A recent article over on Supply Management . com which literally asked if you had money to burn brought up two very good points:
- Buying energy in a volatile market demands specific skills.
- In this economy, you can’t overlook your energy costs if you’re in a market where you have a choice.
In the UK and many states in the US, a business with high energy costs can save millions, if not tens of millions, a year with a well negotiated energy contract. (Savings of 20%+ are not uncommon for some of the energy sourcing specialists.)
Considering that energy prices have increased at an annual average rate of 15% per year in the US over the last decade, and continue to increase, the savings opportunity for a company that has never sourced energy in a competitive market is tremendous. But buying energy is not easy.
First of all, as the article points out, if you wield a big stick you can expect to see “lights out” as energy suppliers, who know their product is in demand, know that you don’t have a lot of options and that if you’re unreasonable, everyone else will walk away too and one way or another, they’re going to sell their product, which is in ubiquitous demand, and make a profit.
Secondly, you have to understand the factors that impact the pricing, what can be fixed, what must be left variable, what can be negotiated, and what can’t. If you’re buying energy, there are often raw material (oil, coal, natural gas, etc.), generation, transmission, and distribution costs. Depending on the market, the raw material costs may be variable and tied to indices (especially if the raw material is natural gas or oil). The generation costs are usually fixed per energy unit. The transmission costs, which generally refer to the costs of moving energy from the source of generation to local distribution systems, may be separate from the distribution costs, which generally refer to the costs of delivering energy to your facilities via the local distribution systems, if the provider has to use third party lines. The transmission and distribution costs can usually be fixed (per energy unit) as well.
Thirdly, you have to understand that the biggest savings usually result from longer term contracts, especially when you are able to lock in fixed prices (across the board). A one year contract is not very attractive to most providers, especially if you want fixed costs, but a three year to five year contract can be very attractive and incentivize the provider to offer significant discounts (because they know that even though commodity markets can go haywire in the short term, costs always trend rather predictably when smoothed out over the long term).
Fourthly, you need to be familiar with the standard agreements and clauses that an energy provider will insist on, or negotiations will take a long time at best, if they don’t fall apart. You need to be familiar with the local legal and regulatory requirements, so you know what is negotiable, and should be familiar with the Base Contract for Retail Sale and Purchase of Natural Gas and Electricity that was made available for download by the North American Energy Standards Board in 2006. (NAESB WGQ Contract Standards and Models) As with any RFP, the presentation of a standard contract up-front, with blanks for the costs and terms under negotiation, can greatly speed the process.
Fifthly, you need to use a best-of-breed e-Sourcing tool to manage the process so you can build TCO models and maximize your return from the sourcing effort. If your sourcing tool is not amenable to the quirks of an energy model, consider using a dedicated energy tool provided by the energy experts, such as Energy Window or Power Advocate.
Sourcing energy might seem strange, and it might be complex, but if energy costs are a significant percentage of your budget, can you really afford to leave millions on the table?