As we start our next installment in this series, let’s recap the mistakes we’ve covered so far when it comes to savvy energy procurement: not procuring proactively, missing the most competitive rates, developing an inappropriate procurement strategy for your specific needs, not having a pre-determined goal of what you want to achieve, utilizing an aggregation for purchasing energy, and taking a decentralized approach. This article will discuss the importance of “compartmentalizing” your energy savings strategies.
Energy savings come in two general forms: supply-side savings and demand-side savings. Saving on energy supply involves energy procurement to achieve better rates for the energy you use, in addition to achieving efficient bill processing and optimizing the rates under which your energy accounts are charged. Demand-side saving, on the other hand, has to do with energy efficiency and can include the purchase of capital equipment such as HVAC systems and building insulation. In short, supply-side strategies reduce the cost of the energy you use, whereas demand-side strategies reduce the amount of energy you use.
The Mistake: Using One Firm for Both Supply-Side and Demand-Side Energy Strategy
It wasn’t too many years ago that, from an energy management standpoint, there were two types of firms available to commercial consumers. One type was the large energy efficiency firms (sometimes called Energy Services Companies or ESCOs), whose specialty was providing energy conservation projects that many times amounted to millions of dollars in expenditures. These projects were sometimes even financed out of the savings through 15- to 20-year deals, and they were always viewed in terms of return-on-investment (ROI) – in other words, determining whether the investment will result in positive returns… and how long that will take.
The other type was the “niche” firm that provided consulting and advisory services designed to negotiate and procure better rates for the energy an organization utilized, such as electricity and natural gas. About a decade ago, a movement started whereby many of these larger ESCOs and efficiency companies began to acquire the niche advisory firms in an attempt to become a “one-stop-shop” for their customers. Over the years, this then became a popular way for organizations to meet their energy needs – by engaging one company that supplies “all things energy.”
Even though this may have made sense for the energy companies, does it make sense for the energy consumer?
Why It Happens: The Notion that Using One Firm Is More Efficient
The same reasoning that led the demand-side energy efficiency companies to acquire supply-side firms became the same rationale for the organizations that engaged them. This was done because it was considered more efficient, and it made addressing a corporate-wide energy strategy easier because there was just one point of contact.
But just because something is easier, does that also make it better?
This is precisely the question that each individual organization must answer. Consumers are presented with similar situations in just about every facet of the economy. Sure, it is easier to buy a Big Mac while you are gassing up your car – but is that really the best culinary option available? The problem with hiring one company to handle supply-side and demand-side energy issues is that, all too often, the consumer doesn’t get the best out of either role. In fact, in some cases, you may find you are even creating conflicting goals that lead to bad decisions on energy projects.
Consider for a moment that you are looking to undertake a massive energy efficiency retrofit that will cost several million dollars to implement. Your decision to proceed is highly dependent on the expected duration of ROI, and the ROI of any energy efficiency project is a direct result of the future electricity rates you will pay. If your future rates are higher, the ROI is shorter. It would difficult for an energy firm to promote your energy efficiency project (demand-side) while at the same time reducing your future rates (supply-side) through energy procurement because such a move would raise your ROI and jeopardize said project. There is too much a potential conflict of interest.
How to Fix It: Use Separate “Best-in-Class” Firms for Supply-Side and Demand-Side
As we’ll see, a better approach is to find and engage the best companies from both the supply side and demand side to craft a comprehensive energy management strategy. The skills and expertise required for creating an energy procurement analysis (supply-side) are very different from those necessary for establishing an energy efficiency project (demand-side). Whereas a background and understanding of the wholesale energy commodity markets is key to a successful supply-side strategy, an engineering background is the heart of any demand-side conservation measure.
Trying to find one company that provides both services typically results in one or both of these aspects lacking the experience and/or resources to make it successful. The result? What you gain in efficiency is lost in quality.
As an example, let’s say you determine that a particular demand-side company is the best fit for replacing chillers and upgrading your HVAC system. You may find that this same company also says they can assist with the procurement of your electricity and natural gas contracts. Because their expertise is on the engineering side, they will not also have the financial and commodity background specific to a more specialized supply-side firm. The better route is to politely decline when these services are offered and instead seek out a separate energy procurement advisory firm that best meets your supply-side needs.
Conclusion: Checks and Balances
Another way to look at this issue is that, by engaging a supply-side advisor that is separate from your demand-side company, you have a system of checks and balances to ensure that your overall energy strategy is optimal and stays on track. Having a separate supply-side firm review any energy efficiency proposals ensures that a second set of eyes has evaluated your future electricity rates and given you further information in evaluating this project with the demand-side firm.
The bottom line is that engaging separate supply-side and demand-side firms as part of your overall energy strategy not only means you can customize the services you receive to match your exact needs. You will also be able to develop a comprehensive energy management strategy that incorporates a best-in-class approach and expertise on both sides.