There is no doubt that the electricity market is extremely complex and confusing. As a manufacturer, electricity is typically a top three expense and is likely a main feedstock to your product. So the dilemma unfolds, in order to effectively manage a major cost of your business you have to begin to understand one of the most complex markets in the world. Ughhh…Where to start….
Understand What Matters Most
As you know, a majority (about 70%) of your electricity costs can be competitively negotiated with the remaining costs dictated by your utility. Of the costs that you can competitively bid, 80% is made of the energy market itself. The rest are competitive costs that are either difficult or impossible to control. The number one cost priority is the electricity market itself. This market is fairly volatile which can provide great opportunities to capture low prices. Now you need to sort out what electricity product to buy, when to buy it and who to buy it from.
What to Buy and When to Buy It
At this juncture you have two options, fix your price based on the forward markets or float on an hourly index rate. Most manufacturers tend to lean toward budget certainty especially given the low price environment of the current market. If you don’t want to lock in all of your volume at one time you can choose to lock in a portion and either float on the remaining volume or fix it at a later point in time. The best answer will depend upon the balance between your risk tolerance and market conditions. Both of these will change over time so what you did “last time” may not be the right decision today. (Please see my previous blog posting for more detail about fixing or floating given current market conditions.)
Know the Players
Ohio is teaming with all sorts of “energy experts” that are willing to help anyone who is willing to give them an electric bill. Unfortunately this makes it very difficult to tell the real experts from those willing to also sell you swamp land in Florida. These solicitors are typically either: 1) sales agents (includes telemarketers) hired by a supplier; 2) sales employees of a supplier; or 3) independent brokers representing multiple suppliers. Depending upon the culture of the organization they can be fairly aggressive in their tactics making an already frustrating situation more unpleasant.
In working with one of these experts, demand more from them than just a number. If they are truly an expert they will take the necessary time to understand your business, risk tolerance and budgetary goals. They will explain the market conditions, regulatory changes that may impact you and offer other cost controlling solutions such as demand response.
Understand ALL Your Options
Even though electricity is a commodity the cost difference between suppliers can be as much as 30%. The way in which these suppliers operate their businesses can greatly impact their offers. For example, a large corporate energy provider can have higher margin requirements than a small boutique energy company. Also, if a supplier knows that they cannot compete on a fixed rate they will position an index product as a great option even though it may not fit your needs at all.
Absolutely and positively get a good survey of all your options. There is an average of fifteen suppliers providing quotes in any given Ohio utility. You should see offers from at least half of these suppliers but full transparency of ALL offers is ideal.
Find Your Advisor
Finally, it can be a daunting task to navigate all the options in this dynamic environment so most manufacturers team up with an energy advisor. This advisor typically takes the form of a broker and/or consultant. In looking for the perfect fit for your company please consider these questions:
- Does your advisor have tenure in the electricity business (i.e, they have seen the market ups and downs and can advise you under both conditions)?
- Can they provide you with multiple products, not just a fixed rate?
- Can they provide you access to a large network of suppliers?
- Do they inherently understand the market or are they just pitching a price?
- Do they hold your interests above their sales goals?
Getting your arms around this beast can take a village: just make sure you are not teamed up with the village idiot.