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Should Your Company Buy Its Own Electricity Supply? Some Things to Consider

Understanding the nuances of the power market can present many challenges for companies large and small that are considering procuring their own electricity supply. As referenced in Figure A, there are a handful of states in which power is deregulated and can be procured via a competitive third-party supplier, versus regulated states where power is provided by the local utility company.

CHOICE PROGRAMS

In most deregulated states, the state or public utility commission operates a web-based service for residential consumers and smaller commercial users to help them buy their own electric supply. These Internet sites offer convenience, allowing consumers to quickly see the latest offers from reputable suppliers.

Figure A
Figure A – Limited and Deregulated Energy Markets Nationwide

Choice programs may work for smaller consumers but they are not suitable for large commercial and industrial users. This group should consider a much more sophisticated approach which includes market intelligence, custom pricing, customized contracts and a customized risk-management strategy.

SHOULD YOUR COMPANY BUY POWER?

This is the first essential question for businesses. Depending on the utility, the default tariff rate may be the best alternative; at least for the time being. If your facility is temporarily in a low-usage period or may even be closed or sold in the near term, it may be best to remain on the generation supply from the utility. In some instances, the utility rate may be a better price than what is currently available from third-party suppliers. Before deciding to buy power, it is important to calculate the potential savings and understand the risks of using third-party suppliers.

WHEN TO BUY?

If your organization decides that buying supply on the market is in your best interests, the next question is when to lock in prices.  To answer this question, it is important to understand the natural gas market.

In every de-regulated power market, the forward power prices are closely correlated with natural gas prices. As displayed in Figure B, in various parts of the country, future power prices correlate closely with natural gas prices.

Figure B
Figure B – Electric and NG Correlation; 12 Month Strip Prices

If natural gas prices are likely to be significantly lower six or eight months from now, it may make sense to postpone a decision until later. However, there is a lot of work to do to prepare for buying power, which can be started right away.

YOU CAN AFFECT THE PRICE

Leading up to signing a power contract, there are steps that can be taken to ensure your company is getting the most competitive market offers.

First, make sure your credit is excellent. Power suppliers will almost always add extra margin to their offers for companies with less than sterling credit. Similarly, make sure you’ve paid all your utility invoices on time.

Is your facility using electricity efficiently? Consult with engineers to see if there are steps they can take to improve your facility’s load factor. If there are any energy efficiency projects that your company has been contemplating, take a closer look. The more efficient you can make your facility, the better price offers you’ll receive when it’s time to contract for supply.

Figure C
Figure C — PJM-West Real-Time Pricing (Jan 2014) [$/MWh]

WHAT TO BUY?

Suppliers can offer a variety of different products that are tailored to the larger, more sophisticated customer depending on the nature of the operations and the specific company’s appetite for risk.

What are your company’s overall goals? Is it more important to management to strive for the lowest price possible, or, is meeting budgetary goals more important? If budgets are important, a product that locks in 100 percent of the supply price, thus eliminating price risk, may be the most appropriate.

However, if your company has a larger threshold for risk, lower priced products often have energy prices tied to a regional index. This approach can offer savings — but can also come with significant risks.

For example, in some parts of Eastern and Northeastern U.S., hourly prices approached $2,000/MWh during the Polar Vortex in 2014, as evidenced in Figure C. Thus, if an index product is chosen, the risks should be identified and weighed carefully.

Most large companies have found it prudent to retain an energy management consultant to help them manage their energy procurement needs. These companies have realized that, just as with other professional services like doctors and attorneys, having expert advice is an essential part of a truly world-class procurement program. There are plenty of energy consulting companies ready to help you. Choose one that is unbiased, independent, specializes in energy and is data-driven.

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