Are you throwing darts blindfolded with your energy procurement?
Implementing a Energy Procurement Strategy can have major impacts on not only the bottom line, but also the triple bottom line
For most of us, when the gas gauge on our car starts to dip below half or a quarter tank of gas, we begin paying attention to gas stations, and more specifically gas prices. We start noticing which service station is a dime more, or a penny less, and our purchasing decision is largely driven by that price. You might even start to take into consideration the reputation of the gas station itself.
But did you realize a similar opportunity exists in certain states when it comes to buying your electricity and gas supply for utilities? These “deregulated” states allow for the ability to shop for the supply of gas, electricity, or both. This choice provides the opportunity to shop, to find a plan that best meets the needs for your asset, and then enter into a term that you are comfortable with at a pre-negotiated rate.
Unfortunately, when this ability to shop presents itself, it is often done with little coordination and without regard for the bigger implications. More than once I have seen properties that have locked themselves into contracts with bad terms and little ability to change those terms, poorly negotiated rates, contracts with provisions that place the buyer at a disadvantage, often with limited or no ability to terminate the contract. When a coordinated strategy is not in place, the potential to end up with multiple contractual conditions increases, and the ability to leverage volume decreases.
There are of course some standard areas that should be standardized to the extent possible, including:
Payment Terms
Termination Clauses and Fees
Adding and Deleting Account Procedures
Energy Usage Swing
Each of these areas in the supply contract can be approached from a seller-friendly or a buyer-friendly position, with the element of risk shifting from party to party. Risk equals cost, much like an insurance policy. But also, much like an insurance policy, the development of a strategic approach can help mitigate risk and allow the buyer to carry more risk, translating to potentially reduced cost.
Where does risk exist? One example is in payment terms, the shorter the payment term, the more burden is carried by the buyer, and the longer those terms the more risk is transferred to the seller. Late fees can be a very real issue in utility account management, aligning processes such as bill payment services with payment terms can reduce the occurrence of late fees and translate to reduce cost.
Termination Clauses and Fees can also vary widely without a central strategy, unfortunately, the majority of energy supply contracts are entered into without an understanding of what happens if the customer attempts to terminate the contract. Can the contract be terminated? If so, under what conditions and with what termination fees? Can it be assigned upon property purchase? If so, under what conditions and under what terms? Are the rates locked if assigned, or can they be adjusted?
Closely tied to the issue of the contract termination is the practice of “slamming”, an increasingly aggressive tactic used by misleading salespeople who upon obtaining a customer’s account number, submit for a supplier contract change without advising the customer. The effect terminates existing supply contracts, and typically comes to light if they are lucky when the customer receives a phone call from their energy supplier telling them they are facing a large fine for terminating their agreement. Often, however, if that phone call isn’t received, the costs are passed on through the bill, the customer possibly wonders why the bill went up, but then gets busy and never realized the issue. State Public Utility Commissions provide countless stories of customers filing complaints after being victims of such practices. The ability to recognize and counter “slamming” is yet another example of the importance of a centralized and strategic approach to energy procurement.
The ability to add or delete accounts relates directly to understanding the future needs of the property. Like every other contract term discussed, this is a point of negotiating and can be aided by a consistent strategy. There are many factors that can set up a scenario in which the property needs to change the number of accounts from renovation to adding additional amenities such as electric vehicle charging. Unfortunately, the ability to add or delete is not a standard contract term in most supply contracts, so when you need to change, new accounts will be priced at current market rates and deleted accounts may face termination fees.
Similar to adding and deleting accounts is energy swing, sometimes referred to as bandwidth or tolerance. Understanding the amount of energy you historically use is a critical element in setting up your supply needs. But what happens when the future needs change from historical trends. The inclusion of a percentage of change from base contract supply can save you from paying additional fees related to selling back unused energy or having to purchase new energy at current market rates.
Buying energy on a market is a timing exercise, locking in contracts when supply rates are low provides the ability to hold down costs during high supply cost periods. Because the cost of supply is tied to demand, there is a time to buy and a time not to buy. Typically the height of summer or winter is not that time. When heating and cooling loads decrease, the demand decreases and supply costs drop. Similarly, when deposits are made into the supply storage instead of being consumed, the supply costs drop. Understanding these peaks and valleys is an important dynamic in the relationship between an energy manager and the energy supplier or broker. Communication must be frequent and an understanding of trends must be shared by both parties.
Communication between broker and buyer should include an understanding of where every contract stands, when does it expire, which ones have experienced rate decreases since entering into terms, which ones are candidates for extensions. It should also include a constant conversation around the commodity indexes for each state contracts are held or being considered. An open dialogue and a regular cadence must be maintained for both parties to have a feel for the direction the market is moving.
If your gathering that energy purchasing can be complicated, your correct it is definitely an art, however unfortunately many fail to go beyond the intricacies of the pricing and timing elements of utility contracts. There are additional implications of the purchasing decision that can have a real impact on the purchasing organization. For example, in terms of electricity, the source of the electrical generation can have a large impact on the carbon footprint of an organization. In sustainability, we spend a great deal of time reducing our consumption to positively impact the carbon footprints of our portfolios - but we sometimes miss the role electrical supply contracts can play.
While the cost of a capital improvement to reduce impact may cost tens or hundreds of thousands of dollars, simply understanding the source of generation and including this in your purchasing decision can sometimes have the same reduction of impact at no cost or little cost in comparison. Different suppliers may have different generation mixes of their electrical supply offerings. Simply asking the question if alternative generation sources are available typically opens up a conversation around options. You should always be provided with the source of the electrical generation that you are being quoted. Are there renewable sources included in the generation mix? If so, are the RECs (Renewable Energy Credits) provided as part of the supply delivery? Each utility supplier must report its generation mix to the state public utility commissions. If they are supplying electrical mix data to the state utility consumption, they often try to avoid sharing this with their purchasers. The data is there however and it is not difficult to be obtained, but you need to be aware that it is there, and you have to ask for it.
This is also data your broker should be tracking for you, sorry brokers but we want to know more than the amount of kW being purchased, and you should be tracking it. If we purchased 100 kW from supplier X, and that supplier is generating 50% of their electrical supply from renewable sources, we need to know that 50 kW of generation came from renewable sources. Why? When we calculate carbon footprint models, routinely we rely on e-grid statistics to take into account the impact of the generation mix of our electrical consumption. But what if our electrical supply is cleaner than the standard grid supply? As we move towards a carbon-neutral building, being very precise on the source of our electrical supply can provide a competitive advantage.
What about RECs? Should this be part of your mix? Is it possible to obtain RECs as part of your electrical supply procurement? In some cases, the answer is yes. Be sure to ask these additional questions. You might pay a few pennies more but in return receive 100% renewable power supply for your property complete with REC’s, REC’s that you might have had to purchase separately had you not considered this when making the initial supply purchasing decision. Laws such as New York’s LL97 potentially may require REC’s to get to full compliance.
In addition, what other services does the supplier offer beyond energy procurement? Energy suppliers often have programs to assist with demand response program needs as well as energy efficiency programs to help their customers reduce future energy needs. Often suppliers have exclusive programs available to their customers that provide another conduit for energy efficiency measure implementations.
The procurement of energy can be an important part of an overall strategy that positively impacts the utility costs at a property and within a portfolio. It is difficult to execute a consistent strategy without a centralized approach. Decentralized efforts tend to minimize opportunities to collaborate with suppliers to develop long term strategies across the portfolio. In effect, your properties are constantly reinventing the wheel. While I understand for some purchasing decisions, it may make sense to decentralize purchasing decisions so each property can make the decisions that are the best fit for their property, when it comes to energy purchasing there are real disadvantages of this approach.
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Stay well!
Chris Laughman is the author of the ThirtyNine Blog, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping multifamily properties reduce their energy and water impact as a senior account manager at Bright Power. A full-service energy strategy company, Bright Power is a leading provider of energy efficiency, renewable energy, and energy management solutions for the real estate industry. We use our Find-Fix-Follow approach to Find the best opportunities across a real estate portfolio, deploy the Fixes on specific assets, and Follow to ensure long term value, always optimizing for your financial and sustainability goals. Contact me at claughman@brightpower.com for more information.