Tim Hogan, a Clean Energy Advisor on Edison Energy’s clean energy team, discusses the opportunities and challenges of brokering a power supply contract in today’s fast-moving energy landscape.
Nothing is real until a contract is signed–at least in the energy sector. A power supply contract is a big deal, impacting people and communities far beyond the players that actually broker the deal.
Just ask Tim Hogan, a former Senior Energy Manager at Edison Energy who recently moved to Edison’s clean energy team as a Clean Energy Advisor. While his new role will include negotiating renewable energy PPAs and other deals, Hogan continues to leverage his expertise and experience on the conventional side of energy supply, overseeing negotiations and ensuring that clients enter into the right contracts. Or, as Hogan says, helping clients avoid the wrong contracts.
“We bring on new clients all the time on conventional and clean power supply,” Hogan said. “If they’ve never been with an advisor before, a lot of times they start out immediately in the wrong contract because they’ve done one of a few things.”
According to Hogan, he looks for three telltale signs that a client is in the wrong power contract. These include:
Signing with the same supplier for years rather than going out to competitively bid.
“In most cases, that’s going to put you behind the eight ball,” Hogan said. “The supplier can tack on fees after a couple of contracts to make up for lower margin in previous deals and you just assume you’re getting a good rate, and in most cases you’re not.”
Not paying enough attention to evolving or growing business operations.
“Some clients are not paying attention to changes in their business, to increases in their consumption or the number of hours they’re working,” Hogan said. “If they are changing their operations without thinking about their power supply contract and leave it as is, they could be costing themselves money.”
Not understanding the contract.
“A lot of people just don’t understand supply contracts,” Hogan said. “The supplier may tell you that you have a fixed rate, and you don’t. You could have multiple things that are passed through, such as taxes or other fees in specific areas that don’t get included in the rate when they should be. You get your supply bill, and your rate is six percent higher than you thought.”
A supplier may have a client in what is known as a “capacity adjust” or “transmission adjust” contract. If capacity and transmission are not labeled as “fixed” in a contract and the contract remains adjusted, that will translate into annual adjusted fees–meaning that a client’s rate is likely going to change.
“Most suppliers market that as a fixed price because it’s fixed for 12 months of the contract,” Hogan said. “The contract is fixed and in parenthesis it says, ‘cap adjust.’ They do it intentionally because they’re putting the risk on the customer if those rates were to change. A lot of times those rates are adjusted up to pass through, but if they are adjusted down, the savings do not pass through to customers. If you work with an advisor like Edison, we can help make sure that you’re in the right kind of contract for your business and tailor it to your operations. We help clients understand the different components that are either passed through or if ‘fixed’ truly does mean ‘fixed.’”
Power sector challenges
The ongoing energy crisis across Europe, coupled with geopolitical unrest in the region, has hit international clients with significant price increases.
“There are energy shortages in Europe due to the situation in Ukraine,” Hogan said. “The U.S. imported quite a bit of oil from Russia, which they are not doing now. Because of that, we are seeing our gas prices rise. One of the things that a lot of people are nervous about is LNG being shipped overseas at rates that are significantly higher than what we pay here.”
Hogan said U.S. gas prices will climb further if it goes through with a plan to increase capacity to ship LNG by building more terminals. The plan is already having a pricing impact on the gas market.
“The U.S. has decided that they are going to increase the number of terminals,” he said. “At this point, if we have a lack of production in gas and we’re getting rid of more, then we’re going to have a supply issue at some point. And right now, we are behind the eight ball when we look at it compared to previous years.”
The nation’s power sector has also been impacted by events much closer to home. Winter Storm Uri, which hit Texas in February 2021, caused gas supplies, power generators, and renewable projects to go down. Suppliers took massive hits during the storm due to unprecedented daily price surges, with many suppliers and utilities forced to purchase gas in the hundreds of dollars to cover their daily load. The impacts of Uri have since caused energy suppliers to shift more risk onto customers.
“The suppliers took the brunt of that,” Hogan said. “What we’ve seen since is that suppliers are reluctant to fix pricing. Now they say if there’s any kind of constraint, we’ll get you the gas potentially, but it’s going to be at a rate we decide, and the customer has no say in that. It used to be that a few suppliers had that type of language in their contracts, and now almost all of them do. It’s putting additional risk on our customers, which is really challenging. The energy advisors are really having a tough time working with suppliers to negotiate that kind of language.”
The ongoing global energy challenges and anticipated volatility highlight the need for expert guidance and strategy-building from an energy advisory firm like Edison, says Hogan. That strategy comes down to ensuring that the contracts clients enter into are fair and mitigate risk.
“To us, a fair contract is not one-sided,” Hogan said. “It doesn’t mean it favors the customer 100 percent. A good and fair contract splits the risk of that contract with both parties equally. That’s really what we try to get to because we need to build solid relationships with both our customers and suppliers. The customers trust us, and the suppliers trust that we’re not going to try to pull the wool over their eyes.”
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