In the world of finance and procurement, some of the preferred buzzwords include “conservative,” “stable,” and “predictable.”  Because of the need to keep operational costs as low as possible, energy procurement presents a unique set of challenges to businesses that use a lot of energy.   To begin with, energy commodities are volatile – and electricity proves to be the most volatile commodity of all.  Prices rise and fall daily, making it difficult to ensure a low cost and stable budget.

Hence the approach that many businesses make, which is to secure a fixed-price electricity agreement.  With markets hovering around multi-year lows for much of this year, we see business decision-makers taking advantage of these low rates to lock in prices for several years to provide longer-term budgetary savings.

Up to this point, the longest terms were commonly 3-5 years.  With the continual advancement of deregulated electricity markets, along with the expansion of solar and other on-site generation solutions, large energy users are now finding increasing opportunities to address long-term electricity costs – for a decade or more.

Structuring Deals For 10 Years or More

Most organizations value price certainty and budget stability, and want to keep those valued things for as long as possible.  As we all know, though, the unpredictable fluctuation makes it very difficult to secure a price for an extended period of time.

To establish a longer-term deal that can help address this price security, consumers have begun to fix portions of the agreement for different time periods.  This cutting-edge model has been successfully used to enable stability for 10+ years.

One of the key aspects of the 10-year deal is that clients get access to the wholesale electricity market, not the retail market, for their power suppliers.  Additionally, a “checks and balances” system is part of the agreement:  The supplier’s offered price can be compared directly to the general market and checked for its competitiveness.  If the wholesale market price is lower, the client gets that favorable rate.

Utilizing Wholesale Market Intelligence

When the success of the agreement hinges on addressing future wholesale market costs, it is critical for any consumer considering a 10-year agreement to have full first-hand access to wholesale energy market intelligence.  Budget stability requires fixing costs for various portions of the agreement at different times throughout the term.  Securing future prices for wholesale energy is done with as much primary source market intelligence as possible – otherwise the room for error can be too great.

The thing that turns an agreement– where the only certain aspects are fixed – into something more stable is fixing the costs on the underlying wholesale commodity.  At the onset, the agreement is essentially an index type, meaning that the bill fluctuates every month because it is solely based on the market.  The key to making ten-year agreement work is monitoring the wholesale market and, on a regular basis, fixing portions of that wholesale energy cost so that costs can be predicted years down the road.

If your organization wants to explore these options, don’t attempt to do this yourself unless you have direct access to wholesale market information.  Just like repairing a car engine, don’t start taking everything apart unless you have the tools, resources, and know-how to actually do it.  That kit car might be a fun project that can sit idle in the back of your garage for years – but your electricity is something you need right now.

Making Concessions for Solar

In addition to these recent developments leading to 10-year or longer agreement durations, an expansion of solar solutions is providing more options for consumers.  These days, it seems like solar energy is such a popular concept that every large energy consumer has at least discussed solar at some point.  But the technical and financial limitations were a barrier for all but the most serious solar advocates.  As more organizations look to become “green” and generate their own power, however, opportunities like on-site solar generation are becoming more attractive.

A concern for customers has been losing out on opportunities where they may be producing more solar energy than they can use at that particular time.  In the past, if an organization produced more solar power than it needed, there was nothing it could do with the surplus.  Now, however, consumers can structure their energy agreements in such a way that, if they were generating solar power (or considering it), they can negotiate terms in the supplier agreement that allow them to sell unused solar power back to the utility and earn revenue on it.

These solar buy-back programs are frequently referred to as “net-metering.”  Suppliers may treat this by displaying this transaction as a credit on the energy bill, thereby allowing the consumer to benefit from selling unused power.

Although the specifics of net-metering differ by region, we’re seeing this opportunity in almost every market where energy is deregulated.

In all markets where supply agreements involve negotiating with third party suppliers, consumers have the ability to negotiate these kinds of provisions into their energy agreements.  As suppliers increasingly write agreements that allow for net-metering, customers are able to structure a long-term energy agreement in such a way that even enables a future installation of a solar application.

It’s an opportunity that has existed for some time, but suppliers are just now getting comfortable with allowing for it.  Net-metering requires additional steps that suppliers viewed as a costly hassle.  Selling generated power on to the grid is a transaction that may be regulated, requiring that certain licenses are in place and additional reports are filed.

So why the shift?

Like any competitive market, the suppliers that provide enhanced customer services – such as net-metering – will be the ones to gain business, possibly at the expense of those that don’t offer these programs.  We expect to see more and more suppliers incorporating net-metering in the future as they witness the success that others have with such programs.

Large Energy Users Get Their Cake

It definitely pays to always be aware of new developments in deregulated markets.

From an electricity agreement perspective, it may finally be a time when large energy users can have their cake and eat it, too.  With the market prices being so low, solutions are emerging that can allow companies to secure rates through suppliers long-term by monitoring underlying wholesale costs.  Then if they decide to install solar at a later date, the infrastructure will already be in place to allow for selling unused energy back to the grid, providing a potential source of revenue as well.  The long-term options that are on a path toward becoming commonplace are certainly helping corporate energy procurement edge toward “conservative,” “stable,” and “predictable.”