What Owners Need to Know About … Purchasing Energy

June 1, 2016
There are two ways to lower energy spend: reduce consumption or pay less for energy. The former takes time and capitol, while the latter can be quick and painless.

There has been a lot of talk about “energy spend” in recent years. It is a vague term, meaning different things to different people, however. For example, a homeowner wants to know what his or her household spent on gas and electricity the previous year, while a school-board member wants to know what the entire district spent per square foot. A foundry owner, on the other hand, might track energy expenditure by ton of raw material produced.

No matter the yardstick used, energy spend is a big part of any budget. To keep profitability up, there are two ways building owners and managers can lower energy spend: reduce consumption or pay less for energy.

While reducing energy consumption can be highly beneficial to an organization’s bottom line, it often takes time and quite a large outlay of capitol. On the other hand, reducing the amount paid for energy can be quick and painless.

Let’s take a look at where the energy markets are today and then discuss some options for energy procurement.

Markets at a Glance

Generally speaking, energy looks to remain affordable for the remainder of the year. The Saudis show no signs of intending to cut oil production, and U.S. oil fields remain in production, though greatly dampened since the beginning of the year. Barring major political changes, there should be little fluctuation in oil prices.

Natural-gas prices fell substantially in 2015. When the December gas market closed on Nov. 11, 2015, the New York Mercantile Exchange (NYMEX) price was $2.20. The previous year at the same time, it was around $4.

Much of this reduction can be attributed to large quantities of gas in storage. The polar vortex of two winters ago prompted expansion of storage infrastructure throughout 2014 and 2015. With strong natural-gas production and last year’s mild fall, the United States hit a record 4 TCF (trillion cubic feet) in storage heading into the 2015-2016 heating season. That is 11.2 percent over the previous year.

Expect electricity rates to remain relatively stable, increasing only gradually over the next few years. Further stability will come from low, steady natural-gas prices. The likely slow-but-steady price increase for power will come from infrastructure improvements instead of generation.

The U.S. Environmental Protection Agency’s Clean Air Act now requires coal-fired electricity plants to add pollution control, switch to natural gas to reduce pollutants, or shut down. As they exist today, most coal plants will need to come offline within the next few years.

Looking a few years ahead, as coal is phased out, electricity prices may become more volatile. In the past, switching between coal and natural gas for electricity generation helped to keep the price of all three energy sources down. Going forward, natural gas will be the primary source of power generation, so the price of electricity will closely track that of natural gas. As more demand is placed on natural-gas sources, the price of gas could increase.

Buying Energy

When it comes to purchasing energy, three options are available to nearly all commercial and industrial facilities. There are pros and cons to each, and what is good for one customer is not always good for another.

Individually purchasing energy on the open market. Individually purchasing energy on the open market can be intimidating, as deregulated energy markets can be volatile and tough to interpret. That is not to say a company acting as its own purchasing agent cannot make good decisions. With energy prices changing by the minute, be sure whomever is tasked with purchasing energy is able to dedicate time to the job. Be prepared to act on short notice to take advantage of attractive long- and short-term market opportunities.

If acting on your own behalf, approach energy purchasing as a wise investor handles stock-market investing. Hedge your energy purchases, and keep emotion out of the decision-making process. Keep your budgets in perspective, rather than hold out for the price to drop a few more cents. Try to lower costs in comparison to the prior year. If you are not careful, it is easy to find yourself gambling.

Aggregation group. An aggregation group levies the power of group buying to negotiate a price from a supplier. An aggregation group removes much of the guesswork and hassle from the purchasing process.

The biggest downsides to an aggregation group are lack of mobility and lack of minute-to-minute purchasing power. Though prices are locked in, there still may be room for improvement. Typically, the smaller companies in a group make out better than the larger ones.

Individual energy consultant. An energy-procurement specialist purchasing for only one firm at a time has the mobility needed to navigate fluctuating markets. Purchasing for a client’s specific use trends also is a big advantage. Very often, hiring an energy consultant is the fastest way to cut energy spend.

Be careful when choosing a consultant. Not all consultants bring the same experience to the table. Seek referrals. Build a working relationship with your consultant to be sure you can stake your reputation on his or her qualifications. A consultant’s loyalty should be to an individual client, rather than to a supplier or an aggregator, and the consultant should bring a personalized and independent perspective to an energy buyer’s needs and goals.

President and chief executive officer of Tybec Energy Management Specialists Inc., Tod W. Sherman has more than 15 years of energy-industry experience. He has a bachelor’s degree in civil engineering from The Pennsylvania State University.

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