Why your business needs an energy management strategy

June 20, 2016

Business executives in deregulated energy markets have unprecedented flexibility to create energy management strategies that align with corporate goals, budgets, and fiscal calendars. A core component of risk management is mitigating exposure to volatile energy prices that can cause budget uncertainty and operating cost increases. Effectively managing energy supply contracts yields substantial cost reductions and improved business performance.

Evaluating energy markets and adhering to a buying strategy should be standard procedure. Unplanned events, such as a financial crisis, power plant regulations, or Polar Vortex weather patterns, can result in substantial energy price swings and cause budget uncertainty. It’s prudent for your business to have someone on staff designated as the energy manager, or use an external resource with energy procurement expertise.  Knowledge of your operations and energy consumption patterns is critical for success in managing energy spend.  

Business executives are becoming increasingly familiar with electricity procurement and competitive electricity suppliers. From 2013 to 2016, the Energy Research Council (ERC) conducted a survey series of 1,138 executives from small-to-medium size businesses (SMBs), who are involved with electricity procurement. ERC assessed the respondents’ understanding of deregulated energy markets and energy management strategies. Survey results were that SMB (defined as companies with fewer than 500 employees, and with average monthly electricity bills less than $30,000) executives are becoming increasingly comfortable and interested in implementing energy procurement strategies. Yet only half of the SMB marketplace has established an energy strategy or management objectives.

Strategy drivers

ERC examined which factors prompt executives to evaluate their energy management, and why and when they assess energy supply prices and suppliers.

Contract expiration. Seventy-six percent of SMBs with monthly electricity bills greater than $15,000 said that the expiration of their current electricity supply contract is the biggest driver for when to evaluate prices and suppliers. A common misconception is when energy supply agreements can be executed. Many executives believe they must wait until just before their current contract expires to decide what to do next. They are not aware they can begin the process much earlier, in fact, at any time during their current contract term.

Business executives can choose to enter into energy supply contracts with favorable terms and conditions, including a fixed price, whenever they think prices are favorable, regardless of when their current contract expires. Many energy suppliers provide prices for supply contracts with start dates up to one year or more into the future, enabling SMB decision makers to lock in a fixed price and execute an agreement for their future supply needs.

Price trends. Favorable electricity price trends also greatly determine when executives evaluate prices and suppliers. The question is, do you have adequate time and knowledge to track energy price trends and compare suppliers. For a business that consumes one million kilowatt hours of electricity annually, the cost difference between supplier price quotes could be several thousand dollars annually.

Bill changes. Half of SMB executives evaluate prices and suppliers when their electricity bill substantially changes. Supplier companies that track electricity bills and notify customers of changes have a competitive advantage of attracting and retaining customers.

To what extent do the following events determine when your company evaluates electricity prices and suppliers?

Education and Information

Electricity consumers are seeking expert advice regarding procurement. The majority (56%) of ERC survey participants responded that they want help evaluating, ranking, and selecting energy suppliers. These findings suggest that SMB executives have become responsive to education and information sharing, rather than to aggressive sales interaction.

For many businesses, natural gas supply is an important component of a comprehensive energy management strategy. The majority of ERC survey respondents consume natural gas. In 89% of cases, the same individual is responsible for procuring gas and electricity supply. This person can benefit from working with an independent energy consultant that provides reliable, thorough, and current information about both commodities, and who understands the dynamics and interplay of electricity and natural gas prices and supply.  

Efficiency, benchmarking, data analytics, customer service, cost management, risk management, price trend monitoring, and notifying customers of regulatory changes have become value propositions. An integral component of an energy management strategy is to seek consultation regarding market timing, the procurement process, and suppliers and supply contracts. Business executives that are proactive and access energy information regularly have a competitive advantage when addressing their energy supply needs. They are positioned to make more fully informed decisions that decrease costs and provide improved budget planning and forecasting. For more information, contact consulting firm APPI Energy at 800-520-6685.