5 Tips in 5 Minutes: What You Need to Know About Buying Energy in 2021January 27, 2021
By: Luke McAuliffe, President, Transparent Energy
As businesses and institutions head into 2021, turning the page on a tumultuous, pandemic-ridden 2020, it is time to evaluate and understand the energy market dynamics they will be facing.
Energy is a top-5 operating expense for building owners and commercial and industrial (C&I) corporations around the country, and, as such, is something to be managed carefully to obtain the greatest value. For those commercial, industrial and institutional entities looking to get the most from their energy dollars in 2021 and beyond, here are five recommendations you can act on immediately – and take to the bank!
1. Understand the Market (and Your Opportunity within It)
This is an “evergreen” recommendation, i.e., one that applies any year and any time, but we’re mentioning it first, because we’re on the precipice of potentially dramatic changes in energy prices. At this moment, i.e. mid-January 2021, natural gas prices, which are the proxy for electricity prices, are pretty good. For companies that can buy power and natural gas right now, odds are in your favor that you will get a good price. But this favorable pricing may turn on a dime quickly.
Let’s unpack this a bit.
Over the last year we have repeatedly pointed out 2020’s unique, once-in-a-generation low energy prices, created by years of high production, unseasonably warm winter weather, and, with COVID, enormous demand destruction. Those low prices were a boon for business buyers of energy, helping them save money at a time when they particularly needed it.
But those lows have already come to an end, and industry watchers, including Morgan Stanley, are predicting precipitous rises this year.
Now is the time to work with an energy procurement specialist, someone who will monitor the market for you and ready you to transact within it at the most opportune times, ones that will meet your cost-containment and risk management goals. You can begin by signing up here for a monthly market update or by filling out the form at the bottom of this article, provided gratis by Transparent Energy.
2. Unbundle Energy Procurement from Other Energy Services
Bundling home and auto insurance policies may work great like it says in t.v. commercials, but when it comes to energy, bundles are an unmitigated disaster. That’s because the skills required to audit and pay bills at scale are completely different from those required to purchase energy at the best price. And those differences cost large energy buyers millions.
Yes, a typical 6-figure annual fee for energy services, including procurement, bill auditing and payment, provides convenience. But it does not provide energy at the best price. Big-name energy services providers don’t want you to know that they aren’t experts at energy-procurement – and that their processes for procuring energy are embarrassingly scant.
The problem for the customer here is that when it comes to energy management cost, the 80/20 rule applies – with 80% of the total cost of energy lying in the cost of the commodity itself. If your energy services provider isn’t bringing your load to market with the most robust procurement process – one that increases the pool of suppliers bidding for your business and involves an online auction to stoke competitive bidding – you are leaving serious cash on the table.
It is not uncommon for an energy services firm to solicit two or three suppliers, and a bid or two from each, to purchase energy on your behalf. In 2021, that is not even close to being good enough. In one of our most recent procurement events, the CFO of a Midwest manufacturer marveled at how we got more than 100 bids for their natural gas contract in under an hour – in an illiquid market!
3. Dig into Demand
Understanding every line-item on your monthly electric bill may be a tall order, but in 2021 you can benefit greatly by focusing on just one – your “demand” line. In most regions, “demand” costs are charged by the grid operator to ensure enough generation is available at peak times, and rates are set by competitive auctions. Your demand charges depend on your “capacity tag,” which is calculated based on how much power you use when the grid is operating at peak demand. On many electricity supply contracts, demand charges are bundled into the fixed price of energy. For large industrials and other big consumers of energy, capacity costs can account for as much as 50% of your energy commodity cost.
That’s a lot of money.
But guess what? You may not have used nearly as much peak energy in 2020 as you did in the past, and that matters if you are in an energy contract where your capacity tag was calculated prior to 2020. Put simply, you have two potential opportunities for major energy savings in 2021 around demand charges. First, you may be able to re-negotiate – and reduce – this portion of your electricity bill with your supplier. Second, if you procure energy in 2021, you can leverage your reduced peak usage in 2020 to secure a lower-than-normal demand tag for your future contract.
4. Riding the Renewables Bandwagon
So much is happening on the renewables front, from technological innovation that is driving down solar and wind-power costs to federal, state, and local initiatives and incentives to “go green.” We have a lot to say in these matters, and can help you decide how best to green your energy portfolio, but for now, let’s focus on one area: buying renewable energy credits (RECs).
RECs are certificates that each represent the clean attributes of 1 megawatt-hour generated by a renewable energy generator. They are separate from the electrons themselves. Commercial, industrial, and institutional buyers have been active in purchasing RECs for years, and for years Transparent Energy has helped these buyers build REC purchases into their traditional energy procurements. In 2020, for example, we helped Westchester Power procure more than 1 billion kWh of green power in the form of New York State RECs. This was the first time in history a Community Choice Aggregation procured energy through a live auction event, and the results were an award-winning success! The auction created millions of dollars in savings over paper-based procurement techniques, and did so in a way that increased the competitive supply pool – all while providing the buyer and its stakeholders full transparency.
While many very large energy buyers are looking to jump start large on-site or off-site solar projects by entering directly into power purchase agreements to buy the output from newly constructed wind- or solar-farms, some of these projects can take years to get up and running. At Transparent Energy, we commend you for your clean-energy commitment, but we’d also like to suggest you purchase RECs in your next energy procurement as a bridge to deploying your large-scale solar, wind-power, or other green initiative. Transparent can assist you to include renewable energy in your procurement strategies through RECs and other renewable contract options using our competitive auction process.
5. Get Ready Now!
Procuring energy rewards the prepared. Get ready now, so you can take advantage of soft spots in the market. This will be even more important in 2021 and beyond as the potential for rising energy prices – spikes in energy cost – outweighs a return to 2020’s record lows.
Transparent Energy can work with you now to assess your energy use, understand your cost parameters and risk-management needs, and monitor the market daily for an opportunity to pounce on savings. Don’t be an “order taker,” someone who goes to market at the last minute and takes whatever it gets because your energy contract is about to run out. Instead, look a year out and engage an expert who can bring the best of the market to you each and every time.
To receive current indicative pricing in your region and a preview of future pricing, click here.
For help evaluating your current energy contract and opportunity for long-term savings, please contact Jonathan Le, Transparent Energy, at firstname.lastname@example.org.
About the Author
Luke McAuliffe is President of Transparent Energy, a leader in online energy procurement. An expert in retail electricity, natural gas, renewables, and demand response sales, and in applying technology and process to extract the best prices from the market, he is an industry veteran with a long record of service excellence. Prior to Transparent Energy, Luke served in senior roles at World Energy Solutions and CPower. He can be contacted at email@example.com.
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