Strategies for electricity procurement
Fixed price, tranches, spot market, or a hybrid model: The right electricity procurement method depends on your consumption, the contract terms, and the risk your company can bear. No single model is superior in every market situation. A good strategy primarily answers three questions: What quantities should be purchased at fixed prices, by when must this be done, and who decides?
This guide explains the procurement options and the rules that should be established before the first purchase. Our article on Spot Market and Futures Market provides further explanation of the basic market concepts.
Why the purchasing framework counts before the first deal
With the procurement strategy, you define, before the first contract is signed, which part of your expected electricity demand will be purchased, when, and according to which rules. It determines how much fixed pricing your company requires and what level of risk it is willing to accept. Whether you purchase on a single date or in several tranches is determined by this framework; no strategy can definitively predict the most favorable future purchase date in advance.
The entire example quantity receives the price of that day. This provides clarity early on, but concentrates the timing risk.
Each component receives the price at the time of purchase. The subsequent average price distributes the timing across three market phases.
In brief: A tranche is a predefined portion of total electricity demand. 900 MWh equals 900,000 kWh. The procurement date is the day or market phase in which the price of a tranche is fixed.
- Demand: Annual quantity, load profile, delivery points and foreseeable changes.
- Period: Start and end of the procurement as well as the subsequent delivery period.
- Division: Number, size and timing of the tranches.
- Guardrails: Price limits, risk budget, maximum open quantity and closing deadlines.
- Exceptions: Rules for suspensions, data disruptions and unhedged quantities before delivery begins.
- Responsibilities: available approvals and intervention options of the specific tariff, supplier and system.
These points should be clearly documented. Ask the supplier for a concrete example of the process: What happens when a price limit is reached, who receives a notification, and by when are the remaining quantities purchased? This will allow you to assess whether the rules will work in your company's day-to-day operations.
Basic principles: Differentiate between a supply contract and a market product
The futures market is where contracts for future delivery periods are concluded. The spot market deals with short-term deliveries. Your company usually obtains energy through a supply contract that combines this procurement with processing, metering, profiling, and other price components.
Therefore, do not simply compare a market price with a full delivery price. Examine the energy price, service charge, volume flexibility, and other contractual components on the same basis. Existing load profile data will show whether a standard product suits your timing requirements.
Single-date procurement and fixed-price model
In the fixed-price model, the agreed price components are fixed for a specific delivery period. With single-date procurement, the contract is concluded at a single purchase date. This simplifies the planning of these components but also concentrates the risk associated with that specific date.
Strengths
- The fixed components are known for the agreed period.
- Budgeting can be based on a clear price foundation.
- Fewer individual purchasing decisions are needed for this hedging.
Considerations
- Subsequent price declines generally do not lower the already fixed price.
- A price guarantee may exclude certain components.
- Quantity discrepancies or other conditions may cause additional costs.
Check the scope of fixed pricing, the delivery period and the volume tolerance band. The contract rules determine what is predictable, rather than the “fixed price” label. Hedging is a deliberate risk choice; it does not guarantee the lowest price when judged in hindsight.
Structured procurement: the tranche model
With tranche procurement, the planned quantity is divided into smaller quantities. Each smaller quantity is purchased at a separate time. This way, the energy price is not entirely dependent on a single market phase. This can support budget planning, but it does not guarantee a lower price or any advantage over purchasing the entire quantity early.
900 MWh in three equal tranches
Three purchase times, each 300 MWh. The prices are arbitrarily chosen example values and not a market forecast.
- 01EARLY MARKET PHASE
Tranche 1
- Quantity
- 300 MWh
- Price
- 90 €/MWh
- Partial costs
- 27,000 €
300 MWh × €90/MWh = €27,000
- 02MIDDLE MARKET PHASE
Tranche 2
- Quantity
- 300 MWh
- Price
- 105 €/MWh
- Partial costs
- 31,500 €
300 MWh × €105/MWh = €31,500
- 03LATE MARKET PHASE
Tranche 3
- Quantity
- 300 MWh
- Price
- 120 €/MWh
- Partial costs
- 36,000 €
300 MWh × 120 €/MWh = 36,000 €
27,000 € + 31,500 € + 36,000 €
= 94.500 €€94,500 ÷ 900 MWh
= 105 €/MWhEach tranche is counted according to its quantity. Because all three subsets are the same size, the result here is simply the average of the three prices.
Why is the calculation based on partial costs?
The weighted average price must take into account how many MWh were purchased at each price. Therefore, the quantity × price is first calculated for each tranche. The sum of all partial costs is then divided by the total quantity procured. For tranches of varying sizes, a simple average of the individual prices would be incorrect.
What does the comparison to a one-off purchase show?
In this example, buying the entire quantity early would be cheaper than buying in three tranches.
The result lies between the three observed example prices.
In this example, the late, total purchase would be more expensive than the three tranches.
The strategy spreads the timing risk. Only in retrospect can you see which individual buying day would have been more favorable. The tranche rule creates a predictable decision path beforehand, not a guaranteed lowest price.
Before the start, procurement windows, the number and size of tranches, price and risk guardrails, and possible suspensions are defined. Which decisions can be implemented automatically or approved separately depends on the specific offer.
AI-supported, rule-based tranche procurement
One possible approach uses a data-driven system to monitor predefined market signals. Depending on the system, AI can support signal analysis. The ruleset can trigger or suspend individual purchases. If prices rise, further purchases within the agreed-upon parameters can be postponed.
However, waiting leaves unhedged quantities at the mercy of further market developments. Therefore, procurement deadlines, remaining quantities, and procedures in the event of further price increases must also be clearly defined. Whether manual intervention or approvals are possible depends on the tariff, supplier, and system. Therefore, inquire about the signals used, decision-making authority, and procedures in case of data or system failures. Even with automated processes, responsibility for the budget and agreed risk limits requires a designated contact person.
Clearly distinguish between horizontal and vertical tranches.
The terms can be used differently depending on the supplier. Therefore, have them show you which quantities and delivery periods a specific model includes. The crucial point is how your requirements are reflected in the contract.
Horizontal division
In a common approach, the same delivery period is divided into quantity shares. Several purchase times together form the hedge for this period. With equal quantity shares, the pure energy price corresponds to the simple average of the tranche prices; with unequal shares, it must be weighted.
Vertical division
Here, demand is mapped across different delivery periods or products, for example, year, quarter, and month. This can allow for a more precise allocation to seasonal quantities, but increases the demands on forecasting and invoicing. A more granular breakdown does not automatically mean lower costs.
For multiple locations, quantities and contract durations should first be checked for each delivery point. A joint purchasing strategy can still include different product proportions for individual locations.
Spot market and hybrid tariffs as components of the strategy
A spot market model reflects short-term prices according to the contractually agreed-upon rules. This means that later price changes have a greater impact on the energy price. Both falling and rising prices are possible. The actual cost pattern also depends on when your company consumes electricity.
Hybrid tariff: combining fixed and variable components
A hybrid or mixed model combines a fixed-price component with a spot market component. This mix can balance opportunities and risks: one part is hedged, while another part remains market-based. A ratio of 70 percent fixed and 30 percent variable is one possible example, not a general recommendation.
Check whether the percentage values refer to quantities, standard products, or other contractual parameters. The allocation of excess and shortfalls, as well as any potential changes to the allocation, must also be clear. A hybrid tariff does not eliminate the price risk of the variable component.
The SMARD chart shows published day-ahead prices. Its average is not a consumption-weighted price for your business. For a sound decision, consider market movements, your load profile and contract costs together.
Decision support for your company
| Model | focus | What remains open |
|---|---|---|
| Fixed price | Fix agreed-upon components early | Timing risk and excluded components |
| Staged purchasing | Spread procurement over several times | Price risk of quantities not yet procured |
| Spot market | To depict short-term market developments | Fluctuations and profile effect |
| Hybrid | Combine fixed pricing and a spot component | Risk and billing rule for the variable component |
Start with two concrete figures: your expected annual consumption and the available leeway in your energy budget. For 900 MWh, a €10/MWh increase in the energy price would theoretically change the costs by €9,000 if the entire quantity were purchased at this higher price. Consider whether and for what portion of your demand you could absorb this fluctuation. Then address questions about quantity planning, procurement deadlines, and the responsible personnel.
Regularly reviewing quantities, outstanding commitments, and responsibilities helps to implement the strategy transparently. If needs change, it's essential to review what adjustments the contract allows.
Preparing for the energy discussion
For a consultation, please bring your latest invoice, current contract, a list of delivery points, and existing load profiles. Also, please bring any foreseeable changes and your planning requirements.
In a consultation with OPTUM, we compare which procurement process best suits your budget and operational capabilities. You provide the requirements; together, we clarify unresolved data questions, suitable options, and the next decision-making steps. We agree on the scope of the collaboration before any engagement. Preparing for a consultation on electricity procurement →
