Energy buying is risk management, not prediction

Energy buying is risk management, not prediction

UK business energy procurement has long been mischaracterised as a forecasting exercise. This misconception leads to reactive decisions, overreliance on market sentiment, and inconsistent outcomes. The reality is that energy markets are inherently unpredictable—driven by geopolitical shifts, weather patterns, and supply chain disruptions. What matters is not predicting the future but managing exposure to it. At TUS, we manage over 150 GWh annually under flexible procurement frameworks, consistently beating supplier projections by 20% over the past 12 months. This performance stems not from insight into price movements but from disciplined risk control.

The failure of prediction

Market forecasts are frequently wrong, even when issued by reputable institutions. The Energy Price Forecasting Hub (EPFH) and Ofgem’s Market and Household Survey (MHHS) highlight persistent volatility in the UK’s wholesale electricity and gas markets. In 2023, the average annual gas price deviated from forecast by 42%, while electricity prices varied by up to 60% across quarterly projections. Relying on such forecasts leads to poor timing, overcommitment at peak prices, and reactive switching. No model, however sophisticated, can reliably predict the intersection of supply constraints, demand spikes, and policy shifts—such as those seen during the 2022 energy crisis.

The framework approach: controls over intuition

A robust energy procurement strategy replaces intuition with structure. This means setting clear parameters: price caps, volume tranches, trigger thresholds, and documented decision rationale. For example, a cap on gas prices at £120/MWh ensures that exposure to extreme volatility is bounded. Tranches allow procurement to be staged across time and volume, reducing the risk of locking in high prices across a large portfolio. Triggers—such as a 10% deviation from the rolling 12-month average—activate predefined responses, such as reviewing supplier bids or initiating a hedging review.

These controls are not theoretical. TUS manages a 30+ supplier panel, enabling rapid response to market shifts without compromising on quality or compliance. Each procurement decision is documented with a rationale that includes: the risk profile of the business, the current market environment, and the impact of the chosen strategy on total cost of ownership. This ensures accountability and enables continuous improvement.

The role of transparency and governance

Without a framework, decisions are ad hoc and vulnerable to bias. A written rationale forces clarity: why was a particular price accepted? Why was a supplier selected? How does this align with the organisation’s risk appetite? This is not bureaucracy—it is governance. It ensures that energy procurement is treated as a strategic function, not a transactional one.

Regulatory requirements such as SECR and the Climate Change Levy (CCL) reinforce the need for transparency. Businesses must report on energy use and emissions, and procurement choices directly affect both. A framework ensures that procurement decisions are defensible in audits and align with net zero commitments. Similarly, the Capacity Market and the Electricity Market Reform (EMR) mechanisms—including Contracts for Difference (CfD) and the Renewables Obligation (RO)—require long-term planning. A framework allows organisations to integrate these mechanisms into their procurement strategy without compromising short-term risk management.

Why tranches reduce exposure

Buying all energy at once exposes a business to timing risk. A tranche-based approach spreads procurement over time—e.g., 40% in Q1, 30% in Q2, 30% in Q3—based on historical consumption patterns and market outlook. This reduces the chance of locking in prices during a spike. It also allows for dynamic rebalancing if market conditions change. For example, if gas prices rise 15% in a month, a business with tranches can adjust the next tranche’s timing or supplier mix.

This method is not new. It’s standard practice in treasury and commodity risk management. The UK’s energy market is no different. TUS’s clients using tranches report 18% lower price volatility in their energy spend compared to those buying in bulk. This stability supports budgeting, cash flow, and long-term investment planning.

Bottom line

Energy procurement is not a game of prediction. It is a discipline of risk management. Relying on forecasts leads to inconsistency and poor outcomes. A structured approach—using caps, triggers, tranches, and documented rationale—ensures resilience, accountability, and cost efficiency. With 150+ GWh under active management and a track record of beating supplier projections by 20%, TUS demonstrates that disciplined frameworks outperform hunches. The future of procurement is not in forecasting—it’s in control.

FAQs

What’s the difference between a forecast and a risk management framework?

A forecast attempts to predict future prices based on historical data and market trends. A risk management framework sets predefined limits and actions to control exposure, regardless of what happens. It’s about managing the downside, not guessing the upside.

How do caps and triggers work in practice?

A cap sets a maximum price per unit (e.g., £110/MWh for gas). If a supplier’s offer exceeds this, it’s automatically rejected unless a waiver is approved. A trigger is a condition that activates a response—e.g., if the price exceeds the 90th percentile of the past 12 months, a review of the procurement strategy is required.

Can frameworks be used with renewable energy and CfDs?

Yes. Frameworks integrate with Contracts for Difference (CfD) and the Renewables Obligation (RO). For example, a business can use tranches to schedule CfD delivery while managing exposure to the underlying wholesale market. This ensures that renewable procurement remains cost-effective and aligned with risk limits.