Optimising Energy Procurement Strategies for UK Manufacturers

The current geopolitical landscape means the energy market is more volatile than ever, and for manufacturers, this volatility translates directly into rising costs and tighter margins. With energy expenses often accounting for a significant portion of operational budgets, businesses are under increasing pressure to look at optimising their energy procurement strategies.

With an optimised strategy, you can get greater cost control and resilience within your organisation. Beyond financial considerations, the shift towards sustainability and energy efficiency adds another layer of complexity to decision-making.

Despite its critical importance, navigating the complexities of energy procurement remains a challenge for many manufacturers. Ineffective contracts, a lack of market insight and rapidly changing government policies – such as shifting pricing structures in the UK – are leaving businesses exposed to unnecessary risks.

For manufacturers, the time to act is now. By understanding the evolving energy landscape and adopting a strategic, data-driven approach to energy procurement, UK manufacturers can not only control costs but also identify cost-savings as well as future-proof their operations against ongoing market disruptions.

The energy landscape in the UK is undergoing significant transformation, bringing both challenges and opportunities, which is why it’ll be important to know why these market changes will matter to UK manufacturers.

Many of these changes are due to government iniatives such as the 2021 Net Zero Strategy and the rapid adoption of renewable energy sources. For instance, in the third quarter of 2024, renewable electricity generation was 6.5% higher than the same period in 2023 and overall totalled 50.5% of all electricity generation. This is a positive for the UK energy landscape as far as sustainability goes, but how does it translate into risks and opportunities for manufacturers?

Understanding these changes is essential for crafting an effective procurement strategy that ensures cost control and long-term stability.

Geopolitical Pressures: 

Brexit and ongoing geopolitical tensions in Eastern Europe and the Middle East have disrupted energy supply, driving up prices and adding unpredictability to the market. In the UK, wholesale gas prices began to rise significantly in the summer of 2021, with the system average price reaching highs of 12.8 pence per kilowatt hour in December 2021, more than eight times higher than the same period the previous year. 

This surge had a direct impact on businesses, leading to increased operational costs and squeezing profit margins.

Policy Developments: 

Recent changes to how manufacturers are charged for electricity through the Targeted Charging Review (TCR) increased fixed daily charges by up to 2,000%. These charges are due to be refreshed in December 2025 and come into effect from April 2026.

Looking further out, zonal pricing structures are being considered by the UK government, which would change how manufacturers procure and pay for energy but will offer a range of benefits. These include a more efficient use of the electricity grid, better integration of renewable energy, and potentially lowering overall costs by reducing grid congestion and transmission losses.

For manufacturers, it’ll be critical to stay informed of policy updates to ensure that they can benefit from better energy management by following government bulletins, consulting industry experts, and reading energy insights in the news.

Transition to Renewables:

The UK is moving away from fossil fuels and embracing renewable energy sources to stabilise the volatile energy market and meet net-zero targets. This shift impacts energy pricing and availability, requiring manufacturers to adapt their strategies and consider renewable energy procurement. 

Supply Issues and Infrastructure Challenges:

Unplanned outages and ageing grid infrastructure present significant risks to energy reliablity. The UK’s electricity grid needs modernisation to meet growing demand and incorporate renewable energy sources effectively. Without these updates, there’s a risk of disruption to manufacturing operations, which can cause production downtime and in turn, can lead to financial losses.

Increased Price Volatility: 

Rising prices driven by supply-demand imbalances require manufacturers to monitor market movements closely.

Opportunity to Leverage Renewables: 

As renewable energy becomes more affordable, manufacturers can incorporate it into their procurement strategy for both cost savings and sustainability gains.

Eligibility for Government Support: 

New incentives and policies may help offset costs, but manufacturers need to be proactive in identifying and applying for these benefits. You can learn more about our exemption management services here.

Reliability Concerns:

Manufacturers need contingency plans, such as backup power sources or alternative suppliers, to address potential supply disruptions caused by infrastructure challenges or outages. 

By staying ahead of these trends, manufacturers can transform challenges into opportunities, building resilience in their manufacturing energy procurement strategies.

When it comes to picking the right procurement contract, you’ll need to be aware of the different types of contracts available. Manufacturers should be aware of the differences between fixed, pass-through and flexible contract options, ensuring that they are on the right energy contract for their business needs.

Understanding your consumption patterns is going to be an important process when looking at energy procurement. Going in blind isn’t advisable; collecting the correct data will help you make better informed decisions about which contract is best. Using data analytics could uncover additional opportunities that might only work with particular contract types.

Fixed Contract:

This type of contract locks in both commodity and third-party charges under one unit rate for the length of the contract term. Having a fixed-rate energy contract is ideal for manufacturers that want simplicity and budget assurance. However, while you get price stability, you will pay a premium for the security and may be unable to access government support for those third-party charges that have been ‘locked’ and hidden within the single unit rate.

Pass-through Contract:

This contract splits your energy bill between fixed commodity costs and variable non-commodity charges. If non-commodity unit rates change, these will be reflected on later bills. This purchasing model should be considered when applying for government support, as it helps to separate the best components, enabling you to receive the support for targeted reliefs you might be eligible for. 

Flexible Contracts:

With a flexible procurement contract, you can buy energy in smaller chunks prior to the contract period and even leave volume unhedged on the open market to take advantage of low month- and day-ahead rates. This allows you to be more strategic and manage risk, but it is important to note that this type of contract has to be actively managed, and billing and invoice validation can be more complex than other contract types.

A key factor to consider when choosing your procurement contract is whether a short-term energy agreement will be better suited to your business or if a long-term energy contract fits your needs. The answer will hinge on the organisation’s situation, the current market conditions, and the type of contract being chosen.

As an organisation, you must be clear on current consumption levels and how likely it is that these consumption patterns will remain the same into the future. Fixed contracts come with ‘take or pay’ clauses, so locking into an agreed volume for a long term and then dramatically altering the production levels and therefore consumption could present a risk. A flexible contract volume can be re-forecast season by season, which eliminates this risk.

Market conditions also play a part; however, there is an element of crystal ball gazing required here. Considering where the market is right now, how likely are prices to go up (or down) in the next 2, 3, 4, or 5 years? If you are confident in the answer, then that would tell you, for a fixed or pass-through contract, whether to go short or long. A flexible contract manages the trades and therefore the unit rates for each season, hedging against price increases and unlocking value as the market goes down.

These are some strategies to mitigate volatility and ensure cost-effective energy supply.

Managing risk is a critical component of energy procurement, especially in a market characterised by volatility and uncertainty. A robust risk management strategy ensures that manufacturers can mitigate price fluctuations, hedge against market risks, and make informed procurement decisions.

To effectively manage risks continuously, manufacturers can leverage the following energy purchasing risk strategies:

Leverage Risk Management Tools:

Employ advanced tools and software to monitor market trends, analyse pricing data, and forecast future energy costs. These insights help businesses make proactive and informed decisions. 

Hedge Against Market Movements: 

Use trading strategies and hedging strategies for energy procurement and market analysis (e.g., fundamental and technical analysis) to secure energy contracts when prices are favourable.

Flexible Energy Baskets for Risk Sharing:

For manufacturers with smaller energy consumption or multi-site operations, flexible energy baskets are a powerful strategy. By aggregating energy demand with other businesses, manufacturers can increase buying power, access better rates typically reserved for larger consumers, and reduce individual exposure to price fluctuations. 

Risk management doesn’t stop at pricing – it also extends to aligning with sustainability goals. By incorporating renewable energy sources or on-site generation options (like solar or CHP), manufacturers can hedge against price volatility while meeting ESG targets.

By generating your own energy on-site or having a PPA in place, this can help to reduce long-term volatility as well as lowering a manufacturer’s carbon footprint.

Sustainability is no longer just a nice-to-have; it’s a critical part of energy management for manufacturers. However, balancing financial savings with environmental targets can be challenging, but doing so can yield significant benefits.

Implementing sustainable energy practices not only helps reduce costs in the long run but also enhances a manufacturer’s reputation, demonstrating a commitment to corporate responsibility. Businesses that prioritise sustainability can gain a competitive edge, attract environmentally concious customers, and strengthen stakeholder trust.

Below are actionable ways manufacturers can incorporate sustainable practices into their energy procurement strategies through on-site renewable energy generation.

On-site Power Generation In UK Manufacturing

Installing rooftop solar panels allows manufacturers to generate renewable energy on-site, reducing dependency on the grid and lowering long-term costs. Many businesses can benefit from government incentives or tax credits that help offset installation costs, with typical payback periods ranging from 5 to 10 years.

UK manufacturers can also look into Combined Heat and Power (CHP) systems, which produce both electricity and heat simultaneously, offering up to a 20% reduction in energy costs and a 30% reduction in carbon emissions. These may also qualify for financial incentives, making it an attractive option for improving energy efficiency.

Power Purchase Agreements (PPAs)

Manufacturers can consider a Power Purchase Agreement (PPA) with an energy generator, which can help meet sustainability and carbon reduction targets.

A PPA is an agreement between a manufacturer and an energy generator. The manufacturer agrees to pay the generator directly for the energy they are generating, and they lock in a specific long-term rate.

Committing to Buying Renewable Energy

Manufacturers can reduce their carbon emissions by choosing to purchase a renewable energy contract. By doing this, they can indicate that they have a commitment to sustainability and eliminating their Scope 2 emissions, as well as increasing their brand reputation and improving their investor relations. It will also help to unlock more government incentives.

When choosing your renewable energy contract, make sure that you also purchase the REGO or RGGO certification. Some energy suppliers only provide renewable energy contracts with REGOs as proof of where the energy is sourced is provided.

By doing this, manufacturers can align their energy procurement strategies with broader business goals, such as cost reduction, carbon neutrality targets, and improved operational resilience, creating a win-win scenario for both financial performance and environmental impact.

In the current volatile energy market, manufacturers need to take a proactive and strategic approach to energy management. A solid energy procurement strategy is critical to reduce costs and ensure long-term operational resilience. Being more proactive with an energy purchasing strategy can help avoid “bill shock” and maintain competitiveness in the market.

The key to a successful energy management plan will be data-driven decision-making, strong supplier relationships, and using energy management software such as myenergyManager, with its 24/7 real-time data visibility, to monitor and optimise performance.