Energy prices in the UK have been a hot topic of discussion in recent years, with dramatic increases affecting both consumers and businesses alike. For procurement teams, managing the rising cost of energy has become a critical challenge that demands new strategies to mitigate risk, maintain profitability, and ensure business continuity.
In this blog, we will explore the impact of rising energy prices on procurement strategies in 2024, the key factors driving these increases, and how UK businesses can adapt their procurement practices to minimise disruptions.
The Current Landscape of Energy Prices in the UK
Energy prices in the UK saw significant fluctuations in recent years, with steep rises caused by a combination of factors. These include:
1. Global Market Disruptions: Geopolitical tensions, particularly in Eastern Europe, have caused disruptions in global energy supplies, driving prices higher. The ongoing conflict between Russia and Ukraine continues to impact gas and oil supplies, which, in turn, increases energy costs across Europe.
2. Transition to Renewable Energy: The UK’s commitment to achieving net-zero emissions by 2050 has led to a major shift towards renewable energy sources. While this is essential for long-term sustainability, the transition phase comes with upfront costs and energy price volatility, especially as the UK reduces reliance on traditional fossil fuels.
3. Inflation and Post-Pandemic Recovery: Inflation, compounded by supply chain disruptions stemming from the COVID-19 pandemic, has placed upward pressure on prices across all sectors, including energy. The increased demand as the global economy recovers post-pandemic is further straining energy supplies, pushing costs higher. Although energy prices in the UK have shown some signs of stabilisation in 2024 compared to the record highs of previous years, they remain elevated. Many businesses are struggling to manage these costs, which are affecting overall operational expenses, including supply chain and procurement budgets.
How Rising Energy Prices Affect Procurement
The rise in energy prices has created several challenges for procurement teams, as energy costs directly impact both operational expenses and the cost of goods and services sourced from suppliers. Here are some of the key effects:
1. Increased Production and Transportation Costs: For many businesses, especially those in manufacturing, transportation, and logistics, energy is a major operational cost. Higher energy prices lead to increased costs for production, as energy is needed to power machinery, fuel transportation, and run distribution centres. Procurement teams now face the challenge of sourcing goods from suppliers who are passing on their increased energy costs. As a result, businesses may see their own input costs rise, reducing profit margins and increasing the pressure to adjust pricing models.
2. Supply Chain Disruptions: Energy price fluctuations can create significant disruptions across the supply chain. For instance, rising fuel costs affect the transportation of raw materials, components, and finished goods. Businesses may face delays in shipments or need to pay higher prices for expedited delivery to meet customer demand. Additionally, some suppliers, particularly those heavily reliant on energy-intensive processes, may face production slowdowns or even halt operations temporarily due to unaffordable energy costs. This, in turn, can lead to procurement challenges such as stock shortages or delays in meeting contractual obligations.
3. Pressure on Procurement Budgets: Procurement teams often operate within fixed budgets, and rising energy prices can quickly erode those budgets, making it difficult to meet financial targets. As energy prices impact both direct and indirect procurement costs, businesses may need to reassess their expenditure, reallocate resources, or negotiate with suppliers for better terms. These budget pressures are particularly acute in sectors where energy is a significant proportion of operational costs, such as manufacturing, transportation, and food production. Procurement teams in these industries are feeling the strain as they work to find cost-effective solutions without compromising on quality or service levels.
4. ESG and Sustainability Goals Under Threat: As businesses continue to prioritise Environmental, Social, and Governance (ESG) goals, the transition to more sustainable energy sources has become a major focus. However, rising energy prices pose a threat to sustainability initiatives, as companies may struggle to afford the investments needed for green energy solutions. For procurement teams tasked with meeting ESG goals, the challenge is twofold: ensuring that suppliers meet sustainability criteria, while also managing the financial impact of energy price increases. This could result in some businesses delaying or scaling back their sustainability efforts, despite the long-term benefits.
Strategies for Procurement Teams to Manage Rising Energy Prices
To navigate the challenges posed by rising energy prices, procurement teams need to adopt new strategies and approaches. Here are some key strategies to consider:
1. Long-Term Contracts with Energy Suppliers: One way to mitigate the impact of rising energy prices is by entering into long-term contracts with energy suppliers. These contracts provide businesses with greater cost certainty by locking in energy prices for an extended period, shielding them from short-term market volatility. Procurement teams can negotiate favourable terms with energy providers, securing more stable pricing structures while avoiding the risks associated with sudden price spikes. Additionally, some energy suppliers offer contracts that include renewable energy options, helping businesses align with their sustainability goals.
2. Energy Efficiency Measures: Investing in energy efficiency measures can significantly reduce a company’s exposure to rising energy costs. For procurement teams, this means sourcing equipment, machinery, and technology that consume less energy while maintaining or improving operational performance. Businesses can also work closely with suppliers to encourage energy-efficient practices throughout the supply chain. This includes identifying opportunities for reducing energy consumption during production and transportation, as well as promoting the use of renewable energy sources where possible.
3. Supplier Diversification and Localisation: Rising energy prices are exacerbating the risks associated with over-reliance on a single supplier or region for sourcing goods. By diversifying suppliers and seeking alternatives in regions with lower energy costs, procurement teams can spread their risk and potentially reduce costs. Additionally, businesses may consider localising their supply chains by sourcing goods from suppliers closer to home. While this may not always be feasible for every industry, reducing the distance goods need to travel can help mitigate the impact of rising transportation and fuel costs.
4. Renegotiate Supplier Contracts: In the face of rising energy prices, procurement teams may need to renegotiate supplier contracts to secure better terms. This could include negotiating longer payment terms, volume discounts, or fixed-price agreements to help manage the financial impact of increased energy costs. Furthermore, businesses can work with suppliers to explore joint solutions for managing energy costs. For example, suppliers may be willing to share the cost of investing in energy-efficient technologies or renewable energy sources, creating a mutually beneficial arrangement.
5. Leverage Technology for Energy Management: Technology plays a crucial role in helping businesses monitor and manage energy consumption across their operations. Procurement teams can invest in energy management software that tracks energy usage in real time, identifying inefficiencies and opportunities for cost savings. For businesses with complex supply chains, digital procurement platforms and supply chain visibility tools can help monitor energy consumption across different suppliers and regions. By leveraging this data, procurement teams can make more informed decisions about sourcing, pricing, and supplier selection.
Case Study: How a UK Manufacturing Company Managed Energy Price Increases
To illustrate the impact of rising energy prices on procurement, let’s look at the example of a UK-based manufacturing company that experienced a significant increase in energy costs over the past year. Faced with a 25% rise in energy prices, the company’s procurement team took a proactive approach to managing the situation. They implemented several key strategies: 1
. Energy Efficiency Investments: The company invested in energy-efficient machinery, reducing its energy consumption by 15%. This not only lowered their overall energy costs but also aligned with their sustainability goals.
2. Renegotiating Contracts: The procurement team renegotiated contracts with their key suppliers, securing fixed pricing for the next two years and reducing their exposure to further energy price increases.
3. Localising the Supply Chain: By sourcing more raw materials from local suppliers, the company was able to reduce transportation costs, which had risen significantly due to higher fuel prices.
4. Collaboration with Suppliers: The company worked closely with its suppliers to encourage energy-efficient practices, resulting in lower production costs for both parties. As a result of these actions, the company was able to mitigate the impact of rising energy prices on its procurement budget and maintain profitability while continuing to meet its sustainability objectives.
Conclusion
Rising energy prices in 2024 are presenting significant challenges for UK businesses, particularly for procurement teams that must manage increasing costs while maintaining operational efficiency. The impact of these price increases is being felt across supply chains, with higher production, transportation, and operational costs putting pressure on budgets and profitability.
However, by adopting proactive strategies—such as securing long-term energy contracts, investing in energy efficiency, diversifying suppliers, and leveraging technology—businesses can manage the risks associated with rising energy prices. Procurement teams that take a strategic approach to energy management will be better positioned to navigate the challenges ahead and maintain a competitive edge in an increasingly volatile market.
As energy prices continue to fluctuate, businesses that prioritise energy efficiency, collaboration with suppliers, and innovative procurement practices will be able to minimise disruptions and build more resilient, sustainable supply chains for the future.
