Introduction to Electricity Procurement
In deregulated natural gas and electricity markets, the commodity portion of your bill rules. It represents the largest percentage. Strategically, the best time to plan your purchase of an energy commodity is when its seasonal demand is lowest. Let’s look at the electricity market.
- You may be looking at a renewal
- Or, you may have hedged with a fixed a price that is expiring
- Your Utility may be refreshing their price-to compare offers.
Electricity markets operate against a backdrop of volatile prices determined largely by financial commodity markets and economic growth. Also, seasonal demand just adds to the mix. Seasonally, now is the best time to review your electric budget.
PRODUCT PRICING
The link between the natural gas and electricity markets has tightened in many parts of the country and has broadened the impact of natural gas market volatility on electricity futures prices. Electricity demand tends to drop during winter months when compared to summer. Market prices are low now but prices begin their assent as we near summer. Forward price curves for electricity will rise or fall as forward price curves of natural gas change. This is due to natural gas increasingly becoming the marginal fuel for electricity generation in this country. Gas-fired plants often establish the market-clearing price of power generation. Peak periods of electricity use in the summer (the warmest weeks) tend to draw down natural gas storage inventories that could otherwise be used as a buffer against cold winter heating seasons. More than ever, end-user purchasing or hedging strategies should be coordinated across energy sources.
PRODUCT OPTIONS
Each product may provide economic incentives to lower cost when compared to rate tariffs. However, each requires understanding the relationship between cost and risk. The most commonly offered are shown in order of least to most expensive that correlates with highest to lowest risk.
Where do you start? A good electricity procurement strategy takes into consideration these four criteria. End users are offered several products with price options defined by how your facility will use energy.
- Developing Your Load Profile - Due to the differences among supplier contracts and pricing provisions, it is worthwhile to invest adequate time developing your load profile.
- Understanding How the Market Works - Product options are driven by load profiles. It is important to estimate how these options will play out in actual bills over the life of the contract is paramount.
- Understanding Pricing Options – Full requirement options provide customers a pricing plan that provides the same fixed unit price regardless of the customer’s consumption and is the most expensive option. Index, block, and shaped block products allow customers to participate in markets with a downward price bias. However, the customer should be aware of the cash out provisions in these energy contracts.
- Understanding Common Pitfalls - Comparing apples to apples is often difficult without requiring suppliers to itemize components in their price. Provisions should be understood related to scheduling and balancing charges to avoid unnecessary penalties. Time is of the essence, since market prices change hourly.
Negotiate contracts in advance of issuing an RFP. You will need to move quickly after receipt of prices due to market volatility. Suppliers often require same day signature or they will need to re-price their offer.
SELECTING THE MOST FAVORABLE PRICING OPTIONS
Selecting the most favorable pricing option for you depends on understanding what impacts a particular pricing option.
- Your load profile is paramount. How much of your load is on-peak vs. off-peak?
- Is your load steady or subject to spikes?
- What is your risk tolerance?
- How flexible is your operation? Can you shift load to less expensive off-peak hours?
- Can you adjust production based on price signals?