A new energy paradigm is sweeping the commercial real estate market, and it is time for building owners to notice.
A recent study demonstrated that locking into long-term energy contracts is not always the best option for commercial energy procurement. Long-term contracts were often considerably more expensive than implementing a blended purchasing strategy. The study found that, on average, over a 13-year period, buildings like hotels and apartments with long-term energy contracts paid more than the market rates.
In contrast, the new paradigm in energy procurement focuses on actively evaluating natural gas, electricity and other energy markets daily and purchasing when conditions are suitable, rather than locking into a fixed rate. This layered hedging strategy allows you to take advantage of market conditions and achieve your financial goals.
In addition, this approach provides greater flexibility and will enable you to respond more quickly to changes in the market. As a result, building managers can realize lower overall energy costs while hedging against price fluctuations. By embracing change and staying ahead of the curve, your organization can ensure its continued profitability and success in an ever-changing world.
The Changing Energy Landscape and the Need for a New Paradigm
In a world where energy costs constantly fluctuate and new technologies continually emerge, it is essential to have an effective energy procurement strategy to keep up with changing conditions.
In many cases, organizations may find that their current approach to purchasing energy is no longer working, forcing them to look for a new solution.
One key element of an effective energy procurement strategy is stepping into a new way of doing things. This might mean reevaluating old assumptions or adopting new technologies to improve efficiency or reduce costs. Ideally, this transition should be managed by people who are well-versed in both the existing system and emerging energy industry trends, as they will be best equipped to recognize the benefits of a change and convince others to participate.
Ultimately, successfully migrating to a new approach requires an open mind and willingness to explore new possibilities. If you're flexible and adaptable in your thinking, you'll be better positioned to take advantage of new opportunities.
Adopting a New Paradigm in Energy Procurement
Various companies have embraced this new paradigm in energy procurement, with the help of seasoned experts.
Experienced energy consultants are suggesting layered hedging and actively managed energy procurement strategies as integral to their clients’ success.
Loyola University Chicago, for example, was facing high energy bills and needed help reducing its energy costs. An energy adviser helped the university renegotiate its contracts and save thousands of dollars on energy costs by reducing service fees, auditing electricity charges and creating new load and delivery profiles.
In February 2021, an energy consultancy saved northern Illinois clients more than $3 million on their natural gas bills through risk management strategies, including:
- Negotiating lower prices with suppliers
- Locking in prices with forwarding contracts
- Monitoring the market and making timely adjustments
How Can Businesses Take Advantage of the New Paradigm to Save Money on Energy Bills?
A well-designed hedging strategy can help organizations manage their energy costs and risks better. By layering different types of hedges, businesses can take advantage of opportunities to lock in prices at multiple points throughout the day and over time. This "dollar cost averaging" approach can help lower the overall energy cost and the risk of price spikes.
In addition, by actively managing their energy contracts, businesses can avoid the potential pitfalls of long-term fixed-price agreements, which can often become outdated and expensive. Therefore, hedging strategies can provide a tailored approach to energy management that can help businesses save money and minimize their exposure to market volatility.
Businesses Face Challenges When Switching to a New Paradigm
Businesses face several challenges when switching to a new method of energy procurement. First, they need to learn new systems and become familiar with the ever-changing landscape of energy markets. This can be difficult if there are frequent shifts in pricing and demand.
Additionally, businesses may be reluctant to fully embrace volatility as an opportunity, worrying instead about locking in potential cost savings via long-term contracts. However, it is essential to understand that a 24-month futures contract may not give companies the flexibility they need in a rapidly changing market landscape.
For these reasons, moving toward a new paradigm in energy procurement requires careful consideration and thoughtful planning. Nevertheless, the rewards of being at the forefront of this alternative approach will ultimately prove well worth the effort.
Key Takeaways of the New Energy Paradigm
Different types of facilities require varying amounts of energy to operate. Offices, universities and retail outlets all have different needs, depending on their activities. To be truly effective in managing energy usage, it is necessary to understand these varying requirements and design an energy purchasing strategy that considers each facility type's unique needs.
One approach to achieving this goal is what has been termed "all-in" purchasing: committing to buying a specific amount of energy from a given source every day. This strategy requires closely monitoring market trends and making daily decisions about how much energy to purchase from various sources such as solar, wind or hydroelectric power.
This approach can be complex at times due to fluctuations in price or availability of particular sources; however, it allows for a more nuanced understanding of current energy demands and future projections. Ultimately, this approach will enable facilities managers to better adapt to changing economic conditions through their dynamic decision-making process. After all, managing energy consumption isn't just about having suitable data models or relying on statistics; it's also about staying on top of evolving market forces and continually reevaluating your energy needs based on current events.
When it comes to managing your energy budget for commercial properties, there is no one-size-fits-all approach. While there are many challenges associated with being an innovator, the potential rewards make it well worth the effort. Depending on your business's needs and risk tolerances, a blended energy pricing strategy that incorporates layered hedging techniques can be an effective way to save money while optimizing your energy budget.
About the Author:
Azi Feifel is Chief Operating Officer at Prospect Resources Inc., an energy strategy adviser in Skokie, Illinois. A veteran of the hydronics industry, he has many years of experience in the production of pumps, valves, boiler controls, steam specialties and fire pump systems, with a focus on pump and motor redesign for energy efficiency.