Energy Procurement Fundamentals

Planning on implementing an energy management strategy for your business? Start here with a few simple fundamentals, and you’ll be well on your way to improving your game plan.

It’s the weather, whether or not

The subtle differences between natural gas and electricity lie in “storage.” That is, electricity has to be made and delivered in real time and cannot be stored indefinitely for grid use. Peak periods of summer or winter weather amplify this trend. Sustained periods of cold or hot weather create a shift in available electric supply which causes energy prices, (and your bill) to increase. In summer, electric generators move production to meet demand, and if there is a shortfall, backup resources are brought online which are expensive to operate, causing an increase in electricity pricing. During winter, the actual driver of electricity pricing is the underlying cost of fuel such as natural gas or in some cases oil that powers electric generating plants. And with a higher cost of raw materials (fuel), comes a higher cost of the electricity being produced and sold to end users. Fixed pricing combats these price swings by allowing you to lock your energy rates for as few as 3 and as many as 60 months depending on your preference. Fixed pricing does not guarantee savings, so be sure that your fixed rates will meet your energy budgeting goals.

Are you a risk taker?

If you value budget certainty and predictability you would employ different energy management strategies then if you were more interested in market timing and or leveraging downward market trends. Being honest about how you handle risk will surely guide you in your decision-making process.

Don’t believe the hype

Be aware that the lowest price today may not be your lowest price long term, so taking the time to review supply contracts and negotiating favorable term can help you save in the long run. Always track contract expiration and post-term pricing structure as some energy supply companies do a great job of sneaking in exorbitantly high rates when fixed contracts expire.

Understanding these fundamentals is an important part of the procurement process. Be sure to review these with your consultant or management team. When you understand a little more about the factors that contribute to the volatility in cost and your tolerance for risk, you will then be able to review different products suited for your specific needs efficiently.