Fixed all-in contracts for energy have proven costly to large consumers

The energy buying strategy most manufacturers and large energy consumers use to save money, ironically, can be more expensive.

“Energy can be purchased in a variety of ways,” says Karl Shaw, COO at TPI Efficiency Consulting. “Most often it’s purchased at a fixed price for every kilowatt hour of energy. The approach might work for a pizza shop, but not for a manufacturer whose energy spend is a sizable portion of its annual expense budget.”

According to Shaw, manufacturers with a fixed pricing strategy are committing to a price for energy and capacity costs for the next two to three years.

“What these buyers fail to do is use market signals to purchase energy as they would other commodities to get better prices.”

Deregulation of the electricity industry a few years ago expanded the available energy suppliers from one to nearly 100. Now it’s possible to use advanced energy purchasing strategies as a cost-saving mechanism. Most manufacturers aren’t aware these choices exist.

Smart Business spoke with Shaw to learn more about advanced energy purchasing strategies and the impact they can have for large energy users.

How effective is fixed pricing as part of a cost-saving strategy?

Between 2010 and 2015, a fixed price contract was usually the most expensive way to purchase electricity. Locking in a fixed price left companies no way to capitalize on future declining prices. Manufacturers ultimately spent between 10 and 15 percent more on electricity bills.

What are advanced buying strategies and how can they help customers using 1 million kilowatt hours or greater annually?

Among the advanced buying strategies, one of the simplest but often misunderstood, is called ‘block and index.’ The strategy involves buying a portion or block of energy based on the percentage of the user’s monthly consumption. The remainder of energy is purchased at spot market pricing. Customers have flexibility with this approach, allowing them to capitalize on market dips and lower costs over the contract term. They also take advantage of cost savings from demand reductions initiatives such as LED lighting upgrades, HVAC or efficiency projects.

How are advanced buying strategies implemented? Should they be managed internally, or is this service better outsourced?

Implementation is simple. There are minimal contracts to execute with the supplier. Choosing when to buy based on seasonality or market trends is more difficult. It requires a full-time staffer monitoring markets and gathering real-time information.

The approach doesn’t make sense for most companies to execute on their own. This is where working with an energy consultant that monitors the market for thousands of customers is invaluable. Not only do consultants help make purchasing decisions, they also keep users informed of regulatory changes and other issues affecting long-term energy prices.

What misconceptions make large energy users hesitant to employ anything but a fixed-price strategy?

Energy users mistakenly believe there’s more risk with advanced buying strategies. They worry the market will trend up, prices will spike and they’ll lose the opportunity to lock in a low price. These strategies, when informed by an experienced adviser, take all market influences and expectations into account. Purchases are managed to protect the energy buyer during volatile times and take advantage of lower prices.

Exploring advanced buying strategies creates an opportunity to save money on electricity costs. Companies already using an alternative supplier to save money are positioned to easily take the next step and reduce costs by pursuing an advanced buying strategy. It’s a matter of exploring all options instead of subscribing to the simplest one.

Insights Energy Solutions is brought to you by TPI Efficiency Consulting