For those of you playing along at home, we are now on the third installment in our five-part series on the key aspects involved in hiring an energy advisor. The genesis of this series has been in response to the trend we see in the industry toward more and more organizations (both public and private) engaging the services of a professional consulting firm to assist with the procurement and management of energy. While energy costs have declined in the past couple of years, in large part due to more efficient technologies for finding and bringing fossil fuels to market, energy still remains one of the top spend categories in most organizations’ budgets. With the increase in hiring energy advisors, we have undertaken this “Definitive Guide” to consider as you evaluate and choose the right advisor for your organization.
In Part One, we focused on determining a consultant’s qualifications. We encouraged you to consider that so-called “experience” needs to encompass a wide range of factors, from in-depth industry knowledge to breadth of advisory services to wide geographic coverage.
Part Two discussed the rationale for seeking a consultant who can provide a holistic strategy for your energy procurement needs. A firm that offers full-service solutions can have a positive financial effect on your organization by marrying your energy supply needs and your budgetary concerns.
This installment will look at the concept of considering the wholesale market as a means of securing your best price point.
Natural Gas Historical Prices
Wholesale energy markets can be extremely volatile. The chart above illustrates the importance of understanding marketplace forces and buying at the right time.
What Is so Important about Wholesale?
The idea of “buying wholesale” is attractive to many consumers. It is generally understood that the wholesale cost of an item represents the cost immediately post-production and is, therefore, the very best pricing point at which something can be bought.
When it comes to energy, though, only properly licensed retail suppliers can buy energy (electricity or natural gas) for resale to end-user consumers. So if you believe that you are going to save your organization “lots of money” by buying your electricity or gas wholesale, forget it. You must purchase the energy you use from licensed retail suppliers.
Now that we’ve pulled the rug out from under your visions of saving money by going wholesale, let’s talk about what we mean by “wholesale” when it comes to procuring energy. It is all about incorporating “wholesale market knowledge” into the process that leads to significant budget savings.
What Really Drives the Price You Pay?
When people talk about what drives the price of energy, they typically cover a variety of factors: weather patterns, supply and demand, geopolitical factors, industry growth, and many others. Separate articles can and have been written on each one of these factors. There are also plenty of specialists out there who monitor these issues all day, every day, in an effort to better inform their organizations internally and their clients externally so that more educated energy decisions are made. But for those of us “laymen” who really just want to get the best price, what should we consider?
The chart above indicates the events that led to volatile natural gas and electricity prices.
Want a simple way to understand what drives the price you pay as a consumer? Just remember that your cost is a direct result of the price your retail supplier pays for this energy in the wholesale market (In addition to the additional retail supply components of the bill included by the supplier such as Capacity, Line Losses, etc.). Put another way, if you are paying Supplier X a price of $0.05/kWh for the next 12 months, this is a direct result of that supplier having purchased this power on the wholesale market for that 12-month period and then “marking it up” to resell to you.
As with any other commodity or product that falls under your jurisdiction as a procurement specialist, if you understand what that wholesale number is and why the price is where it is, you will be much better prepared to negotiate a procurement that takes advantage of favorable wholesale market movement in securing the best price.
Don’t Rely on Second-hand Information
If your organization is like most, you’re probably not fully staffed with “energy experts” whose sole job is to follow the wholesale energy markets. This is one of the primary reasons why the industry has been moving more and more to the use of energy advisory firms who follow the energy markets on their clients’ behalf.
To bring this full-circle, if you are using (as you should) “wholesale market knowledge” as a key point of criteria in hiring an energy advisor, what is it you should be looking for?
Knowledge is typically only as good as the source from which it is derived. Wholesale market knowledge is no different. The bottom line is that you need to select an energy advisor who is as close to the generation of the wholesale market intelligence as is possible. Wholesale prices are driven by energy generators and suppliers interacting as they buy and sell for physical delivery. An even more significant aspect of the market are the purely financial transactions as the banks and hedge funds buy and sell as part of their overall portfolios.
When selecting an energy advisor, you want to partner with one who has first-hand knowledge of these wholesale transactions. This intimate knowledge helps you see the “color” of the market by finding out not just what the numbers are, but who is transacting and why. As a consumer, you can then better understand if the wholesale prices are moving up or down, short-term or long-term. Translated properly, this puts you in a stronger position to find those dips in the market that allow you to secure low rates over a longer period of time. Relying on an energy advisor with second-hand knowledge of the market—whose sources are reading news stories and looking on the exchanges—should never be a substitute for real primary source intelligence.
Tell Me Again – What’s the Big Deal with Wholesale?
If nothing else, this installment should convince you of two things: 1) the importance of understanding wholesale energy market intelligence to better secure retail energy prices; and 2) the need to select an energy advisor with first-hand, primary-source energy market intelligence instead of a consultant with run-of-the-mill, second-hand information… or no information at all.
If you incorporate these components into your evaluation and selection process when engaging an energy advisor, you will definitely be on the right track. It may not be like going in to Costco to buy your paper towels in bulk at wholesale prices, but it is very close. And when you can utilize an approach like this to reduce your energy costs long term, you really could be the hero who saves the day (or at least saves the budget) for your organization.