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5 Common Energy Buying Mistakes, And How To Avoid Them

By Direct Energy Business

Buying retail energy – whether natural gas or electricity - for a business, residence or institution is not easy. Prices are constantly changing. Government rules and regulations are constantly changing. Suppliers may even change.

Take a look at 5 Common Energy Buying Mistakes and how to avoid them:

1:  DON'T IGNORE THE QUALITY OF A STRONG SUPPLIER

Price is the most cited reason for selecting an energy supplier, but don’t ignore the quality of the supplier, especially if the rates offered between competitive suppliers are close. Start with the credit rating as discussed in a previous blog article. If you sign a contract with an energy retailer that has a poor credit rating, you run the risk of that energy retailer becoming insolvent during a difficult time and all your savings may be lost.

Ask yourself this: Does the supplier issue a simple bill on time and offer helpful and easy-to-access customer service? Maybe you’re seeking strategic advice. The value of these attributes may be difficult to quantify, but will be very apparent if things go wrong. Remember: your energy supplier is your partner for the term of your contract, so choose a solid partner that also meets your needs.

2: DON'T TRY TO BE A BOTTOM PICKER 

Watching the wholesale energy markets can be interesting, fun, and for some, a hobby in an attempt to predict market direction. But be careful in thinking that you can outsmart the market.

Remember, market participants include experts from hedge funds, global energy companies, Fortune 500 retailers and industrials - all of whom employ armies of seasoned energy veterans and analysts. If you are looking for a market pattern, odds are that these experts have already found it.  Just take a look at market history. There are dips and rallies during all seasons. And without hindsight, who is to say whether the current dip is done or just getting started? Look at the fundamentals, the market’s history, your business and your targets. Then develop a strategy, implement it and move forward. If you can always accurately pick the bottom, then you should probably be relaxing on a beach somewhere surrounded by your millions of dollars.

3: DON’T SET BENCHMARKS THAT IGNORE THE MARKET 

Budget-setting time is an annual ritual for many end-users. And beating the budget is a primary tool in forming a strategy to buy energy. Is this wrong, you ask? Not necessarily, but it can be dangerous if a budget is unrealistic or prevents action when it’s needed. Often, the budget is based on the previous year’s rate. This isn’t recommended if the previous year was exceedingly low and is unlikely to be matched. The result may be inaction despite good buying opportunities that result in too much risk undertaken. Last-minute buying, regardless of price, is then necessary. Similarly, a budget could be too high if the previous year was locked in during a period of high prices. It’s best to review your budgets for reasonableness in the market, and to assess your risk philosophy and the level of importance of price certainty versus low price.

4: DON’T GET LEFT BEHIND WHEN A GREAT BUYING OPPORTUNITY COMES ALONG

Once you are ready to buy energy, you must be able to actually buy the energy. This seems obvious, but is often not followed in practice. Buying opportunities are often brief. Consumers watching the energy markets should have a mechanism ready to execute a buy quickly at the time of the opportunity. If there is a price dip, don’t issue an RFP due in two weeks. The buying opportunity will leave you in the dust. It’s important to have your supplier short-list established, product and key contractual terms identified and to have internal approvals and targets set far before buying deadlines. Then you can hopefully execute during a dip. And if a dip doesn’t occur, have a plan in place for market surprises. That might mean buying a shorter term or changing products or buying above budget or taking more risk – there’s no right answer for everyone except to have a solid plan in advance.

5: DON’T MAKE APPLES-TO-ORANGES PRICE COMPARISONS

A price that appears too good to be true may not be the same product as competitors. The following is a checklist of things you should research and questions you should ask:

  1. Check the contract term.
  2. Research the product.
  3. Scrutinize the list of pass-through line items.
  4. Ensure losses are included in the various components.
  5. Ask what the bandwidth provision is if usage varies from historical levels.
  6. Review the contract to make sure that it matches the quoted terms.

These are all factors that may not be obvious in the price quote, but are critical to determining which offer has the best economic value. Otherwise, the surprise may be on you after it’s too late.

Posted: November 07, 2013

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