Richard Costello, founder and president of energy consulting firm Acela Energy Group, talks with BUILDINGS about cost-effective procurement practices.
How should building owners
develop a strategy for energy
purchases?
My recommendations for procurement are based on two assumptions. One, most businesses in the U.S. are in deregulated markets and thus they have the option to purchase energy from a third party. Two, no one can predict future energy prices.
Having said that, the first thing to do – although most building owners do not do it – is to determine your risk tolerance and your risk profile. Some organizations like to have their energy costs known for the next two or three years. They want to fix their cost, protect themselves against increases, and have the number for budgeting purposes. Other organizations always pursue the lowest possible price and are willing to give up budget certainty and protection against future increases.
The energy purchaser in an organization needs to make that decision, either by himself or with the input of others who are familiar with the organization's preferences for fixed or floating prices in commodity purchases generally.
How does the risk profile translate into action?
Once the tolerance is known and written down, the energy manager can follow through, whether that is with fixed or floating purchases. Or the manager may follow through by hedging – making a percentage of the purchase at a fixed price and the remainder at a floating price.
What can owners do to manage their gas transportation costs?
This is quite different from the energy commodity side. On the transportation side they can look at what they are paying via their LDC (local distribution company) and go out for competitive bids. With a good credit rating and a beneficial load profile, building owners may be able to lock in a transportation contract at a significantly lower price than what they can get from their LDC.
When comparing energy contracts, what should owners look for?
Regulations, renewables, and other factors are continually changing the field. There are so many attributes now that go with the cost of a kilowatt-hour. As a result, power marketers find it harder to price their energy because they cannot predict costs like congestion and capacity charges over the life of a contract. Many power marketers are now trying to pass through those charges to the consumer.
A building owner can get bids from four different suppliers and go with the lowest one, only to find out later that their costs are actually far higher due to pass-through charges. The ultimate cost does not depend so much on the energy price as on the contract term and conditions.
Another point about contracts that seems obvious but is still overlooked: be sure to go out for bids before your current contract expires. Sometimes your supplier may not work very hard to alert you that your contract has expired and that you are now paying month to month.
What are good practices for dealing with gas and power brokers?
There are good brokers and there are bad brokers. You may not want a broker whose fee is based on your kWh or MMBTU consumption. Instead you may want an hourly fee based on the amount of time that the broker assists you. When the broker's fee is included in the energy price, it gets hidden as an operational expense – and it can add up to a large sum over the contract's lifetime. For some owners, this may be the only way to pay a broker, so make sure you are getting the value for your costs.
Be sure you know how much a broker is paid. Brokers should show you a copy of their contract with their fees from each marketer that they work with. Beware of brokers who work exclusively with a single power marketer because they are not truly seeking competitive bids.
