Coronavirus has altered American life in a vast number of ways, and the working world has been no exception. A large number of businesses have been either shutdown or have drastically reduced on-site operations, and as a result the energy consumption of these businesses has changed dramatically.
As businesses work to take stock of what’s happened and what’s to come, here are two considerations to help in your energy planning.
Manage Risks Hidden in Supply Agreement Terms and Conditions
Energy demand is down for many commercial, industrial, and institutional buyers as organizations dial-back facility operations in response to the Coronavirus pandemic. As a result, wholesale energy prices have fallen to historic lows across the country.
Logic might dictate that lower energy consumption and wholesale prices might directly translate into lower energy costs, but significant reductions in energy usage can lead to new and sometimes costly risks for many organizations.
Retail supply agreements for both electricity and natural gas include clauses for bandwidth or swing tolerance. These provisions protect retail suppliers from unexpected, short-term changes in a customer’s energy usage patterns by requiring customers to buy specific quantities of energy. Swing tolerances for natural gas products and bandwidth provisions for electricity products can range from 0% to 100%. Any deviation from the specified tolerance may result in spot market prices and service fees. For example, a customer that has entered into a retail electric agreement for 1,000,000 kWh per month and 25% bandwidth can use as much as 125,000,000 kWh and as little as 750,000 kWh per month; any usage above/below those volumes may incur additional and unexpected costs.
Similarly, material usage deviations protect energy suppliers against long-term changes in customers’ energy consumption patterns. Provisions around material usage deviation can vary considerably across contracts and suppliers. In most cases, suppliers will work with customers if the customers notify them in advance of any known consumption changes.
Whatever your contract terms, it’s important to evaluate your agreements and assess your contract risks. We recommend that customers notify their suppliers of significant operational changes, and, if necessary, work toward a mutually acceptable renegotiation of rates and terms.
Consider the Opportunities
Coronavirus has impacted both the stock market and the energy market, and it’s also coincided with recent price wars in oil. Combining drastic shifts in demand with the potential for oversupply of oil has created significant shifts in energy pricing. In many, if not most, regions around the country, prices have dropped precipitously.
After ensuring all more serious and urgent priorities regarding safety are in order, taking advantage of lower energy prices could provide significant cost relief for many organizations.
Customers may have several options to take advantage of lower prices. One option is to extend a current contract past any near-term end date in order to get your current prices down – this is often called a “blend and extend” contract. If your contract ends in 12 months, for instance, you may be able to add another twelve months onto your existing contract, and your prices adjust accordingly. You could also simply buy a new contract now for the end date of your current one, without adding an extension.
Moreover, companies that buy energy incrementally should consider adjusting purchasing strategies given the significant drop in energy rates. If your organization is on an index rate or has open positions, the historically low-priced environment represents a significant buying opportunity.
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