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5 Guidelines to Better Enhance Energy Purchasing Decisions

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Post the 2013-14 winter price shock, one may be asking, “Am I doing everything I can to optimize my energy budget decisions and help my company save money?”

Over the last four years, gas commodity prices were rarely above $5.00 and volatility was low, implying energy costs may have not been a priority.

There are many actions you can take to reduce your energy usage, but decisions related to energy purchasing will still be required.

Let’s examine some guidelines to making better energy purchasing decisions. Whether you’re a seasoned buyer or a novice, here are 5 guidelines that should lead you down the path to better energy management.

1. Expand your purchasing horizon. 

Natural gas commodity prices are lower in the future than today, but that could change rapidly.  

This does not mean that you should hurry up and enter into a multi-year, fixed price transaction tomorrow. What it does mean is that you should consider lengthening your purchasing horizon.

The savviest buyers we deal with are not just looking at purchasing opportunities today, but as far as 36 months into the future or longer.

One way to get into a position to manage your energy budget, and potentially lower costs in future periods, is to enter into a longer-term agreement with a trusted supplier (a supplier with a good credit rating is ideal) where only a portion of the commodity price is fixed (more or less based on your risk tolerance).

This leaves you free to lock in additional commodity prices during any significant market dips. A side benefit of doing this is directly related to #2 below.

2. Focus on your budget goals.

Volatility, relative to the prior four years, has increased in both the natural gas basis and commodity markets.

There are regions of the U.S. where the basis cost of an energy budget is quite low (i.e. 15%), but can be significant in others. If you’re in a lower cost region, then your focus should not be on comparing and/or negotiating 1-2 cent basis price differences between suppliers while the gas commodity market is moving $0.40 cents per day. For a facility that consumes 120,000 dth/year, a $0.02 savings on the basis during negotiations equates to $2,400 for the year, yet the commodity cost may have increased by $48,000.

3. Decide what is most important to you.

If there are three executives in a room, you are likely to get three different responses to what is most important as far as energy procurement is concerned.

Is it price stability (guaranteed price)? Is it meeting your budget? Is it achieving the lowest possible price, while not exceeding some maximum price? This needs to be answered so a supplier can help you figure out the best energy plan to meet your goals.

4. Be realistic about how much of your own time you can invest in managing your energy purchases.

Most energy buyers we talk to share that they have a lot on their plate.

Energy expenses typically make up at least 30% of a building’s budget. There are ways to make sure you are involved in the key decisions, but also have your supplier working for you to execute your plan. Typically, the more your supplier works for you, the less time you should have to focus on managing your energy purchases. For the largest buyers, it may make sense to spend more time and be more involved. In that case, you want to work with someone who is going to provide you with top-notch information and access to people that are watching the energy markets every day.

5. Spend some time figuring out how to use less energy.

Although we have given you some useful tips on how to go about procuring energy, you might need assistance from an energy expert to implement a comprehensive procurement program. There are plenty of reputable firms that can help you explore options from simple lighting upgrades to cogeneration.

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