When was the last time you evaluated your energy risk management strategy to see if it was meeting your organization’s original expectations?  If it was more than a year ago, you could be making a costly mistake.  The good news is that you can rectify that mistake and reduce this unnecessary overhead with these simple tips, below.

Energy is the most volatile commodity an organization procures, electricity being the most turbulent, and it also tends to be one of your biggest budget items.  Given that one of the most significant sections of your budget is so unpredictable, ongoing performance analysis is an absolute must.

There are two key pieces to any sound energy risk management program:  the supply-side elements and the demand-side elements.  Demand-side measures, implemented to make your company more energy-efficient, involve a capital investment to reap future savings from lower energy usage.  Supply-side initiatives, encompassing the procurement of the energy commodities, can produce immediate benefits via lower rates and should result in more favorable contract terms.

Manage Your Energy Usage

Understanding your usage pattern is just as important as knowing your overall usage costs.  One commonly overlooked element in the pattern is peak load, the highest amount of energy used at any one time during a month.  Your average monthly energy usage may be low, but if it spikes on just one day of that month, you could face a considerable boost in costs for the rest of the year.

Consider a common scenario for a university: a Saturday football game that requires much more energy than the rest of the month’s average can cause a tremendous spike in energy demand.  Even though the price of the energy commodity itself may stay at 5 cents, the utility responsible for transmitting and distributing that energy will begin charging more to provide that higher capacity when the university needs it – even if that may only be one day a year.  As a result, the university’s bill for the next year will show a large increase on regulated transmission and delivery.

The lesson?  Avoid huge spikes through graduated usage rather than running everything all at one time.  In this case, instead of simultaneously switching on every field light and powering up all concession equipment and boosting the air conditioning, cycle in each unit at intervals. Also consider alternating a/c usage.  Although some components may run longer, this method will still cost less than an all-at-once surge in use.

In addition to graduated usage, the university can enroll in a  “Demand Response” or “Curtailment” program.  Local utility operators around the country offer incentives for cutting back on energy usage in times of increased stress on the electric grid.  Participation benefits are two-fold: lower bills plus the incentive bonus.

Coordinate Demand-Side Efforts with Supply-Side Efforts

Demand-side measures include all the strategies to reduce your energy usage.  Supply-side initiatives involve the actual procurement of the commodity itself.  These two sides of your energy equation need to balance out, and the smartest time to tally them is during contract negotiations.

Everyone who buys energy – from private consumers to businesses to the federal government – enters into a usage contract.  You should negotiate your contract terms as your usage changes and renegotiate as your goals evolve.

Obviously, you pay more if you use more – but many energy contracts have provisions that also penalize you for using less energy than you initially contracted.  This over-/under-usage clause is common – but it’s easy to overlook if you don’t read your contract closely.  You may either want to mitigate or eliminate the penalties, or adjust the supplier’s expectations at the beginning of the contract.  Again, the only way to accurately manage expectations is through careful, continual usage monitoring.

Choose Product, Price, & Term Wisely

Your budget priorities and your ability to manage actual usage help determine the right energy supply program.  Common solutions for managing overall energy cost include utilizing the right type of “energy product” such as a fixed price, an index price, or a block & index price.

At the most conservative end of the risk spectrum, fixed-price commodities provide more budget certainty.  These packages safeguard against market volatility because the customer agrees to a set price, regardless of fluctuations.  Most government entities opt for fixed pricing, as do many industrial outfits with more stable budgetary needs.

At the other end of the spectrum are index products.  Because of the flexibility and possibility that costs could increase over the duration of the contract, index pricing assumes a high risk.  However, this allows for savings if the price moves down.   Organizations that effectively manage and adjust power consumption, or target usage to off-peak hours, may benefit from index pricing.

Block and index pricing falls somewhere in the middle of the risk profile.  An organization can fix the price for a certain portion of their load (providing budget certainty), while allowing additional load to float with the market on index (allowing for savings if rates go down).

The choice between short-term and long-term contracts in relation to current market conditions ties back into your annual evaluation.  If the market is falling, choose short terms to keep negotiating for lowest price.  In a rising market, long terms will lock in good rates.  The “best choice” varies depending on your organizational goals:  Government entities focused entirely on stability and budgetary targets will want a long-term fixed price approach, while large manufacturers seeking the lowest price may choose shorter terms if the market is falling to achieve better rates by taking on market risk and floating with an index rate.

Evaluate Your Energy Program At Least Once A Year!

To gauge performance accurately, it is vital to have a feedback loop regarding your energy risk management strategy to help you determine what to adjust, based on what has worked best in the past and how organizational goals have changed.

Perform a multifaceted review of all the elements within your energy risk management program at least annually to evaluate your strategy, in relation to your goals and on the basis of current market conditions.  Groups whose energy contracts float with the market might actually consider a quarterly evaluation.  Even organizations with multi-year contracts at a fixed price should review:  While they can’t adjust their actual rate for the commodity, portions of the bill tie in directly to their energy usage patterns.

In our ever-changing energy market, the biggest mistake is complacency.  Simply employing the same tactics or relying on past usage trends is no way to determine your future opportunities.  You can sit back and complain about escalating prices, or you can evaluate your risk management strategy and adjust it accordingly.