Benchmarking power costs: is your supply contract good value?

When utilised correctly, benchmarks can give energy buyers the measurement tools to defend strategy internally and improve outcomes in the next cycle. They can provide a roadmap for using insights in procurement cycles, across different energy applications, sources and contract types.

There are various benchmarks energy procurers can use, including crude benchmarks. This metric benchmarks different grades of crude oil to stabilise global crude oil prices.  

With successful procurers comparing costs such as unit rates, standing charges and non-commodity charges fairly across different sites and peers to get a holistic overview of the market. 

We take a look at key benchmarking strategies, including factors such as supplier margins versus market movements, to help energy buying specialists make strategy-level procurement decisions.

Why benchmarking is essential for procurement credibility

We can use benchmarking to make value-led energy buying decisions, reinforcing the credibility of a strategy before an energy contract is drafted. 

Procurement as a performance function, not admin

Credibility comes from measurable insights, often driven by evidence such as data. The energy market has an abundance of data, so treating procurement as a way to demonstrate the value of a contract to the broader business, rather than simply admin, can solidify benchmarking as a method of proving credibility.

Avoiding hindsight bias after price shocks

Procurement specialists should undertake robust pre-event documentation before using benchmarking to avoid hindsight bias after price shocks. Hindsight bias occurs when procurement specialists believe they had greater insight into price changes than they actually did, thereby skewing perceptions of market performance. Introducing benchmarking with a data-led, evidence-based approach and reviewing both before and after pricing changes can help avoid hindsight bias. 

Choosing the right benchmark reference

Different businesses have different goals they're seeking to understand, and benchmarking can be a powerful tool to help them gain this knowledge. However, it's key that you bear these unique goals in mind and ensure your benchmarking strategy aligns with them. 

Factors you could look at when benchmarking include day-ahead average pricing, which is relevant for businesses looking to adjust energy usage daily to achieve the best value. Your company would need the flexibility to adapt consumption regularly to achieve the best value. Forward curve benchmarking is more appropriate for businesses that converge with projected values over a longer-term contract, for example, by locking in discounted energy for the future. Benchmarking retail indices is a valuable metric for smaller businesses looking to use a third party for energy sales, as it allows them to compare multiple third-party contracts to find the best deal. Overall, it's critical that you benchmark by horizon and by contract type, so the insights you glean are relevant, helpful, and ultimately help you secure the best value.

Adjusting for load shape, region and risk profile

Energy performance data is a useful resource for procurement specialists to make decisions based on past, present, and future performance. However, data is only useful for benchmarking when it provides realistic insights relevant to the business that is benchmarking.  

Avoiding apples-to-oranges comparisons

For energy benchmarking to be truly reflective and practical, benchmarking data needs to be adjusted and variables taken into account to avoid comparing data that isn't comparable and delivering insight that isn't relevant. 

Shape-adjusted benchmarking

Consumers' usage patterns, such as evening peaks after work and significant industrial pushes, are known as the load shape. These types of patterns reflect different sets of data, so care must be taken when comparing them to standard baseload usage. You can get the most out of benchmarking these types of data by grouping operations with other buildings or profiles with similar energy usage, similar regions, or specific stakeholder concerns.

Identifying supplier margin and hidden costs

We can first separate the different operating costs that make up power costs by calculating the central elements that make up the market price: the wholesale cost. This is how much each unit of energy would be sold on the open market. Next, calculate the non-commodity costs, sometimes known as pass-through costs or adders. These include costs such as metering charges, environmental levies, and balancing costs, which can be up to 50% of the bill, causing what's known as non-commodity leakage. What's left are supplier costs: marketing, profit and factors like customer service. You can access this information by requesting a breakdown from your supplier or using independent market data. Using a supplier-provided dashboard may not always be accurate, as not all data may be displayed.

Turning benchmarks into procurement action

Benchmarking allows operational targets to be set, which procurement specialists within the business can use to negotiate energy contracts. Part of this is improving tender design by utilising external benchmark data, such as load profiles and peak demand information, either in real time or from historical sources. However, while information is helpful, the kit must be streamlined into KPIs and real, actionable procurement targets. Benchmarking can also help highlight risk, exposure, and volatility, enabling exploitation for potential profit or avoiding pricing instability that resets overall risk appetite when benchmarks expose misalignment.

With good insight and careful planning, benchmarking can turn procurement from guesswork into accountable performance.