The Value of a Managed Energy Purchasing Strategy
Energy prices are always moving. The past several years we’ve seen historically low power and natural gas prices. Now, we’re seeing upwards pressures on energy prices as production remains flat, liquefied natural gas and pipeline exports to Mexico are at all-time highs, and as the U.S. is on pace for the sixth warmest summer since 1950, which is driving strong gas-fired power burns, among other factors.
Staying on top of these factors and more makes energy procurement a daunting task at times. Even full-time stock analysts and sports handicappers are right about 50% of the time. A “bad” choice on when to buy can cost your company thousands of dollars today, and into the future, depending on how long your contract lasts. So, how do energy buyers mitigate such risk?
Why a Managed Purchasing Strategy Works
By deploying a managed, or layered purchasing strategy, energy buyers can effectively manage risk and price. A managed strategy can take a variety of forms—from simple and manual to very complex and automated. The key is that you take a managed approach when buying portions of your energy usage (load).
Instead of looking at buying energy once a year, or every other year, spread your risk and purchasing over time by layering or locking in percentages of your load over time, with the rest subject to market rates. Doing so provides control over energy price changes and lowers overall risk in both price and timing.
According to our Evaluating Power Purchasing Strategies for Your Business White Paper, customers could see a cost avoidance in the range of $30,000 – $50,000 range if they execute a buying strategy, depending on their annual energy consumption
For example, the white paper estimates that customers that consume 7,500 megawatt hours annually could achieve in the range of a $30,000 annual cost avoidance if they were to put a managed purchasing strategy in place rather than using one of the “fix it all at once” approach. However, there are market-related events that may impact the trajectory of these figures, including anomalous weather events such as what was seen in February 2021 with Winter Storm Uri, when prices skyrocketed in Texas and had rippling impacts beyond.
Check out Figure 7 from the white paper below where you can see that the process of layering those purchases significantly lowers risk, while not having a great impact on overall costs.
Figure 7. Constellation’s Evaluating Power Purchasing Strategies for Your Business White Paper
Download our Evaluating Power Purchasing Strategies for Your Business for a detailed look into how managed strategies performed over a 10-year period.
How to Get Started on Your Strategy
To get started on creating a managed strategy, you should first look at your usage seasonality, hour-by-hour usage and your business’ financial budget. We estimate an effective strategy can be developed with about 20 hours per year, and your Constellation business development manager can guide you along the way.
Additionally, look at the economic and natural gas and power conditions, as well as upcoming weather forecasts impacting energy prices. Constellation updates energy managers with this information every month during our Energy Market Intel Webinars. Knowing the current trends and what’s expected to come are all important to consider when strengthening your energy strategy.
For customers that want further assistance, we also provide customers with a variety of tools to help plan, measure and adjust their strategy over time. Our Information-to-implementation (i2i) is a no-cost reporting service to help you plan your budget and make informed purchasing decisions. One component of the service is the Energy Strategy Planner, which shows your usage and cost over a period of time, typically five years, identifying your expected budget costs under a variety of plans.
In moving forward with a purchasing strategy, it’s important for customers to have a clear understanding of their load, layering strategy and risk tolerance that makes the most sense for their business. For help with your energy strategy, get in touch with your Constellation representative by visiting our website.