Much like other important assets in running a business, commercial energy procurement is an often overlooked—yet critical—aspect of any operating strategy. Like any aspect of a successful business, the best decisions are the ones that leaders make with the help of research strategy. So, which energy procurement strategy makes the most sense for your organization?
Commercial energy procurement, the process in which large companies buy energy supply to use in their operations, can be broken down into three commonly used strategies. In no particular order, those methods are:
You Can Buy Energy Through An Indexed-Pricing Strategy
Indexed-pricing strategies (sometimes referred to as spot purchasing) offer energy procurement companies the opportunity to take advantage of fluctuations in market conditions and energy pricing, unlike traditional fixed-priced strategies.
When using an indexed-pricing energy procurement strategy, a certain percentage of a company’s gas or electric plan becomes floated on the market. Like other commodities, both of these energy costs are subject to volatility and changing market conditions on a frequent and ongoing basis.
While the appeal of an Indexed-pricing strategy is clear, it’s also important to be aware of the potential for these strategies to run in the opposite direction, costing you much more money. If the energy markets experience a swift tick upwards and that trend maintains, you’ll be forced to settle at a much more expensive cost.
As such, the price of your energy will fluctuate throughout the duration of your energy procurement contracts, coinciding largely with market trends that are out of your control. The risk-reward spread when using this type of strategy without the help of a consultant is much greater than if you have an expert who can track the markets for you—while you continue operating your business. The more commonly used energy procurement strategy is fixed pricing, which we’ll explore now.
The Fixed-Pricing Strategy
A fixed-pricing strategy (sometimes referred to as forward or firm purchasing) is the type of pricing strategy that is most common. It works exactly the way that it sounds like: At the beginning of your contract term, all of the energy that you wish to procure throughout the duration of said contract will be at a single price, determined ahead of time and unchanging.
When using this type of strategy, there are far less variables to worry about as opposed to an indexed strategy. With the price per kWh set at the beginning of your contract, it becomes much easier to work out a strong budget. And, when you don’t have to pay as much attention to the commodity markets as a whole, it frees up more time to focus on other parts of your business.
The downside here is that you may not get to take advantage of market lows as you buy energy. However, you can time your contract so you're locking in a solid price from the start.
The Final Energy Procurement Strategy Is Blended Pricing
Here we have another pricing strategy that does exactly what its name says. When employing blended pricing, some of the best aspects from both fixed-pricing and indexed-pricing methods are taken and repurposed to form a, well, a blended strategy.
Part of your contract cost for every kWh of energy will be fixed at the onset of a new contract, and will remain the same throughout the duration of it. The rest of your contract is floated on the market, and its price fluctuates as such. Many companies like the versatility that a blended strategy provides them with, as it allows them to lock in a certain level of pricing, while also playing the market for a better price overall.
ENERGY PROCUREMENT CHECKLIST
Check out this checklist for strategic energy procurement tips to optimize your companies overall energy plan.
Before Deciding On Your Strategy, Ask Yourself About Your Load Profile
When determining which strategy is right for your business, it’s important to know what your energy load profile is, and how you can improve it.
There are certain times of the day—and times of the year as a whole—where energy is in higher demand than normal. Think summer and winter in terms of season, where the energy grid is running overtime to account for the extra usage of heating and air conditioning across the region, especially in large commercial and industrial facilities. In terms of daily usage, whether or not the sun is up usually coincides with how much energy is being used (loads tend to go up during the day and down at night).
By optimizing your load profile, you make yourself a much more attractive customer when dealing with commercial electricity suppliers. These suppliers like customers who have a high usage on a consistent basis, ideally 24 hours a day, seven days a week. If you only use energy from 9–5 (peak hours), and you use even more in the summer and winter months, your load profile will decrease in attractiveness, causing you to be charged higher prices.
How Energy Procurement Companies Can Help You Strategize
One of Ferris Bueller’s all-time great ideas came at the expense of a beautiful Ferrari. If Ferris drove home backwards, all the miles that he had put on it would vanish from the car’s odometer. It's laughable, but when talking about it in the world of energy procurement, it’s not only a real thing, but it can be a great piece of solid energy procurement strategy advice.
What we’re talking about is called net metering. In layman's terms, it’s an effective way to run back your energy meter’s reading by supplying energy back into the power grid. How? A little thing called on-site generation.
By purchasing and installing energy-creating mechanisms (often in the form of solar panels) on their property, companies can create and store their own energy. When this energy isn’t actively being used on-location, it flows back into the grid to be distributed elsewhere. When this happens, the company that’s supplying the extra power will get credit for it on their energy bill. If done correctly, it can be a useful way to not only support the green movement, but to also earn revenue from the grid.
If this feels complex to you, you're not alone. Companies employ energy consultants on a regular basis to help them strategize as they buy energy. Reach out to A1 Energy for advice on how to strategize your energy purchasing and procurement from start to finish.