allow businesses to take advantage of low prices during periods of reduced demand or oversupply in the market. For businesses that can operate with flexibility (for instance, shifting production hours), this approach can lead to substantial savings.
Risk of Price Increases: The major risk of variable-rate contracts is exposure to sudden price spikes, which are common in the NEM, especially during extreme weather events. Businesses need to monitor the market closely or work with consultants to mitigate this risk.
Seasonality: Understanding seasonal demand trends in Australia is critical when considering variable-rate contracts. Prices are generally higher in summer due to increased air-conditioning use and in winter due to heating needs.
4. How to Optimise Your Business Energy Rates
Tariff structures play a major role in how much businesses pay for energy. The key to tariff optimisation is aligning your business’s energy consumption patterns with the most appropriate tariff. In Australia, the most common tariff structures are Time-of-Use (ToU) tariffs, flat-rate tariffs, and demand-based tariffs.
Time-of-Use (ToU) Tariffs
ToU tariffs vary based on when energy is consumed. These tariffs charge higher rates during peak periods (usually during business hours) and lower rates during off-peak times, such as overnight or early morning. For businesses that have flexibility in their operating schedules, ToU tariffs can be an effective way to reduce energy costs.
How to Optimise ToU Tariffs:
Shift Non-Essential Operations: Businesses can schedule energy-intensive activities, such as manufacturing or processing, during off-peak periods when rates are lower. This is especially useful for industries like manufacturing or warehousing, where operations can be shifted outside typical 9-to-5 hours.
Energy Storage Solutions: Businesses can install battery storage systems to store energy during off-peak hours and use it during peak periods, reducing reliance on expensive peak-rate electricity.
Demand-Based Tariffs
These tariffs charge businesses based on their highest energy demand during a specific period (usually monthly or annually). For companies that experience short periods of high energy consumption, demand-based tariffs can be costly.
How to Manage Demand-Based Tariffs:
Peak Shaving: Businesses can reduce their maximum demand by using alternative energy sources (such as onsite generators or battery storage) during periods of peak consumption.
Power Factor Correction: Installing power factor correction equipment can improve the efficiency of electrical systems, reducing the strain on the grid and lowering demand charges. This is especially important for businesses with large industrial operations that require significant power.
Flat-Rate Tariffs
Flat-rate tariffs charge a single rate for energy, regardless of when it is used. While this option provides simplicity and predictability, it may not offer the same cost-saving opportunities as more dynamic tariffs, especially for businesses that can adjust their energy consumption.
5. Bulk Energy Purchasing for Businesses
For larger businesses, especially those with multiple sites across Australia, bulk energy purchasing can provide significant cost savings. By consolidating energy requirements across multiple locations or departments into a single contract, businesses can negotiate better terms with business energy providers.
How Bulk Purchasing Works in the Australian Market
Bulk purchasing agreements allow businesses to pool their energy demand and approach energy suppliers with higher volumes, increasing their leverage in negotiations. This strategy is particularly useful for businesses with multi-site operations, such as retail chains or large manufacturing facilities. Larger contracts often result in better rates, more favourable contract terms, and additional flexibility.
Group Purchasing Arrangements
Smaller businesses that may not have the scale to negotiate bulk energy contracts on their own can join group purchasing arrangements. These agreements allow multiple businesses to combine their purchasing power and secure lower rates collectively. This is an effective strategy for SMEs looking to access the same competitive rates as larger enterprises.
6. How to Manage Energy Procurement Risks
Given the volatility of the Australian energy market, risk management is a necessary part of any procurement strategy. Businesses must protect themselves against price spikes, supply disruptions, and long-term cost fluctuations.
Hedging Strategies in the Australian Energy Market
One of the most effective ways to manage procurement risk is by hedging energy purchases. Hedging involves using financial tools such as futures contracts or options to lock in future energy prices. This strategy allows businesses to mitigate the risk of future price increases, offering long-term cost stability.
Diversifying Energy Sources
Another way to manage risk is by diversifying energy sources. Many Australian businesses are integrating renewable energy sources such as solar or wind power into their energy procurement strategy. Power Purchase Agreements (PPAs) with renewable energy producers allow businesses to secure a portion of their energy supply at stable, long-term rates while reducing their reliance on the fluctuating fossil fuel market.
7. Technology in Energy Procurement and Optimisation
Technology plays an increasingly important role in helping businesses optimise energy procurement and manage consumption. Advanced tools such as Energy Management Systems (EMS) and smart meters enable real-time monitoring, forecasting, and decision-making.
Energy Management Systems (EMS)
An EMS helps businesses monitor energy use across multiple sites and identify inefficiencies in real-time. By providing detailed data on energy consumption, EMS platforms allow companies to optimise their procurement strategy by shifting consumption to off-peak periods or reducing demand charges.
Predictive Analytics: EMS platforms can use historical data and market trends to predict future energy demand, enabling businesses to better plan their energy purchases.
Automated Demand Response: Some EMS systems can automatically adjust energy use during peak periods, helping businesses avoid high spot prices and reduce overall costs.
Smart Metering in Australia
Australia’s rollout of smart meters, particularly in states like Victoria, has enabled businesses to track their energy use with greater accuracy. Smart meters provide detailed, real-time data on consumption patterns, allowing businesses to optimise tariffs and make more informed procurement decisions.
Secure the Best Energy Outcomes for Your Business
Effective energy procurement and tariff optimisation are essential for businesses in Australia, especially in light of the complexities of the NEM and the growing push toward renewable energy. By understanding the market dynamics, choosing the right contract structures, and leveraging technology, businesses can better manage their energy costs and reduce their exposure to market volatility.
To help businesses overcome these challenges, Choice Energy offers a quick, free energy audit. Our audit helps businesses identify areas for cost savings, compare business energy plans, and develop a tailored strategy for energy procurement and tariff optimisation.
Get started by uploading your energy bills, and let our experts at Choice Energy analyse your current consumption patterns, identify potential cost-saving opportunities, and recommend the best energy procurement strategy tailored to your business needs. It's a quick and easy process that could unlock significant savings and optimise your energy costs. Upload your bills today to take the first step towards smarter energy management!
