Setting guidelines for the right timing, negotiating the right contract language, and going to market for the right product prepares companies for strategic and efficient sourcing
With companies facing more pressure than ever to deliver savings, energy buyers can offer not only short-term relief through sourcing, but also long-term rewards by designing an energy program to proactively manage risk.
Over the past two years, many energy users were met with unexpected energy costs because of the Covid-19 pandemic, Winter Storm Uri, and this winter’s high natural gas prices.
During these types of extreme events, some increased costs are unavoidable. However, energy buyers can mitigate future exposure by considering timing, product, and contract language before the sourcing event, and reserving decisions on volume, price, supplier, and term for during the sourcing event.
Plan to Optimize Risk
The most successful energy programs are proactive when considering timing, contract language, and product.
Energy buyers often initiate energy RFPs based on a calendar budget cycle or a minimum number of days before the current contract expiration. While this approach creates tidy budgets and predictability, it leaves money on the table by ignoring the nature of commodity markets. RFP timing should be determined by the underlying value and credibility of the forward market. Energy buyers should document and understand the market factors that will trigger a sourcing event.
During Winter Storm Uri, sky-high energy bills sent energy buyers to carefully examine supplier contract provisions such as market disruption, force-majeure, delivery obligation, spot-price standards, and material deviation. Companies often execute deals governed by old supplier paper that leaves them exposed to high prices and supply disruption. Terms and conditions should be reviewed by experienced advisors regularly and should be updated to reflect today’s market conditions and expanded risks.
The right product allows energy users to take advantage of low-price opportunities in circumstances where risk is acceptable and understood, while avoiding market exposure when the possible reward is not worth the risk.
In 2020, many energy users curtailed production in reaction to reduced demand and available workforce. Customers with minimum-takes or take-or-pay products had no choice but to pay suppliers for energy they were unable to use. Conversely, users choosing to buy gas on the spot market experienced lower than expected prices because of the same decreased demand.
An experienced advisor will help energy users understand their sensitivity to likely price fluctuations by market and develop a strategy to best meet client goals.
Source to Capture Value
With a proactive framework, near-term savings can be maximized during the sourcing event by focusing on volume, price, supplier, and term.
Load-profile and consumption are analyzed as part of risk planning and contribute to product strategy. In preparation for an RFP, consumption and load profile must be revisited and adjusted for planned changes to operations and other energy initiatives. Historical forecast accuracy will inform product choice, while planned consumption and demand are necessary to lock natural gas contract values or fixed blocks of power.
The U.S. is fueled by thousands of unique energy markets across geographies and different commodities. Each of these markets is nuanced and includes specific costs that will either be bundled or passed through by a supplier. The lowest offer price does not always equate to the lowest cost. To choose the best offer, energy buyers need to compare offers that have been levelized to account for market-specific price components, pass throughs, and carve-outs.
When going to market, it’s best to encourage competition from a cultivated list of the most reputable suppliers. With pre-negotiated contract language, risk is already pushed to suppliers and energy buyers can transact quickly. For the biggest suppliers, review spend by supplier to leverage buying power.
Like RFP initiation, energy buyers tend to choose term length based on a comparison of prices quoted during a procurement event rather than based on market opportunity. While this approach creates easy-to-calculate year-on-year savings metrics, it ignores the fundamental market factors affecting the forward curve. Term lengths should be determined by the underlying value and credibility of the forward market.
During on-boarding, Edison Energy will work with you to understand and document organization risk tolerance and policies. We start with your goals and work backwards to build an energy program with your endgame in mind. Strategic and efficient sourcing translates into time and cost savings for your company.
Edison helps you develop and deliver a disciplined supply strategy for conventional power, gas, and renewables to capture maximum near-term savings and promote long-term value, empowering your organization to resolve the global challenges of energy cost + carbon reduction + complex choices.