Building A Better Tomorrow
Building A Better Tomorrow
Commercial Energy
In today’s competitive business landscape, controlling and managing energy costs is not just an environmentally responsible decision, but also a critical factor in maintaining profitability. Energy costs can significantly impact a company’s bottom line, and effective energy management can lead to substantial savings. Strategic energy procurement involves carefully selecting suppliers, negotiating favorable contracts, and implementing energy-efficient practices. By optimizing energy usage, mitigating price volatility, and reducing carbon emissions, businesses can enhance their financial performance and contribute to a more sustainable future.
The Impact of Energy Costs on Business
Energy costs often represent a significant portion of a company’s operating expenses. These costs can fluctuate due to various factors such as market dynamics, geopolitical events, and changes in energy policies. Such volatility can make budgeting and financial planning challenging for businesses. Energy procurement plays a pivotal role in managing a company’s energy costs and ensuring a reliable supply of energy. It involves not only purchasing energy at competitive prices but also understanding market trends, negotiating contracts, and managing risks associated with energy price volatility. This is where we come in.
Benefits of Effective Energy Procurement
Cost Savings
By procuring energy strategically, businesses can achieve substantial cost savings. This involves purchasing energy when prices are low and capitalizing on various energy procurement strategies.
Budget Certainty
Energy price volatility can significantly impact a company’s energy costs. Through fixed-price contracts, businesses can achieve budget certainty, making it easier to plan and manage finances.
Risk Management
Effective energy procurement involves managing the risks associated with energy price fluctuations. This can be achieved through various hedging strategies.
Sustainability
Businesses can enhance their sustainability efforts by procuring renewable energy. This not only reduces their carbon footprint but also improves their reputation among stakeholders.
Energy Rates are Determined by Several Factors:
Load Profile
This shows your daily and seasonal patterns of energy consumption, based on your historical usage data.
Historical Usage Data
This is a file that contains your energy usage and demand for the past year. Retail energy providers need this file to give you a quote for your commercial electricity rate.
Energy Demand
This is your maximum energy need during a 15-minute interval from your previous month, measured in kW. This measurement is needed to ensure they have enough supply to meet your highest demand.
Energy Usage
This is how much energy you consume, measured in kWh. Your monthly energy charge is based on your energy usage times your rate. Your energy rate is negotiable, but your demand charges are not. Your energy bill total is the sum of your energy, demand charges, and taxes.
Contract Start Date
Your energy rate varies dependent on your start date and other factors affecting the market at the time. These factors are supply and demand, world events, and weather. Usually, long-term rates are lower than short-term rates. So, it is usually better to sign long-term contracts early before your current one ends.
Energy Procurement Strategies
Fixed Price
This involves locking in a specific price for energy for a set period, providing budget certainty.
Index Price
This strategy involves paying the market price for energy, allowing businesses to benefit from price reductions.
Hybrid
This strategy combines elements of both fixed and index pricing, providing a balance between budget certainty and market opportunities.
Load Following
This strategy enables you to lock in non-energy costs and strategically layer fixed energy purchases. By doing so, you distribute price risk across multiple percentage-based transactions.
Heat Rate
This strategy is a way of calculating the cost of electricity based on how much fuel is needed to produce it. A heat rate energy strategy allows customers to have more transparency and flexibility in their electricity prices, as they can lock in the gas price component or let it float with the market.
Empower Your Mind: A Guide to Navigating Energy Rates and their Contracts!
FIXED PRICE CONTRACTS
FIXED PRICE CONTRACTS
Fixed-Based Pricing Contracts:
These contracts allow you to lock in a specific price per kilowatt-hour (KWh) for the entire duration of the agreement.
Minimizing Risk: By opting for fixed prices, you mitigate the risk associated with fluctuating energy costs.
Volume Commitment: Typically fixed-price contracts don’t require you to commit to a specific energy volume. However, this requirement can be added to the contract known as swing tolerances (more details below).
Advantages:
Budget Certainty: Fixed prices provide stability, allowing you to plan your budget effectively.
Low Risk Tolerance: If you prefer a predictable energy cost, fixed-price contracts are ideal. The suppliers are the ones that bear all the risk.
Disadvantages:
Market Price Fluctuations: Keep in mind that market prices may decline after you lock in your fixed rate.
Risk Premium: Suppliers add a risk premium to account for the volume and price risk they assume when offering fixed prices.
Remember, even though they provide a sense of security, not all fixed-price contracts are the same. Retail Electric Providers (REPs) and at broker’s request have the ability to adjust the fixed-rate by omitting certain pricing components (list below) and passing it through to the customer on a separate line item of the invoice, making the energy rate appear more attractive than it really is. Additionally, fixed-rate contracts can be structured with swing tolerances to achieve an even lower price, a detail that might not be disclosed to the client.
Price Components:
- Non-Spinning Responsive Reserve
- Regulation Down
- Regulation Up
- Responsive Reserve
- Hub To Load Zone Basis
- Ercot Fees
- State Mandated RECs
- Securitization (Uplift & Default)
Fixed Rate Swing Tolerance:
Fixed energy contracts with swing tolerance allow businesses to vary their energy usage while still being billed at the fixed or index price.
The variance in swing ranges from 0-100%, and most suppliers offer options to have 0%, 10%, or 100% swing.
A 100% swing option, also known as “full requirements,” provides protection for customers who are unsure of their volume requirements or expect that it may change.
However, a premium is generally built into the fixed price to cover usage fluctuations, and that premium would likely be higher for a full requirements product than for a product with 10% swing.
INDEX-PRICED CONTRACTS
INDEX-PRICED CONTRACTS
- Index-Based Pricing Contracts:
- These contracts allow you to monitor market conditions and remain on a market rate if you believe prices will stay flat or fall.
- You have the flexibility to convert to a fixed price when the time is right.
- Ideal for businesses willing to bear the risk associated with market price volatility in their pursuit to drive out additional costs.
- Advantages:
- Market Flexibility: Index pricing lets you adapt to changing market dynamics.
- Cost Optimization: It allows you to take advantage of favorable market conditions.
- Risk Management: You assume the risk associated with price and usage volatility.
- Disadvantages:
- Budget Forecasting: Due to varying market-based electric prices, accurately forecasting energy expense budgets can be challenging.
- Risk Awareness: You assume all risk associated with price and usage volatility.
Remember, index-based pricing offers both opportunities and risks. However, bear in mind this is the same type of contract that you witnessed on the news. It caused both commercial and residential customers to face difficult times after the 2021 winter storm due to the massive bills they received from their energy providers.
HEAT RATE CONTRACTS
HEAT RATE CONTRACTS
With a heat rate energy contract, the buyer pays for electricity based on how much natural gas it takes to produce it. It can give buyers more clarity and control over their electricity pricing. By tying the electricity price to the natural gas price, which is set by the market, buyers can benefit from changes in the gas market and protect themselves from swings in the electricity market. Buyers can also decide to fix the gas price part of the contract at any point, making it a fixed price contract.
Here is an example of a heat rate energy contract:
Electricity Price = (Heat Rate x Gas Index) + Retail Adder
Heat Rate: Fixed at contract signing Gas Index: Varies on index (NYMEX) Retail Adder: Fixed at contract signing
The gas index changes based on the monthly NYMEX settlement price of natural gas. The gas index can be locked by fixing the price of natural gas used in the formula.
HYBRID-PRICED CONTRACTS
HYBRID-PRICED CONTRACTS
Hybrid-Based Contracts:
These contracts combines two pricing components:
Fixed Block: You secure a portion of your energy load (the “block”) at a fixed price.
Market Index: The remaining load operates on market-based rates.
Risk Distribution: By splitting your load, you spread price risk over multiple transactions.
Active Management: Ideal if you want to actively manage your electric purchases and have consistent usage patterns.
Advantages:
Cost Optimization: You can optimize purchasing based on your power usage patterns or in response to market fluctuations.
Flexibility: Take advantage of market lows while maintaining budget certainty for a portion of your load.
Disadvantages:
Market Exposure: Remember that some part of your load will always be exposed to market index rates.
Risk Awareness: Understand the trade-offs to make informed decisions. You should be prepared to monitor and manage your energy account.
Remember, Block and Index contracts offer flexibility and risk management.
LOAD FOLLOWING-PRICED
CONTRACTS
LOAD FOLLOWING-PRICED
CONTRACTS
Load-Following Contracts:
These contracts provides a balance between fixed and variable pricing and are for companies with energy consumption patterns that vary throughout the year, rather than maintaining a consistent steady baseload.
Non-Energy Costs: You secure non-energy costs (such as capacity charges) at a fixed rate.
Layered Energy Purchases: The remaining energy load operates on market-based rates.
Risk Distribution: By spreading price risk over multiple percentage-based buys, you maintain flexibility.
Advantages:
Purchase Flexibility: You can adapt your energy purchases based on usage patterns or market opportunities.
Budget Certainty: Securing up to 100% of your load provides budget stability.
Disadvantages:
Active Management: Organizations opting for load-following contracts should be willing to take an active role in managing their energy program.
Not “Set It and Forget It”: Be prepared to engage in managing your program.
Remember, Load Following contracts offer a dynamic approach to energy procurement.
