Tips for Strategic Natural Gas Shopping For Companies
When it comes to natural gas, the word “nomination” has nothing to do with political campaigns that culminate in conventions, confetti and a presidential candidate. In the context of energy, “nomination” refers to the process used to estimate how much natural gas companies expect to use in the coming month. Then, energy managers or buyers go to market to buy that amount.
This may sound like a standard shopping excursion: Make a list, purchase the items on the list and use what you need. If you bought too much, you store the extra for later. If you didn’t buy enough, you go back to the store to buy more.
But shopping for natural gas is fundamentally different than buying groceries or office supplies, or pretty much anything else you can think of. To benefit your company’s bottom line, you must understand this unique market.
Here’s what companies should know — and do — to come out ahead.
Three “Branch” System
OK, enough with the government analogy. There are no branches involved in buying natural gas — but there are three phases: nomination, usage and balancing.
- Nomination: As already mentioned, this is the company’s estimate of its need for natural gas the next month and the resulting purchase.
- Usage: This is how much natural gas the company uses in the month for which the nomination purchase was made.
- Balancing: This is where natural gas is different from other goods purchased. At the end of every month, a company must reconcile estimated usage (its nomination) with actual usage. Bought too little? The company must now pay for the extra usage above the nomination. Bought more than needed? Because natural gas cannot be stored, the company must sell the overage back into the market.
Here’s a useful analogy that illustrates how natural gas purchasing works: You’re about to throw a party, and you intend to provide wine for your guests. You’re a diligent host, so you sit down well in advance of the event to estimate how much wine you’ll need and scan the market for good deals.
Let’s say 20 people have said they will attend the party, and you assume each person is probably going to drink about two glasses of wine, so you need 40 glasses total. Given that you can pour five glasses per bottle, you go shopping for eight bottles. But you don’t just go anywhere — you head to the wine store that’s running a special and will allow you to purchase your wine at a discount.
If your estimate proves to be accurate on the evening of your party, you’ve hit the jackpot by meeting demand at the best price available. However, if your party is a big hit and guests stay an hour longer than expected — and drink more than you estimated — you’ll have to rush to the nearest store to meet demand. And at that point, there’s no time to compare prices. You’re at the mercy of the market.
On the other hand, if several of your guests are no-shows or simply drink less than expected, you may end up with unopened bottles the day after the party. In the real world, that’s fine. You’ll drink it or bring it to your next get together.
With natural gas, it’s a bit different: A company will likely have to sell any excess back. The problem is a company can’t always guarantee that its natural gas provider will buy it back for the original price the company paid. For example, if a company used less natural gas than expected in a month because the weather was unusually warm, there are probably many other companies in the same position. Multiple sellers drive the price down.
In the end, buying more or less than what a company ultimately uses is likely to be more expensive than getting it just right. So what can companies do to achieve better outcomes in the natural gas market?
Jump Into the Pool
Companies that have managed natural gas accounts are frequently placed in a pool with other companies. The companies’ natural gas provider can then “buy in bulk” to get better prices based on estimates of consumption.
In addition, when it comes time for the balancing, the overage of some companies in the pool can be applied to the under-usage of others, reducing the need to return to the open market.
This strategic approach delivers increased long-term budget certainty, even in the face of unplanned or unanticipated changes in usage.
For companies of all types and all industries, natural gas tends to be a big spend. Discover how to manage that line item more strategically by learning about our SmartPortfolio program, or contact us directly if you have any questions.