DOES CONTRACTUAL VOLUME MATTER WHEN SECURING LONG TERM ENERGY AGREEMENTS?

It could be argued that contractual volume does not always matter when securing long-term energy agreements In today's dynamic business environment, organisations must contend with numerous challenges, including market fluctuations, geopolitical uncertainties, and supply route disruptions that could impact the reliability of their supply chains. Thus, the priority is to secure and resilient long-term supply.

The volume of contractual agreements between buyers and suppliers not only influences pricing structures and negotiating power but also establishes a foundation for strategic partnerships, a stable supply chain and risk mitigation.

The challenge for buyers with smaller volumes is trying to secure, reliable long-term supply when you are seemingly a small fish in a big pond, with less negotiation power.

This article outlines a 10 point guide on the key focus areas that can help enhance the likelihood of establishing secure and mutually beneficial long-term supply agreements:

1. Build Strong Relationships:

Open Communication: Foster transparent and open communication with potential suppliers. Building a relationship based on trust and understanding can compensate for the smaller volume.

2. Leverage Strategic Partnerships:

Identify Key Suppliers: Concentrate efforts on identifying suppliers who are willing to form strategic partnerships. Perhaps they are trying to penetrate a new market or have a strategic regional mandate; These suppliers maybe interested in providing the initial volumes required to establish the market and growing with you as demand increases in the long term.

3. Demonstrate Commitment:

Consistent Demand: Assure suppliers of a consistent and reliable demand over an extended period. This could be underpinned by a specific asset such as a power station or sector such as oil to gas switching in the mining sector, for example. Demonstrating this commitment can help build trust and incentivise suppliers to invest in the relationship.

4. Explore Collaborative Opportunities:

Joint Development Initiatives: Collaborate with suppliers on joint development initiatives. This could be an investment in a upcoming project or using the supply agreement to underpin your investment. Joint development not only strengthens the relationship but also demonstrates a commitment to mutual growth and an revenue generation.

5. Negotiate Flexibility:

Flexible Terms: Negotiate terms that provide flexibility for both parties. While securing a fixed volume is ideal, having the flexibility to adjust the contractual volumes based on demand growth and business needs can make negotiations more amenable.

6. Focus on Value-Added Services:

Emphasize Value-Added Services: Even with a smaller volume, highlight the value-added services you can bring to the relationship, whether it's prompt payments, efficient communication, or other factors that contribute to smoother operations.

7. Explore Niche Suppliers:

Niche Markets: Consider exploring niche suppliers or those specializing in serving smaller buyers and could accommodate niche business models. These suppliers may be more willing to accommodate smaller volumes and offer tailored solutions.

8. Long-Term Commitments:

Gradual Volume Increase: Negotiate a gradual increase in volume over time or at fixed intervals. This approach allows the buyer to establish trust with the supplier and potentially negotiate more favorable terms as the relationship evolves.

9. Diversify Suppliers:

Multiple Suppliers: Consider working with multiple smaller suppliers. While this may increase complexity, it can provide diversification, such as price and increase security of supply.

10. Understand Supplier Perspectives:

Supplier's Business Dynamics: Understand the supplier's business dynamics, challenges, and goals. Tailor your approach to align with their needs, creating a more collaborative and mutually beneficial partnership. Remember, as legacy demand expires in supplier portfolios, they will be aiming to diversify and establish new markets.

The above points are by no means exhaustive, but by focusing on these aspects, a buyer with a small volume can strengthen its negotiation power and cultivate relationships that contribute to the long-term stability of their supply chain. Remember, it's not just about the volume; it's about creating a partnership that adds value to both parties over time.