Group buying or collective purchasing, in an energy context, refers to a group of consumers coming together to buy gas or electricity with the idea that the group’s combined buying power means it will be able to secure more attractive prices or that they will be able to use different purchasing strategies to optimise their prices.
Although there is no set model for group buying here at Power Direct Ltd we usually only recommend this approach if the sites are linked or related in some way. For example, the sites all belong to one organisation or they are joined by a common purpose and most crucially are, in energy terms, similar. For some organisations putting all their purchasing together does increase their buying power so that all the sites benefit from better prices.
It is always worth tendering for several options though, because where there is a large disparity between one site and another, either in terms of the amount of energy consumed or the profile of that consumption then grouping may not always pay dividends.
One case where group buying has had a positive outcome is for the Diocese of Hallam. Over the nine years that we have looked after the energy needs of the Diocese we have added all the sites to the buying group as they have requested. This means that the amount of energy that is bought for the Diocese has increased and they can now command keener prices from the suppliers than they would get by pricing the sites individually.
There is a lot of administration to bring the groups together; the tendering is difficult since suppliers require individual meter and consumption data to prepare their prices, it is generally so time consuming that where groups number tens or hundreds of meters it is usually beyond the individual organisations to achieve. A good broker, like Power Direct, should make this process feel and seem easy. You can read more about the Diocese of Hallam here.
Another form of group buying that is often presented by third party intermediaries such as ourselves, is ‘basket buying’. The name of the buying groups vary but essentially they are all the same; organisations hand over their energy procurement to a third party who ‘wholesales’ or flexibly buys the energy for all the companies signed up to the basket or group. This is not the same as putting all your sites or companies in a single buying group where you stay firmly in control.
Lots of people will tell you that you can take advantage of low points in the market so that ultimately you will spend less. Well if you are lucky you will. There is nothing wrong with buying your energy flexibly – we will arrange ‘flexible’ purchasing contracts for our clients and we will advise them on their procurement strategy looking at all the options available to them. We will consider the risk of each and provide support throughout the contract as they make buying decisions and develop hedging strategies. The problem with these baskets, where people join ‘the framework’ or the ‘basket’, is they don’t get any of this choice, they hand over all the procurement decision making to a third party.
Now that might still be ok if the buying strategy turns out to be a good one but on at least three occasions in the last two months I have come across organisations that have joined such baskets and because the buying strategy has basically been buy the whole requirement once a month, they have suffered the effects of a very spiky market. Sometimes they have paid twice the going rate for whole months of their contracts. Whether you have a significant consumption or not this is never good. The confusing thing is that the months haven’t looked particularly well balanced by low cost months so the average is not really out performing a well negotiated fixed contract even for the smallest of users.
At Power Direct we do not practise this type of basket buying. Where it is sensible we will group our client’s sites together, even then we will always test that against pricing and contracting for them separately. Group buying can undoubtedly pay dividends for some customers, if only by reducing their administrative load by running tendering rounds less frequently, but it is important to keep control over your company expenditure and when you hand over decision making you essential give up control. Make sure whatever you do that you keep the decision making with you always.
Our knowledgeable consultants only recommend taking part in group buying when it is right for the individual sites as well as the group.
If you would like advice or more information about group buying please don’t hesitate to contact us.