Consider Your Energy Procurement Options
- By Doug Snyder
- May 1st, 2013
With more energy markets across the U.S. moving toward deregulation every year, only one thing is certain: volatility.
For commercial and industrial energy buyers, remaining nimble is the key to successfully navigating a volatile energy market, whether natural gas or electric. Choosing the correct supplier and making timely purchasing decisions is paramount to getting the best price and contract terms. Anything that slows or impedes the process negatively affects purchasing power.
No single energy-buying plan works for all facilities. Managers must be aware of their options to make energy purchasing decisions that will positively affect their bottom line.
Reducing energy consumption is hugely beneficial, and nearly everyone is practicing good kW-cutting habits. But the second most direct route to decreasing energy costs is often overlooked: managing the energy purchase itself. The largest barrier to purchasing energy at lower prices: understanding the deregulated energy markets.
Three main energy procurement options exist for commercial and industrial consumers. Business managers, engineering departments, and facility managers should be aware of the pros and cons of each so they can choose what’s best for their institution or company.
Purchasing energy on the open market, individually, is one possibility. It can be intimidating, and rightfully so for someone without years of energy industry experience. Deregulated energy markets are volatile and tough to interpret. That doesn’t mean an individual acting as his or her own purchasing agent can’t make a good decision, but with electric energy prices changing literally by the minute, it can be a daunting process, especially if the buyer has other responsibilities as well.
Another option is to join an energy aggregation group. Although not the best direction for some, conditions exist where joining an aggregation group can be beneficial.
Aggregation groups limit mobility and minute-to-minute purchasing power, reducing some of that market “agility,” but there are benefits. An aggregation group — very similar to the way mutual funds separate buyers from all of the day-to-day stock and bond decisions — removes much of the guesswork and hassle from the purchasing process. Usually, with the aggregator watching the energy market, energy will be purchased below the utility’s price-to-compare, or PTC (more on this later). Although rock-bottom prices are rarely seen by purchasing with an aggregation group, this means of procuring energy can be a safe bet. For administrators, it’s “out of sight, out of mind.”
In the case of some municipalities, schools, and hospitals, there is no other choice. If they’re already a participating member of another purchasing consortium, it’s not an easy task to opt out of an aggregation group.
The third option is hiring an individual energy consultant to manage the entire energy procurement process. This can provide many advantages. It’s like custom-tailoring an energy plan specifically for your institution. An energy procurement specialist purchasing for only one firm at a time has the mobility needed to navigate the violently fluctuation energy markets.
If the consultant is doing his or her job properly (so, yes, you need to choose well here, too — ask questions and seek referrals), you won’t be rushed into buying energy. With the natural gas and electricity markets being two of the most volatile in the world, it pays to be patient and deliberate and to truly understand the factors that impact the markets. And, be prepared to act on short notice to take advantage of attractive long- and short-term market opportunities.
Price to Compare
No matter which of the three purchasing venues you choose, understanding PTC will make the process as transparent as possible. An aggregator or consultant may tout the fact that an energy price below the utility’s PTC can be locked in. While this may be true, just beating the PTC should not be the ultimate goal. The PTC is simply the utility’s posted energy cost for the next quarter; not for an extended period of time. Projected volume, future market prices, and a “true-up” from the preceding quarter are the main considerations utility managers review prior to adjusting a quarterly PTC.
Given appropriate timing, anyone can purchase energy at a price below the utility PTC. In fact, being versatile and familiar with daily market fluctuations and future trends can often result in purchases far below the PTC. But for this to happen, buyers need to take an educated position and must also be prepared to respond to market opportunities on short notice.
Expanding on Aggregation Groups
If an aggregation group looks like the best answer to your energy procurement needs, there are a few things to keep in mind. Some members in the group can benefit at the expense of other members. Energy aggregation cross-company subsidizing occurs when both flat-load (steady use) customers and peaking-load (fluctuating use) customers are grouped together. Because all the members of an aggregation group are invariably given the same price, it will no doubt be fair to some and unfair to others.
Because the distance from an energy source will play a large part in determining an energy price, the same applies to geographic location. A customer located in close proximity to the energy source will subsidize a client located many miles away, yet as members of the same group, they are priced the same.
Also, a widespread misconception about aggregation groups is that if numerous companies or institutions buy energy together they can receive a bulk discount. This isn’t the case. There is no bulk discount, only a delivery discount, and since all the buyers have a different physical address, the discount doesn’t apply to members of a group.
More on Consultants
If an individual consultant looks like the best option for your firm, care should be taken to choose the correct one. Not all consultants bring the same experience and business ethics to the table. Build a working relationship with your consultant to be sure you can bank your reputation on their qualifications. The right partnership should be mutually beneficial.
Consultants worth their salt have years of experience working within energy firms developing purchasing strategies. This gives them the industry knowledge, foresight, and the know-how to buy energy at the right way.
A consultant’s loyalty should be to an individual client rather than a supplier or an aggregator. And he or she should offer a personalized and independent perspective to an energy buyer’s needs and goals. Protecting the client’s bottom line should be the primary goal.
Doug Snyder is chief financial officer for Tybec Energy, an independent energy solutions company based in Lititz, PA.