Electricity Procurement Services: Our Strategy
Related Reading: Electricity Procurement Tips
Lowering electric costs, reducing price risk, and finding new savings – these are goals for businesses that can shop for electricity supply services. Based on our experience, the opportunities are tremendous. But getting there – that can be a challenge. Swamped by phone calls and emails from suppliers and brokers, it can be hard to determine who has the best offer. New lingo, conflicting sales pitches, different pricing options, biased procurement advice – it’s confusing.
What’s the right thing to do to reach our goals?
From our perspective, to get electricity procurement right – to achieve your goals – businesses need answers to three core questions. The first is how to buy electricity? The second is from which supplier to buy? The third is when to buy? Our approach focuses on these three core questions.
How to Buy Electricity?
There are a variety of ways to buy electricity:
- Fixed pricing – The price of electricity will not change for a fixed period. In other words, the price does not change if the market price for electricity changes during the contract term. Protected from price escalation, the consumer foregoes the benefit of cost reduction associated with downward market price movement.
- Variable pricing – The price is based on an hourly price model, and rises and falls as hourly prices changes. Many suppliers base hourly pricing on the Locational Marginal Price (LMP) model incorporated by regional transmission grid operators like PJM and MISO to establish hourly wholesale electricity prices.
- A combination of fixed and variable pricing – A certain percentage of usage is fixed price-based, and the price for the remaining percentage is variable pricing model-based. Generally associated with a product called “Block & Index,” where the “block” represents the fixed-price portion of usage, the price for remaining usage is variably priced (or “indexed”) based on the LMP model
- Fixed “energy” + “pass-thru” pricing – Generally, the “pass-thrus” are related to generation & transmission-related “capacity” costs. These are charges that electricity suppliers are responsible for collecting from consumers, on behalf of the regional transmission grid operator, and are related to maintaining reliable electricity supply and flow from power generation and transmission facilities on the grid network. Additionally, these charges are consumer-specific, based on the consumer’s electricity demand – measured in kilowatts (kW). Therefore, the higher the demand, the higher the charges, and vice versa.
Consumers that can proactively reduce demand, especially during the summertime, may be able to reduce their generation-related capacity cost obligations (or transmission-related cost obligations) – and are good candidates for this pricing approach. Suppliers do not itemize or change these charges under the fixed pricing model. However, in this model, suppliers itemize and bill the consumer at cost (“pass-thru”). All remaining charges are fixed (not subject to change) for a set time frame.
- Variable + “pass-thru” pricing – Energy prices vary, based on the hourly LMP index, and all remaining charges, including generation & transmission-related “capacity” costs, are passed through to the consumer.
How We Help Businesses Do Electricity Procurement
Improvements to electricity buying exist when:
- They are under a false impression that one-way buying practice consistently results in lower costs.
- Their supplier has steered them towards a pricing structure that gives the supplier a better chance to win the business. For example, a supplier may influence a consumer to buy variable + “pass-thru” priced electricity because that supplier won’t win a fixed price competition against other suppliers. Consumers need to avoid biased energy buying advice.
- There are internal disconnects about the goals of the business related to electricity price risk and budgeting.
- The consumer isn’t proactively reducing generation & transmission-related capacity costs (when they can).
We help businesses figure out how to buy electricity by identifying these issues, by bringing clarity to the problems, and by establishing pricing plans that align with their goals.
From Which Supplier to Buy Electricity?
Depending on how a business wants to buy electricity, some suppliers fit better. There are many differences between suppliers that impact the value of their offers and what businesses pay for electricity. These include:
- Bandwidth and associated charges tied to deviations between billed usage and historical usage.
- “Pass-through” charges connected to changes in generation-related capacity costs.
- “Pass-through” charges connected to changes in transmission related-capacity costs.
- “Change in Law” or “Change in Administrative Law” pass-thru charges
How We Help Businesses Decide From Which Supplier to Buy
Offers from electricity suppliers can be vastly different. The ultimate value of their offers is a relationship between pricing, contract terms, and the needs of consumers. As a result, businesses must garner multiple offers. What we do is:
- Create a competition between suppliers by getting multiple offers using a best-in-class Request for Proposal (RFP) process.
- Summarize the offers with emphasis on price and other relevant issues that affect their value.
- Monetize the total value of the offers.
- Walk the client through the advantages and disadvantages of the offers.
- Review the electricity supply agreement and assist with changes if necessary.
- Assist with final implementation of the electric supply agreement.
When to Buy Electricity?
Established on trading platforms like CME, the benchmark price for electricity trades every business day. Every month has a distinct trading value for both on-peak oriented consumption and off-peak. Moreover, electricity is a futures price because prices trade for the current calendar year (and future years) beyond the current month.
How We Help Businesses Decide When to Do Electricity Procurement
Because buying opportunities may present themselves months or years in advance of the end of currently effective electricity supply agreements, we:
- Proactively monitor short-term and long-term NYMEX electricity futures prices.
- Put the value of current NYMEX electricity futures prices in context with historical highs and lows.
- Garner an understanding of the consumers business conditions that could impact a commitment to buying shorter or longer-term.
- If it makes sense to buy, if necessary, implement the shopping process.
- Assist the client with implementing and finalizing the buy.
Wrapping Up Electricity Procurement
Based on experience, electricity procurement done wrong will lead to higher (than they should be) electricity supply prices (up to 25%), increased business risk, and significant cost leakage.
Using best-in-class electricity procurement practices, businesses will buy electricity the way the best aligns to their business. They will reduce costs from buying electricity from the lowest priced & best-valued supplier that best fits. Also, they will better decide when to buy with the right information.
For those using or considering using a broker for electricity procurement, read the following: