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Energy market forces: Friend or foe?

Discover how organizations can leverage new pricing models and rate structures

Overview

Is your energy spend a growth lever for your organization? Today, organizations can leverage new pricing models and rate structures to create a portfolio approach to their energy spend.

Think about how you purchase and manage energy. Now think again. As dynamic energy pricing becomes more prevalent, multi-site organizations have new opportunities to take control of and optimize their energy costs—a portfolio approach requires that organizations align their risk profiles with their strategic business goals.

Ask yourself how you can diversify your energy position and what the resulting benefits will be. Agree upon a risk management strategy and then consider the available options:

  • The block-and-index strategy provides the ability to partially fix a price at different times and also offers opportunities to secure a lower price as you approach the actual contract period for energy requirements.
  • The load-following hedge strategy simplifies the purchase for consumers, therefore customers are able to hedge exactly X percent of energy for every hour, regardless of what is actually used.

  • The heat rate option offers similar benefits to the block-and-index strategy, with the additional benefit of competitively securing and limiting supplier margin for all future hedges.

Becoming educated about the energy market in general is the first step.

Key Findings
Our research shows that to make the most of energy spend, businesses need to understand all options, explore new ways of thinking and doing, and take advantage of new pricing products. What has not been as clear in the past is how an organization can take control of its energy spend to create an integrated energy strategy that matches its risk profile with techniques that take maximum advantage of market forces.

Recommendations

Engage energy management experts to actively monitor markets for opportunities to layer in fixed rates at advantageous prices with more sophisticated hedging strategies to both manage risk and take advantage of opportunities that price volatility provides. 

  • Identify how your organization wants to manage energy spend.

  • Research the energy market conditions in which your plants and locations operate.

  • Understand where your operations can and cannot be flexible.

  • Understand your organization’s risk profile.

  • Understand and predict energy consumption based on predicted production volumes and seasonal variations.

  • Identify your energy consuming assets to know where you may be able to implement energy reduction programs and where your operations are most efficient.

Organizations should make sure these experts keep them “in the know” so the organization can take control and make better decisions about its energy spend.