With electricity prices hitting an all-time high, industrial organizations have seen a sharp rise in production costs. But a new approach to energy buying could give them more control over expenditure than ever before.
In 2022, Russia’s invasion of Ukraine had an aggravating effect on an already constrained energy market, pushing prices to record levels. This spike – paired with the impacts of new emissions regulations, energy import costs, and a global economic downturn – has put immense pressure on businesses, especially those in verticals like manufacturing and engineering with very high energy demands.
With prices still high and the threat of further disruptive events looming, organizations must take steps to protect themselves against the impacts of rising electricity costs.
Wholesale energy buying is good, but only solves part of the problem
One strategy that’s growing in popularity with these organizations is wholesale buying. By working with suppliers to buy energy wholesale, teams can turn price fluctuations to their advantage and buy in bulk when prices are at the right level.
Recently, UK-based engineering company Linde built a new generation of industrial gas plants that can be quickly ramped up and down in line with wholesale power prices. When high availability of solar and wind power drives prices down, Linde’s plants fire up and send the output to large tanks. When electricity prices go back up, the plants can ramp down and supply customers using the gases stored in their tanks.
Similarly in Germany, aluminium producer Trimet – one of the country’s largest power consumers – is overhauling its smelters to vary their power consumption depending on the availability of renewable energy on the grid.
These are just two examples of the rising number of industrial organizations reshaping their production processes and energy buying strategies around price fluctuations. In doing so, they’re enabling a more dynamic approach to energy buying and consumption. And while their strategies rely on significant asset and process transformations, similar results can be gained by negotiating dynamic price power contracts with suppliers.
What are dynamic price power contracts?
Dynamic price power contracts are a relatively new approach to business energy purchasing. Instead of negotiating flat price rates or wholesale prices at the time of purchase, electricity prices are recalculated hourly – enabling businesses to plan their production and power-intensive processes around the times of peak electricity supply.
In places like The Netherlands, Finland, Spain, California, the Great Plains and Texas – all areas of high solar and renewable electricity generation—market prices can reach zero, or even dip into the negative during maximum production hours.
For organizations in those areas, this presents a major opportunity. With dynamic price power contracts in place, they can ramp up production during those moments and cut their costs significantly. But the opportunity isn’t without its challenges.
The art of planning around peak electricity production
For large industrial manufacturers, this approach requires a major shift in operational timing—one that will also impact upstream and downstream processes, leading to a short-term uptick in costs. Once you understand when peak production times occur in your area, operations will need to be rescheduled around that time, but with some flexibility built in.
With renewables likes solar power, there’s also no guarantee that peak production will happen at the exact same time each day. The flipside of dynamic price power contracts is that, outside of peak production times, customers can expect to pay more for their energy. As such, organizations must actively monitor production to keep their costs to a minimum.
Fortunately, continuous market monitoring is something that many industrial organizations’ procurement and buying teams have become adept at. As long as they have the data and platforms to help them track production and minute-by-minute pricing, and are able to adapt their operational timings around dynamic costs, this is one of the greatest cost-saving opportunities many will have encountered.
Delivering simultaneous business and environmental impact
The other major advantage of dynamic price power contracts is that, by design, they encourage the use of renewables and grid-friendly operations.
Under a dynamic price power contract, organizations are incentivized to ramp up production when the grid is at maximum capacity, and when solar and wind power generation are at their peak.
As regulations on non-renewable energy use tighten, this approach can deliver significant sustainability and compliance benefits, while also helping businesses transition towards a new operational model that better aligns with how renewable energy is generated and supplied.
Embrace dynamic pricing and retake control of rising energy costs
This year, WNS Procurement helped a major industrial manufacturer in the UK adopt dynamic price power contracts and alter its operational timings to significantly reduce production costs.
By embedding continuous price monitoring and robust forecasting capabilities, we’ve helped the team maximize production when electricity costs are at their lowest, and prioritize low-consumption supporting activities during peak cost hours.
If another event does disrupt the energy market, the company is now empowered to realign its production as required, giving it control over expenditure rather than placing it at the mercy of an increasingly volatile market.
To find out how we could help you model the impacts of dynamic price power contracts on your business and take an intelligence-led approach to energy buying, get in touch with us today.