Electricity Procurement: 3 Key Questions
With regards to electricity procurement, getting the right answers to the three questions listed below is essential for businesses that want to spend less for electricity:
- How to buy electricity?
- From which supplier to buy electricity?
- When to buy electricity?
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. The price does not change if the market price for electricity changes during the set time frame, either upward or downward. Protected from price escalation, the consumer foregoes the benefit of cost reduction associated with downward market price movement.
- Variable pricing – The price for electricity 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. This type of pricing is 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. These charges are consumer-specific, based on the consumer’s electricity demand – measured in kilowatts (kW). 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 & transmission-related capacity 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-thru” to the consumer.
How We Help Businesses Buy Electricity
Improvements to electricity buying typically 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. This post about the hidden agendas of suppliers explains more.
- 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-thru” charges connected to changes in generation capacity-related costs.
- “Pass-thru” charges connected to changes in transmission capacity-related costs.
- “Pass-thru” charges related to “Changes in Law” or “Changes in Administrative Law.”
How We Help Businesses Decide From Which Supplier to Buy Electricity
Offers from electricity suppliers vary significantly, and the ultimate value of their offers is a relationship between pricing, contract terms, and the needs of consumers. Due to these differences, 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?
The benchmark price for electricity is established on the New York Mercantile Exchange (NYMEX), traded every business day. Every month has a distinct trading value for both on-peak oriented consumption and off-peak. 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 Buy Electricity
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.
The Bottom Line
With correctly-done electricity procurement, businesses will buy electricity the way the best aligns to their business, will reduce costs from buying electricity from the lowest priced & best-valued supplier that best fits, and will better decide when to buy with the right information.
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 & avoidable cost leakage.
Get electricity procurement right and lower electricity supply costs by calling (412) 308-6482 or connect via the Contact page.