Secure Energy Solutions: Considerations for building a solid energy management strategy - by Jamie Collins

Jamie Collins, Secure Energy Solutions

Even if you’ve managed your company’s power procurement for years, buying energy today can be more complicated than ever. Internal demands to control budgets and reduce uncertainty – combined with outside economic influences – can pose significant challenges even for the most sophisticated energy manager. Here are four steps to get you on the road to a winning purchasing decision for your business.

Know the cost components that make up your energy bill

The monthly energy bill for a large commercial or industrial customer includes anywhere from 15 to 20 separate cost components segmented into four different categories: energy costs, capacity costs, ancillary costs, and delivery costs.

Six cost components make up the energy portion of the charges and can account for nearly 80% of a commercial electric bill in ISO-New England. These components include hub energy, zonal basis, shape, straddle, imbalance, and losses. Their price movements make overall future costs less predictable, but in general, they are volatile in relation to the cost of fuel.

Capacity costs, which can vary depending on a customer’s individual load factor, can account for nearly 20% of a large energy user’s bill. In ISO-New England, each load serving entity is charged for their daily unforced capacity obligation priced at the applicable zonal capacity price for the delivery year. The intent of the capacity market is to ensure resource adequacy by sending appropriate price signals to encourage resources to provide sufficient and deliverable capacity in locations where it is needed.

Ancillary costs support grid reliability and make up about 3% of a commercial electric bill for large energy users in ISO-New England. These pricing variables can be presented differently by each retail electricity provider.

Align your energy strategy with business drivers, operational goals, and objectives

Energy costs – for some, the largest category of cost components on the monthly bill – can be managed depending on the amount of pricing-related risk your company is willing to accept. Determining where your company falls on the tradeoff spectrum between budget certainty and costs is primarily dictated by two key business drivers: the degree of budget flexibility and energy usage patterns.

With these drivers in mind, take a close look at your operational goals and objectives. This data, combined with trends in retail pricing, should be reviewed together with your energy broker or supplier, who will help you identify the right product structure and take advantage of any cost-savings opportunities.

Know your product options

Because the retail market for electricity is competitive, customers can choose product structures based on the amount of pricing-related risk that makes the most sense for their businesses. Although a wide range of product options exist, most contract structures offered by retail energy suppliers can be grouped into one of three categories: fixed-price plans, index plans, and flexible plans.

A fixed-price contract is perhaps the most straightforward product. These plans – which are more suitable for customers requiring the highest possible budget certainty – combine all of the energy and delivery cost components into a single price per kWh (or MWh).

At the opposite end of the spectrum are index plans, that are suitable for energy buyers who have a high risk tolerance and who have a sophisticated broker that knows the electricity and associated commodity markets inside and out. These products provide maximum flexibility to take advantage of price movements.

Flexible plans combine the best of both worlds, allowing customers to leverage index pricing while letting them lock in fixed pricing for a portion of their load. These plans deliver price security while allowing customers to float certain cost components to take advantage of market movements.

Leverage tools and insights to support informed decision making

Energy users are wise to consider using savvy brokers if they cannot dedicate the time and resources required to make these important decisions. Secure Energy works with retail electricity suppliers that offer a range of tools to guide informed decisions on energy products. By utilizing our resources we can explore different cost outcomes in real time with our suppliers and adjust different elements of the proposal to achieve the right balance. Various simulations give customers a broader understanding of how product offerings differ in price certainty and risk, which helps them see the relative cost tradeoff and determine the most suitable product structures for their businesses.

In the end, knowing your organizational goals, drivers, and risk tolerance is key to determining which product and supplier best meets your needs. Talk with a broker like Secure Energy, which has extensive relationships with retail providers at the forefront of today’s complex energy environment. As seasoned energy professionals, we can help you understand the options, determine the right supplier, and build the best energy strategy for your business.

Jamie Collins is the senior vice president of business development for Secure Energy Solutions, East Longmeadow, Mass.