In many organizations, buying energy has become a routine process. When it comes time to renew their agreements with their energy suppliers, procurement managers just sign the contract and get back to their top priorities—improving operational efficiency and looking for ways to cut costs.
But what many don’t realize is that energy procurement itself can be an opportunity to mitigate costs. Using the right tools, you can find ways to reduce risk and avoid costs over the course of the long-term agreements with your providers.
Here are some important aspects of the energy procurement process you should know about, and how you can use them to your advantage.
Does Your Procurement Approach Fit Your Organization?
Your organization can procure energy in a number of different ways, from playing the market on a daily or even hourly basis to signing up for long-term supply at a fixed rate. A variety of factors, including risk tolerances and budget requirements, can dictate which approach could work best for your organization.
Is your organization comfortable paying real-time market prices for energy, or do you need to report a steady cost figure when budgeting? Are you able to shift operations to avoid the grid’s peak usage times? Do you have back-up generators readily available to accommodate production?
Answering these questions is important to finding the approach to energy procurement that best fits your organization.
Using Operational Flexibility to Your Advantage
Regardless of your risk profile, whether you can tolerate the day-to-day fluctuations of the spot market or require a fixed price for your budget, your energy buyers should look to leverage any and all operational flexibility to get the best price.
Being able to alter your demand profile can improve the price you pay for energy in a few different ways. For instance, facilities with a flatter and more predictable load shape can often get a better supply price. Additionally, companies that can shift operations to off-peak hours (weeknights, weekends) can take advantage of off-peak energy rates that tend to be lower than on-peak rates.
One of the best ways to use operational flexibility to your advantage when procuring energy is to manage your peak system demand. In many deregulated regions, a facility’s peak system demand is used to calculate capacity charges, which account for a significant portion of your energy bill. To set your capacity charge, suppliers use your kW demand on the days when total grid demand is highest and multiply it by the capacity rate for your location. As it currently stands, capacity likely accounts for 15% to 20% of your overall supply cost.
Due to regional market factors, capacity costs are expected to rise significantly in the next few years, and could even double or triple in some markets.
However, there are ways to offset potential price jumps.
How to Keep Capacity Costs Low
While you may not be able to control the market factors that are driving up regional capacity rates, with the right tools you can be proactive and keep your peak demand on the grid from getting too high. It’s just a matter of knowing when to act.
The grid operator will often measure peak demand on hot summer days, when air conditioning usage combines with regular operational energy consumption to put pressure on the grid. What makes this process complex is the method by which the grid operator measures peak demand. In some regions, the ISO or RTO will look at the one hour when total demand was highest for the entire year, while others find the average of the five days in which you used the most energy to calculate capacity costs.
Either way, trying to prepare in advance of your peak demand measurement can be costly and time-consuming when your only recourse is to guess when it will occur. Energy intelligence software (EIS) can automatically alert your head of facilities when peak demand measurements are approaching, enabling your organization to temporarily reduce demand or revert to a backup generator, and in turn reducing the peak demand figure used to calculate your capacity charges.
These are just some of the factors that you should keep in mind when thinking about energy procurement. Learn more about what drives your energy costs and how you can capitalize on these opportunities with our eBook.
