When procuring energy for your commercial business, it can be difficult to weigh the risks associated with buying strategies.
- How do you know your procurement strategy is the right one?
- How much risk can you tolerate?
- How much time do you have to track the energy market, and do you have resources available to assist you?
In an energy market that is constantly shifting, it is important to make smart decisions about your procurement, taking into consideration the needs of your company and facilities. Risk doesn’t necessarily imply a negative outcome, but it does mean that the future is always subject to change, and these changes will have an impact on your building or facility.
What Energy Risk Management Means for Businesses Today
The energy market changes depending on a number of factors, including global events, weather, imports and exports, and governmental policies. As with any market, energy rates increase and decrease inversely with supply and demand. Many businesses that secured electricity contracts during the lockdowns caused by COVID-19 saw extremely low rates due to an increase in supply and a decrease in demand as businesses shut down and patrons stayed in their own homes. Since 2021, we have seen demand increase significantly, which has caused price hikes. From a more short-term perspective, there is a tendency for prices to increase in the summer and winter months due to extreme weather conditions, and rates settle in the fall and spring. What relevance does this have to your buying habits? This is where energy risk management becomes significant. There are multiple strategies to procure your energy that can mitigate whatever level of risk your business can manage.
Top 3 Tips to Mitigate Risk
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Don’t Assume that One Size Fits All
For businesses with a vast portfolio, it can be best to diversify your energy contracts, suppliers, terms, rates, or purchasing strategies to best suit the needs of your individual assets. Location, building size, operating hours, etc., should all be factors that are considered when looking at procurement options. For businesses without a robust portfolio of buildings, it is important to remember that the procurement option you choose may differ from that of other building owners, even those right next door.
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Make Informed Decisions
It is important to compare all the options that are available to you when procuring your next contract. Terms, rates, suppliers, and contract language vary widely and will directly impact the cost of your utility bills. Consulting with an energy expert is a great way to reduce the time it takes to make these informed decisions.
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Determine Your Risk Level
Determining your risk level is a critical factor in ensuring that you make the best choice for your business for the life of your energy contract. Is a fully fixed solution the best option to maintain budget certainty? Is a fully index strategy best to take advantage of a potentially lower future market? Or is a hybrid strategy most efficient? These options are all dependent on how the future energy market is going to react and whether it will increase rates or decrease. An energy expert with access to price predictors and market movements can be very beneficial when determining the amount of risk that your business can handle.
Examples of Procurement Strategies
As discussed, there are 3 major procurement strategies that businesses use when contracting – fixed, index, and hybrid. This is a high-level overview; however, these strategies need tailored to meet the needs of your facility at the point in which you’re locking in your next energy contract.
Energy Procurement Fixed Rate Solution
The Fixed-Price Solution gives businesses the safety and security of obtaining an all-inclusive per-kWh price for a set contract term. This approach can function as a hedge against volatile energy markets. It is a simple solution for companies seeking cost stability and budget certainty, but it also locks in a price that won’t change, even if the market dips down later during the contract cycle.
Energy Procurement Index Rate Solution
At the other end of the spectrum, an Index Price Solution offers flexibility of pricing that reflects wholesale market conditions. This approach includes the ability to adjust when the market drops. However, if the market suddenly rises, businesses that lack the time or expertise to keep up with it could potentially face soaring costs.
Energy Procurement Hybrid Rate Solution
A blend of both worlds, a Hybrid Hedging Solution is a customized mix of fixed and index-based contracts. This solution is designed to mitigate the risk of buying a fully fixed or an index-based energy product. This strategy can provide you with a diversified way of managing your long-term energy spend within your risk tolerance.
So, What’s the Best Choice?
The best choice when procuring energy is to consult with an energy professional before your next contract. Each building in each company in each market is entirely different, and the right balance of products to suit your needs is important to ensure that you are doing what is best for your facility performance. Be sure to have trusted sources available and choose the right energy broker to help unlock an energy procurement strategy that makes the most sense for you, your goals, and your appetite for risk.
