Understanding energy buying
In today’s unpredictable economic climate, organizations of all sizes are looking for ways to control and cut costs for specialized tasks and noncore services, like cleaning, landscaping and energy.
When it comes to energy, many companies may be missing out on potential savings. Twenty-five years ago, your local utility may have been your only option for electricity and natural gas, and if you didn’t like what they were charging, there weren’t any other options. Today, thanks to energy industry deregulation, many U.S. states and Canadian provinces have energy market structures that promote electricity and natural gas retail competition. This means that your local utility may not be your only choice.
In deregulated energy markets, most retail energy suppliers offer a comprehensive array of options compared to the local utility, including fixed pricing, index pricing and energy efficiency and management strategies.
With energy accounting for about 30 percent or more of the annual operating budget of a typical office building,1 energy purchasing deserves your attention. Energy deregulation presents businesses of all sizes with the opportunity to choose from a variety of suppliers, products and services to manage your energy budget.
Shopping for an energy supplier can be overwhelming, but you don’t have to do it alone. There are a number of resources to help you learn about energy strategies and evaluate which supplier will leverage the right mix of energy supply and services to meet your needs and budget.
If your business is in a deregulated energy market, you can turn your energy strategy into an opportunity to save money, create efficiencies and even earn new revenue.2 It’s time to define what you need in an energy strategy and learn what key attributes to look for in a supplier.
How to evaluate your business before an energy purchase
Today your organization has more choices than ever when it comes to developing an energy strategy and selecting a supplier. But energy costs can comprise a large chunk of your operational budget, and the energy markets and choices available to your business can be complex. That’s why it’s imperative for you to carefully identify your business’s requirements and desires and ask the right questions up front. Here are six considerations to examine about your business before you shop for a supplier.
1. Know what kind of energy you need
When you’re shopping in a deregulated energy market, step one is to determine what you are shopping for: natural gas, electricity or a combination of these. If you are looking for more than one option, selecting a supplier who can meet all of your energy needs is an efficient choice for streamlining energy management and maximizing potential savings through a customized approach.
You’ll also want to consider whether it’s important for your business to use energy from renewable sources. This is a question of growing importance, particularly for consumer-oriented firms, higher education institutions and companies looking to demonstrate their commitment to the environment.
2. Know your historical usage
Energy prices are often partly based on your business’s historical usage. Suppliers assume that you will continue using roughly the same amount of energy going forward as you have used in the past, and then customize your price to this amount. Therefore, it is in your best interest to be ready with an accurate usage estimation – particularly if your usage may change, as fluctuations may create additional costs. Some suppliers charge higher rates or assess financial responsibility if you fluctuate from your expected usage. Others offer unlimited bandwidth with a premium built into the fixed price to cover fluctuations. You should be prepared to see contracts with any of these provisions.
By analyzing your energy usage, you’ll be better prepared to understand pricing options. You may also find patterns that can lend insight to opportunities for changes to operations or schedules that enable you to avoid spikes in consumption during high-cost hours.
At the highest level, you’ll want to know your total annual consumption of natural gas and electricity. You can add value to your analysis by examining the extent to which your consumption varies by seasonal factors, including by week, by day and by hour. It is equally useful to understand the degree of predictability in your consumption. Did last month behave the same as this month? Does Monday look similar to last Monday? Is consumption highly predictable, or does it vary greatly from one day to another? Do the patterns change due to weather, occupancy, production schedules or other factors? If it’s advantageous, you can aggregate individual consumption profiles of multiple facilities to create an overall pattern of consumption for your entire business.
When calculating your price, suppliers may consider factors such as the consistency of your usage, off-peak hours usage, or your ability to curtail your business’s electricity load.3
Many businesses can also gain better control of consumption by collecting accurate, easy-to-read records of all energy usage on a daily, weekly or monthly basis. The more you know, the easier it is to create consumption benchmarks – specifically for different seasons or operational activities. Once you know your typical usage patterns, you can begin to pinpoint where and when to reduce consumption and save on energy.
3. Know your risk appetite
Understanding your energy consumption is an important step, but defining your risk tolerance is equally important. Your business’s risk appetite can help dictate how much of its energy usage you are prepared to expose to wholesale market fluctuations, how much you would like to lock in to certain pricing and over what period of time you should lock-in a price. If your business has a higher tolerance for risk, products that float some of the load in the market may be a good fit. Index price plans give you the opportunity to take advantage of market dips and sustained lows. If your business has a lower tolerance for risk, products with higher price certainty may be a better fit. Fixed price plans offer the most price certainty and significantly reduce your exposure to market risk, but may have higher premiums. Combination price plans are a hybrid of fixed and index prices and offer a blended approach to the risk-cost strategy.
Remember, employing an energy strategy is no different than managing the cost of raw materials. The development of any sound strategy includes isolating the portion of your operational costs tied to energy and determining how well you are managing the risks around energy costs. When determining your appetite for risk, consider your ability to absorb or pass on to customers the fluctuations of your energy costs.
4. Know your business objectives
While you may know what’s important to you, executives in your business are likely to give different answers to financial energy questions. In conjunction with a decision about your risk appetite, it’s essential for you to decide on your business priorities. Is it most important to:
- Maintain price stability with a guaranteed price?
- Meet and stay on budget?
- Achieve the lowest possible price, while not exceeding a maximum price?
You should set benchmarks that acknowledge current market conditions. When reviewing your budget, take into account data based on recent and historical prevailing market conditions and recommendations from a trusted energy advisor. Then, assess your risk philosophy and make adjustments to your business objectives as needed. Budgets that are unrealistic or prevent action when it’s needed can be frustrating. Even budgets based on the previous year’s rate may not be realistic if the previous year was exceedingly low and unlikely to be matched.
The real synergy comes from understanding your energy patterns, your risk tolerance and your business objectives, and then marrying these with prevailing market conditions.
Remember, suppliers can help you identify the right strategy to meet your energy needs and business objectives, but it is your responsibility to tell them where you want to go and what your objectives specifically are.
5. Know how much time you can invest
A typical building owner may spend over 20 percent of their budget on energy expenses – and many spend more – so it is worth some attention.4
Most buyers already have plenty of other responsibilities on their hands and may not have expertise or interest in being involved in energy buying. Rest assured, you can still be involved in key decisions while allowing your supplier to execute your plan. Typically, the more your supplier works for you, the less time you should have to invest in managing your energy purchases. When you lean on the strengths of an established, full-service energy supplier, your business has the opportunity to leverage the resources, information and services that can result in better, more cost-effective purchasing solutions.
For large businesses with in-house energy teams and facility managers, it may make sense to spend more time and be highly involved in your strategy. For example, index price plans may require additional time on your part to remain appraised of market conditions and actively manage your energy plan. In that case, you should work with a supplier who can provide you with detailed market information and access to experienced, in-house professionals to guide you and your team.
6. Know the potential of your decision
The energy markets are complex and can be unpredictable, which can make energy management and optimizing your purchasing strategy a challenge for any business. But it may be beneficial to expand your purchasing horizons and turn volatility into your friend. This does not mean that you have to enter into a multi-year contract or purchase an index energy product tomorrow – although many businesses are doing just that. What it does mean is that you should recognize the potential of your purchasing decisions. The savviest buyers are not just looking at purchasing opportunities today, but well into the future.
As a result, flexibility in purchasing and timing are paramount. Ensure your business is prepared to buy energy when prices are low. In other words, once you are ready to buy energy, you must be able to actually buy the energy. This seems obvious, but it is often not followed in practice. Buying opportunities are brief. Consumers watching the energy markets should have a mechanism ready and coordinated with their energy supplier to execute a buy quickly when the opportunity arises.
Have your product, key contractual terms, internal approvals and targets set far before buying deadlines. If there is a price dip, don’t issue a request for proposal (RFP) due in two weeks. The buying opportunity will leave you in the dust. If a dip doesn’t occur, have a plan in place for market surprises. That might mean buying a shorter term, changing products, buying above budget or taking more risk – there’s no right answer for everyone except to have a solid plan in advance.
The easiest way to position yourself so you can act quickly on market movement – or protect yourself from volatility – is to work with a trusted supplier with flexible terms and purchasing options.
Set targets and acquire internal approval
Make a plan for market surprises
Agree on a purchasing mechanism with your supplier
Set your sights for the long-term
Predetermine your price and begin triggers
What to look for in an energy supplier
When choosing a retail energy supplier, it’s important to do your homework.
Energy supply companies typically offer businesses the broadest set of energy purchasing options to meet their unique needs and business objectives. Options range from all-inclusive fixed price options, which give you better management over your budget, to index price deals, which come with market complexity and higher risk for price fluctuations, but present opportunities for potential savings during market price dips.
Many suppliers also offer valuable energy services, such as load management programs and efficiency initiatives, to help businesses better control costs and curtail energy usage. Some may be able to assist your business in complying with various state and federal energy regulatory requirements – or identify applicable rebate programs.
But with retail energy choice comes the responsibility of selecting a trusted supplier who will help your business meet all of its energy needs. Here are the key attributes to look for while you’re shopping.
Supplier has a range of pricing options to suit your needs
Unlike independent energy suppliers, many utility companies set prices based on their entire pool of customers. So businesses with specific needs may end up paying higher prices based on usage during peak periods. Because utilities are regulated by local commissions or government agencies, they must have their rate filings approved and may not have the resources to drive more flexible options for commercial and industrial consumers.
In contrast, independent energy suppliers, like Direct Energy Business, offer customized pricing plans to meet your unique needs. Because they operate in the free market on a daily basis, their pricing plans are based on market variables, such as dips or spikes in commodity prices, as well as the specific load profile of your business.
By understanding your organization’s historical usage, business objectives, and desired level of risk, an energy supplier can recommend a range of pricing options and products. Different industries have unique requirements and energy usage patterns, so working with a supplier affords you the opportunity to take a customized approach to your business’s usage, budget and operating goals. Your options from most suppliers include products from the following categories:
A fixed priced electricity or natural gas product enables you to lock in a set price for the supply portion of your energy bill, meaning the price you pay per unit of the commodity remains constant no matter what happens in the market. This strategy can provide some level of budget certainty, but you may miss out on potential savings if energy prices drop.
An index priced product is tied to market rates and therefore changes regularly based on market pricing. With an index priced strategy, you are exposed to the most risk in terms of potential price increases, but you also have the potential to realize good savings if prices decline or remain at relative lows over the course of your contract term.
A combination priced product involves locking in a certain percentage of your load requirements at a fixed price and settling the remainder of your load on the open market. The percentage you wish to float depends on the level of risk you’re willing to assume. If you have a lower tolerance for risk, you’ll want to lock in a greater percentage of your load at a fixed price.
When you’re considering price quotes from energy suppliers, don’t make the mistake of making apples-to-oranges price comparisons. A price that appears too good to be true may not be the same product as competitors. To make sure you understand what’s included in the price, you should:
- Check the contract term
- Research the product
- Scrutinize the list of pass-through line items
- Ensure losses (charges that cover energy lost between generation and delivery to your business) are included in the various components
- Ask what the bandwidth provision is if your usage increases or decreases from historical levels
- Review the contract to make sure it matches the quoted terms
These are all factors that may not be obvious in the 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.
Supplier offers complementary cost-saving and efficiency programs
Energy suppliers should offer services beyond energy procurement that can help you meet your goals.
Businesses that would like to lower their electricity costs may want to consider a load management program, such as demand response, which is designed to help lessen demand on the grid during peak periods. Demand response offers benefits for your business’s commitment to curb energy use during periods of peak demand and when called upon by the program administrator or local utility. Depending on program rules, participating businesses are generally paid quarterly or monthly, simply for committing to curtail a specific amount, and may receive additional payments when they are called upon to curtail consumption.
A reputable energy supplier can often assist you with the planning and execution of participating in demand response programs. They can help you determine if your business meets program criteria and prepare to curtail if called upon so you can benefit from the potential monetary rewards of the program. In addition to monetary benefits, you may also have the opportunity to save on energy costs by using less energy overall.
Some businesses may also want to evaluate their building systems and take advantage of energy efficiency programs. Buildings can degrade over time and should be tested to determine their variance from the original design. Commercial facilities, for example, may consider replacing old fluorescent tubes with high-performing models, and magnetic ballasts with electric ones. More significant energy efficiency projects you could implement include replacing existing windows with energy efficient ones, and upgrading your HVAC system for a newer, smaller version that uses less energy.5 Some energy suppliers can help you jumpstart these kinds of energy efficiency projects by integrating project costs with your energy supply agreement, eliminating the need for upfront capital. By making these adjustments, updates and upgrades – even small ones – businesses can often benefit by using less energy.6
Energy efficiency programs and products may not only help you lower your usage – and thus costs – through building upgrades and modifications. They may also help you qualify for incentives and rebates for the cost of the updates. In addition, by implementing certain energy efficiency programs, you may qualify for certifications,7 which can further assist your business with achieving its corporate sustainability targets and attaining status as an environmental steward.
Gaining insight into how and when you’re using energy can help you identify cost-saving opportunities. Reputable energy suppliers often offer complementary energy-related services and technology that can unveil additional insights for better decision-making. For example, Panoramic Power® from Direct Energy Business. These wireless, self-powered energy monitoring devices clip onto the circuit breakers of individual equipment and transmit information about energy use to a central cloud-based dashboard in real time. That means you can achieve total visibility into your business’s electricity usage as it’s happening at the device level.
With tools like Panoramic Power, you can identify and eliminate energy waste, prevent equipment failures before they happen, improve operational processes and position your business to be more energy efficient – not to mention save time and money.
Supplier offers renewable energy options
For some businesses, it may not be enough for your supplier to just take care of your energy supply and efficiency needs. If that’s the case, you should look for a supplier who can meet your organization’s broader goals as well, including those related to sustainability. As more companies begin to address corporate responsibility, the question of what a business can do to offset the environmental impact of its operations – including energy usage – has moved to the forefront.
In many regions, businesses can choose to purchase some or all of their electricity from sustainable and renewable sources. A reputable supplier will be able to provide you with a choice in the types of alternative energy you can purchase, and sometimes even pinpoint the source or region of generation. This can be seamlessly integrated into your total energy purchase – whether you want all or just a small portion of your load covered by alternative energy source – as long as you’re working with a supplier that offers renewable energy options.
Renewable energy certificates (RECs) are a great renewable energy option for businesses – particularly those located in climates not suitable for generating their own solar or wind energy. RECs represent renewable energy purchased to offset the emissions from your business’s traditional energy consumption. Generated from sustainable sources such as windmills and solar panels, RECs help support renewable energy projects and may set your business apart as an environmental steward. Look for RECs that are certified by an independent third party, such as the Center for Resource Solutions or Green-e. Depending on your usage and the amount of green energy in your portfolio, your business may qualify for the Green Power Partnership,8 offered by the U.S. Environmental Protection Agency (EPA).
In addition, some suppliers offer on-site solar generation products, which allow you to lock in a portion of your energy load based on the solar power produced at your site. Solar Power Solutions from Direct Energy Business not only provides and installs your on-site rooftop solar panels, but also reduces up-front costs with a dedicated investment fund for financing solar projects for businesses.
Having a sustainable component as part of an energy purchasing plan may help businesses – particularly those with an environmental focus – meet corporate sustainability objectives.
Supplier clearly explains costs and billing
When you enter into an agreement for electricity or natural gas supply, be sure that you understand exactly what you are paying for – what’s included and not included in your quoted price – and how your monthly bill will be structured. Ask which costs will be fixed based on contracted volumes and usage, and which will vary based on your electricity consumption.
Then, ask how the supplier will bill you. Will all cost components be included in your price or will some components be charged separately? The latter could lead to larger-than-expected bills or more variance in monthly costs than you expect, so it’s important to understand what’s included and see a sample bill, if possible.
Remember that there will also be taxes and fees associated with your energy supply charges, regardless of which supplier you choose.
But be wary – it’s important to moderate contract negotiations with the bigger picture. There are many energy buyers who spend so much time negotiating the best price on the smallest cost components of a deal that they lose out on the opportunity to save thousands of dollars.
For example, buyers sometimes focus solely on locking in the basis portion of a gas deal, which usually represents a small percentage of natural gas supply. Locking up the basis is a good first step, but your strategy and timing for the commodity portion of the deal is much more important. While negotiation for the basis costs is taking place, commodity prices could be moving up, causing you to lock in at a higher $/DTh rate – and having a much higher impact on your supply costs.
Energy supply costs that comprise your rate
Here are some examples of energy supply costs that could be included or passed through as part of your electricity or natural gas supply services. You may want to ask potential suppliers about these costs, if there are any others you should be aware of and whether or not they’re included in their quoted rate or if they will be passed through separately, in addition to your quoted rate for energy.
• Ancillary Services
• Renewable Portfolio Standards
• Fuel or Losses
Supplier delivers outstanding customer service
When it comes to selecting a reputable energy supplier, the supplier with the lowest price may not necessarily be the best choice. The energy supplier you choose can become a vital and trusted asset to your business by offering invaluable operational assistance. In addition, an experienced supplier will provide ongoing education to your organization about the energy markets, offer decision-making tools and resources and proactively recommend savings programs and opportunities.
It is important to thoroughly research potential energy suppliers before signing a contract to ensure that they offer an exceptional level of post-sale customer support. Ask to speak with existing and former clients to hear about their experiences firsthand or check the supplier’s website for testimonials. If the supplier refuses, that may be a red flag for inferior customer service or their lack of experience serving businesses like yours.
In addition, find out who would be managing your account day-to-day and if that contact would remain the same throughout the length of your contract. During what hours will customer support be available and through what means – phone, online chat or face-to-face? And are there any fees associated with customer support?
Supplier dedicates a team to support your goals
For businesses with a large or complex energy portfolio, a trusted supplier should provide a dedicated account team to help drive the success of their energy strategy. For these large commercial and industrial businesses, your account manager should be more than a salesperson – they should bring a deep knowledge of the energy industry to the relationship, as well as a strong desire to help you reach your energy budget targets. They should be ready to respond quickly to questions or requests and have data about your business’s usage at their fingertips, since energy markets and pricing change often. They should also be available through the channels and at frequencies that work for you – whether you prefer monthly conference calls, weekly emails or face-to-face meetings.
The Strategic Services team from Direct Energy Business does just that. This team of experienced professionals employs a “use less to spend less” strategy and operates with an eye toward helping large businesses manage their total energy spend. They provide energy advice and guidance tailored to your business, taking into account your energy profile, business goals, and risk appetite. With regular guidance from Strategic Services, you can make better energy decisions and plan with confidence.
Checking in on the tenure of account managers at the energy supply companies you are considering – especially an account manager that may be assigned to your account – could be an important detail, since a high turnover rate could impact service levels and minimize the benefits of working with that supplier.
Supplier equips you with market intelligence
It’s very difficult to make educated decisions about your energy procurement needs without adequate, up-to-date information. That’s why it’s important to select a supplier that can provide you with regular market information, including historical pricing data, the near- and long-term bullish and bearish factors weighing in on the markets, the regulatory landscape and weather forecasts and patterns.
This flow of information should not stop once you sign a contract. In fact, a savvy supplier will continue to offer you this information in a format you can access anytime, such as a secure customer portal or web tool. During the vetting process, ask potential suppliers about the types of market intelligence tools they offer, how often these are updated, whether there is an additional charge to access them and if you can view a demo.
Supplier provides tools for account management
While you’re asking for market intelligence tools, you may also want to inquire about tools to help you understand your energy consumption. Initially, in order to generate accurate pricing quotes, suppliers need your historical usage. But once you become a customer, a supplier should provide you with electronic access to data points, including historical and monthly usage, peak usage and monthly charges, so you can export this data into your own tracking and budget management systems. Some suppliers offer additional energy tools and services for a fee that can help you manage the usage at multiple sites. These tools can help you develop more accurate forecasts and identify and implement ways to save, based on your requirements and time of use.
MyAccount from Direct Energy Business is a free online portal that enables customers to keep track of all energy account details easily, from consumption to invoices and payments. Its customizable usage and spend alerts can notify you of usual account activity and empower you to review and compare historical trends in printable charts. Customers can access MyAccount from mobile devices, giving them the opportunity to manage their accounts anywhere at any time.
Before signing a contract, make sure you understand how your energy account information will be presented, and whether there are additional charges to access it. Your account manager should be willing to take the time to sit down and intelligently discuss your usage trends.
Supplier serves businesses like yours
Although energy is an operating expense that every business shares, different industries and sizes of organizations have unique energy needs. Your energy supplier should understand those distinctions and have experience helping businesses like yours succeed.
Small businesses, which tend to have little room in the budget for flexibility, may value an energy strategy that is predictable, stable and easy to manage. With energy goals focused around reducing costs and gaining budget certainty, small business owners often depend on a supplier who can deliver good prices and energy expertise so they can remain focused on their business. Fixed rates may give these small business energy buyers peace of mind because the price for the usage portion of the bill will never exceed the price agreed upon in the contract.9
On the other hand, commercial and industrial customers with larger budgets may look for opportunities for investment-style energy spend. Larger businesses can often tolerate greater risk in their energy procurement strategies, capitalizing on market lows when prices are good, and creating a competitive advantage. A total energy management approach integrates a suite of energy products with ongoing advice from energy experts to design a custom, nimble strategy that takes advantage of both supply and demand-side factors.
Strategies and goals also may vary based on a business’s industry. For example, industrial manufacturers may prioritize reducing energy use by optimizing operational schedules for off-peak hours and participating in a demand response program. Conversely, supermarkets and grocery stores may look to reduce their energy costs by improving the efficiency of lighting and refrigeration equipment. Governments and agencies may favor working with a supplier who has renewable energy options and can help them deliver energy budgets and strategies transparently to their many stakeholders.
So when you’re shopping for an energy supplier, look for signs that a supplier understands the needs inherent to your industry and serves other businesses with a similar-sized energy spend. They may offer this information up to you in the form of case studies, testimonials or even by putting you in touch with a current customer who can speak on behalf of their experience working with that supplier on a customized energy procurement plan.
Supplier offers guidance based on best practices
Is your supplier merely a middle man or are they looking out for your business’s best interest to help you make the most of your energy choices?
An experienced supplier understands best practices for businesses of your size and in your industry and looks forward to recommending programs and approaches that have been successful for like-sized organizations.
But a seasoned supplier is also active in trade shows and events where industry experts gather to share ideas and present best practices. They contribute to industry conversations about market trends and weather forecasts, publish tips for consumers about energy-related topics and weigh in on related events. You can check a supplier’s website or request this information from a potential account manager to get a feel for how savvy the supplier might be serving businesses in your industry. Customer testimonials and case studies may also help illustrate just how well a supplier can find meaningful, tangible solutions for existing customers of your size.
Supplier is experienced and can ensure continuity of service
With a relationship this important that can affect your long term goals and initiatives, you must be confident that the supplier you select is financially stable, credible and reliable. A financially stable supplier can offer your organization peace of mind that they will be there to serve you, even amidst the ups and downs of the energy markets. A supplier that is fully established across multiple deregulated regions, with years of experience buying and selling in the wholesale markets, typically can provide more supply options and flexibility. When you select a mature and experienced supplier, you open the doors to a customized energy approach that makes the most financial sense for your business – now and into the future.
To find out a little more about a supplier’s staying power, you may want to ask the following questions or do a quick internet search:
- Research how long the supplier has been in business and its reputation
- Request the supplier’s (or parent company’s) current financial statements
- Obtain the supplier’s credit rating
- Request examples of long-standing customers to find out if they have tenure with other like-sized companies and if any of those companies would provide feedback on their experiences
The value of these attributes may be difficult to quantify, but will be very apparent if things go wrong. Remember, your energy supplier will be around for the term of your contract, so choose a solid supplier who also meets your needs.
Putting it all together
It is critical to think about your energy needs early in the game, and before you begin negotiating with suppliers. The choices available today and the sheer number of players involved in the energy procurement process can be overwhelming. The markets are complex and always shifting. But energy can constitute a large chunk of your business’s budget, and potentially your time. So it is imperative that you carefully choose your supplier based on your business’s needs and the key attributes of the supplier. If you can ask the right questions up front, you’ll be prepared to make an informed choice about an energy strategy for your business.
Whether you are a seasoned energy buyer or a novice to energy purchasing, you don’t have to go it alone. There are energy experts available to help put your business on a path to better energy management and purchasing decisions.
Let Strategic Services from Direct Energy Business help your large business identify its energy needs and develop a strategy to meet them. Our experts are ready join your team to help manage your overall energy spend – and that means more than getting a great price. It means getting customized strategies that measure, manage and control your consumption so you can buy and use less energy.
Our team is here for you the entire way – from planning through procurement and beyond.