Under Control

How a comprehensive energy management plan can save money, minimize risk and reduce budget uncertainty.

Controlling electricity costs and reducing budget uncertainty are no doubt major challenges facing many facility energy managers. Compounding those concerns is the fact that a number of issues — from commodity price volatility to competitive contract rates that may not be as good as they seem — can greatly impact energy spending among facility managers, estimated at $20 billion per year nationally.

Given that reducing electric costs has been shown to boost profit margins and sales per square foot, the benefits of a comprehensive energy management plan speak for themselves. Obviously, there is no “one size fits all” approach, but there are some fundamentals that have the potential to deliver savings and mitigate risk.

In putting together the building blocks for a comprehensive energy management plan, the first step is to get organized and stay that way. This means thoroughly understanding your energy footprint in both regulated and deregulated markets. Key considerations include:

• What are your current rates?

• When do your contracts in deregulated markets expire?

• How much power do you use on a monthly and annual basis?

• What does your load profile look like?

• What is the current product structure for each contract?

Future actions should be shaped by this information in some way. Therefore, it’s critical to build an information database that can be used as a quick reference guide.

You can leverage this knowledge by tracking retail commodity prices over time and building a price trend analysis. For example, energy managers have the ability to receive a weekly retail price signal for extension pricing for each of their existing contracts. By monitoring these price signals closely, they will be able to identify trends that could have a major bottom-line impact to their annual electricity spend.

For example, let’s say that you are paying $65 per megawatt hour for the commodity charges for your portfolio in Illinois. After analyzing extension pricing trends over a period of time, you discover that future electricity pricing offers have dropped to $55 per megawatt and have been stable over a period of months. By knowing the terms of your current contract, you can move quickly to extend it in order to lock in lower future rates and enjoy the advantage of future energy savings.

The ability to track and quickly respond to changing market conditions also enables you to avoid suffering from the price volatility that can accompany unexpected events. When Hurricane Katrina struck in 2005, it idled nearly 90% of natural gas production in the Gulf and contributed to a significant spike in natural gas pricing that consequently translated into much higher costs for electricity for many months. More recently, a severe winter storm in Texas pushed wholesale market prices from $50 to $3,000 per megawatt hour for several days. Clearly, anyone who waits and finds themselves at the mercy of events beyond their control will pay the price — literally.

It is also important to ensure that your existing product structure is consistent with your company’s underlying business drivers. Once again, this means knowing the answers to a number of critical questions:

• Are your energy products consistent with your budgeting process/strategy?

• How much flexibility do you have with your budget?

• Can you pass energy price increases through to your customer base?

• Is your budget on a fiscal or calendar year?

• How closely correlated are your personal goals to hitting budget?

These are some of the key factors that need to be considered when deciding on a product structure, contract term and timing for contract execution.

For example, if you have little budget flexibility, then a fixed-price product may be preferred; it ensures month-in, month-out commodity cost certainty. On the other hand, if you have price elasticity and can pass through energy price increases to your customer, then you might want to consider block and index pricing, which combines fixed pricing for a baseline portion of your load with market-based pricing for certain portions of your load curve. Alternatively, you could consider straight index pricing, which is based purely on the cost of power in the wholesale market.

The product you choose is also a function of your company’s appetite for risk. Consider heat rate pricing, linked to the cost of natural gas as an example. If you are willing to trade off the possibility that future natural gas prices might spike against the upside that they will stay low and potentially fall even further than they already have, this may be the product for you. Again, that decision depends on business drivers like budget flexibility, elasticity and risk appetite.

Although this may be obvious to most energy managers, the final consideration bears repeating: If you are in a state where the electricity market is deregulated, shop wisely. Establish close relationships with two or three qualified retail electric providers — ones that are credit-worthy with a strong balance sheet — with whom you can confidently execute a contract. Make sure that the price offers they propose are executable and the product is normalized to ensure that the terms among them are consistent. Simply put, compare prices on an apples-to-apples basis. If someone offers you a rate that seems too good to be true, it probably is. A close reading of the fine print is likely to reveal hidden fees or add-ons that may produce sticker shock when the first bill arrives. Insist on price transparency from any prospective provider.

In the end, a sound energy management strategy combines three essential elements:

1. An understanding of market fundamentals.

2. A willingness to be proactive.

3. The ability to identify and take advantage of products and pricing specific to your facility’s portfolio and consistent with your business drivers and budgeting process.

Indeed, knowledge is power. The more you know, the more power you’ll have over your energy usage and costs.