Hi, welcome to another podcast from the Energy Insider series. Today we’re going to be talking about energy procurement. I’m joined today by Ashley Gill, who’s in our solutions team, and John Warrick, who’s our VP of Operations. They’ve kindly agreed to join us, and share the discussion, and hopefully get some of those important questions that you want to be answered.

Let’s go to our first and most basic question, what is energy procurement, and who could potentially benefit from our service?

Energy procurement is available to actually some residential customers, small-medium enterprises, and commercial and industrial companies who are in locations where they have direct access to competitive energy suppliers. If you look across the states, of the 50 states, there are 14 very strong states for electricity procurement and some more for natural gas. It’s really is a mixed bag across the various states, some allowing different types of consumers to access more competitive prices for their energy. I think that what’s really important that these consumers understand that they do have a choice and they are able to check and make sure they do have the lowest cost for their energy prices. Also, that they’ve got quite a few tools to choose from, and not many people realize that it’s not just about going to market and getting a price, it’s also about the way that you go to the market and the way that you buy energy because things are a lot more sophisticated than just doing a fixed price contract nowadays.

Why don’t you get into describing some of the different strategies we use when we’re looking at energy procurement contracts?

The first thing we do is talk with our clients and figure out what their needs are. Some are mostly focused on budget certainty and having stable prices for a period of time. Other clients might have a limit on how far they can make purchases or do contracts. So the very basic way we can do energy procurement is with a fixed price contract. That would give you budget certainty, and you would have it have a stable price.

Now, if we move to the complete opposite end of that, we have an index price. That type of contract is purely at the market, so what you do is a contract with the supplier to have some kind of adder over the market price where the supplier would add all of their fees, such as margin, line losses, and ancillary costs, and sometimes they would put capacity charges in that. You would pay the price that the market sets, and then you just have the adder added on, and you’d be completely variable month to month.

The next type of strategy we can do is block type purchase. This gets a little bit more complicated where we can buy energy as a certain percentage of your load or even a certain quantity, and we can do this at any month. We can even get more complex, where we do it at certain hours of the day, like on-peak hours or off-peak hours. So that type of strategy is helpful for certain customers based on their load profiles.

The next thing we can do is, we could do more dynamic risk management. And I think we’ll get into that a little bit later.

So, John, while we know that there are options available, all the way down to the residential customer, it’s fair to say that we really only focus on those large to medium-sized commercial or industrial organizations?

Yeah, in general. I mean, we’d like to work with as many clients as possible, but you have to have a certain threshold in usage where it makes sense to invest the time in it.

I think we will get into it a little bit later but, with some of these larger organizations, there is a lot more time spent on understanding those strategies, what their goals are, and making sure they have that strategic energy plan put in place. So that they are understanding the risks that they’re taking, that they’re quantifiable, and that you have a procurement strategy that is going to meet those goals. That’s what we try and do is to understand those first and then wrap the various tools that John’s mentioned there to deliver those particular goals in the strategy.

How do these strategies differ between regulated and deregulated markets?

Energy procurement can only really be done in deregulated markets. So those will be those 14 or so states that Dan mentioned. Those states will be close to what’s called an ISO and independent system operator, like PJM, or you may have heard of ERCOT in Texas. So, deregulated markets are the ones that we can do procurement. For regulated markets, there are other strategies. That would be utility rate optimization. So, looking through regulated utilities, rate tariff plans. And that’s another long discussion.

I think we will actually be doing a separate podcast just on regulated utilities, as well as the rate and tariff analysis of those available structures. So just keeping focused on the procurement side, one thing that is important to note is that, yes, there are competitive suppliers that you can go to, for pricing at any point in time if you’re in a market, which has that availability. I think one of the things to never forget, is that you also have a local utility that also has a set of rate and tariff structures. It’s really important when you go to market, that you get the bids back from all those competitive suppliers, but you should always compare those to the local utility rates. That is because sometimes you can actually find those local utility rates come out at a lower cost to you. If you don’t do that evaluation, you’re leaving money on the table. That’s a really important consideration. Because I know that some advisors are unable to do that, because of the way that they structure their fees like back-end fees and broker arrangements. Regulated utilities do not offer that compensation mechanism. And so those brokers have no interest or no motive to go and do that final check for you. But it’s important because like I say, money can be left on the table there.

So basically, leave no rock unturned.

Pretty much yeah. Many other advisors will just look at your previous contract and just purely look at suppliers. It’s really important to look at all your options [local] utilities sometimes can be more competitive.

So, tell me when you’re doing procurement for clients, when are you looking at is this? Just when their contracts end? Is that when you’re looking to place them in new contracts?

No, it’s important to actively manage these contracts. So, if you’re just starting and stopping contracts when they end it doesn’t make a lot of sense, because you’re putting all your eggs in one basket. Looking at the market at a very narrow period of time. I mean, even if you’re in a fixed price contract. Say you do a 12-month contract, what we’re doing is we’re watching the market for the next year and the year after that, and waiting for opportunities should the market fall. I mean, given today, we have a lot of demand destruction, because of COVID. So, there are some opportunities in the markets in certain parts of the country.

So, it’s, so it’s fair to say that people need to understand that electricity, natural gas, they’re commodities, and they will move up and down in price every day. And so, Timing is everything to get the very best rates, correct?

Absolutely, if you’re just doing a procurement exercise, where you’re comparing a pool of suppliers, and beating them up and just going after their margin, that’s not necessarily a good strategy. You’re chasing after maybe 2% of the price. Whereas if you do a market-based approach, there are much, much larger variances in price at various times of the year.

And it’s fair to say that, actually, energy commodities are, across the world, the most volatile set of commodities there are. I think what’s interesting is, if you look at what affects commodity prices, it can be conflict in the Middle East, it can be supply disruptions in oil across the globe. That will start to affect the price that we pay for electricity. The reason for that is that if we look at the US marketplace, the marginal cost of generation, the price setter is actually natural gas now, and natural gas takes its pricing influence from oil and the changes in oil price. So, as we see oil prices increase, then we’ll typically see natural gas prices increase. Now, it’s fair to say in the US that there’s been, with the shale discoveries, a massive oversupply of natural gas in the markets for some years. Whereas we saw back in 2008, we saw prices around $8 a decatherm they have dropped as low as kind of $1.60 a decatherm. Today, John, where are they today? Around kind of just under $3? Or around that mark?

Yeah, it’s, it’s a lot lower than when I first started in the industry. I remember gas going up to $13, $14, $15 a therm, and it was crazy. Now we’re one-fifth of that.

That’s interesting because, if you look across what’s affecting these commodity prices, you have to understand as an energy consumer it’s fine to do that to look at the commodity markets. You need to recognize what you can actually control. Now, you can’t control whether there’s a conflict in the Middle East, or whether there’s disruption at one of the main ports or the supply-demand fundamentals. You’ve got no influence on those. What you can influence is the way that you are managing the risk of your purchases into your facility. That’s very much to do with the way that you structure your energy supply contracts, and how you manage that process. I know John, you’ve alluded to some methods, whether it be fixed prices for price certainty or floating price to have that full market participation. Those, as you mentioned, both extreme methods. Then we have other methods like the block index. Even methods for more controlled fixing, and then right down to this dynamic risk management where companies can really fine-tune their procurement. So, the analogy would be rather than going and operating on a patient with a hammer and chisel, you’re actually doing it with a scalpel, where you can really fine-tune the way that you manage that risk with both fixing and unfixing available within a supply contract so that you can manage your position you can quantify $1 value of risk you want to take and keep fine-tuned within that.

Alright, so getting back to the more hands-on side, what does our RFP process with these vendors typically look like? What are we looking for in these contracts? Are we just looking at pricing that they’re offering us, are there other factors we look at?

So, if we’re talking about process, the first thing we want to do is educate you on what the specifics are for the market that we’re looking at. So, each market is different. I’ll give you an example. In Texas, you have to choose a supplier there, there is no default utility. That’s completely different than some other states. You know, in the northeast, like New Jersey, you have high renewable portfolio standards. A high amount of generation needs to be from renewables.  There are high-capacity charges. So, in New Jersey, most of your electricity price is already spoken for. You’re going to pay what the independent system operator and, in this case, PJM charges for capacity. You may only have 25 to 50% of your price being variable and moving with the market. We need to educate you first on what’s going on in the market, we’ll give you a list of the suppliers that are active in that market. Not all suppliers are national, many are regional. We’ll look at the credit will give you details about each of the suppliers, and we’ll look at where you may have contracts in place already with them. We’ll narrow down a list of suppliers for you, and then we’ll go and set up with those suppliers what they need to build a price for you. What the suppliers do is they contact the utilities directly and they pay for your data, your historical usage, and they build models based on you’re on and off-peak consumption and your consumption throughout time. Once we have that setup, then we can go and discuss with suppliers the products that they have available. Not all suppliers will offer the same products. We’ll just cater a solution working with you on what best fits your needs. When we get the information, the suppliers, we can now request pricing. We’ll get pricing in one day, make sure it’s apples to apple comparison, and then talk to you about potentially executing the contract or finding out if we need to negotiate the contract. Then get your legal stamp on it before we execute, choosing the right day. Typically, the way a contract execution works as we get pricing in the morning that’s live. And you’ll have up until the end of the day, typically about 4 pm Eastern Time to find a signature and get the agreement signed.

It’s fair to say that whenever we go to market, it’s never just about the price. I think there are few people that realize that in our process, there is both the quantitative and qualitative aspect of procurement processing. So, when we get those bids in, yes, we’re looking at the pricing, but we’re also looking at the supply terms as well. Those supply terms which may have additional risks within them that we cannot negotiate out, well, clearly, there is a commercial consideration to those which will add to the weighting of the final analysis. So that’s obviously worth putting as well.

So, in essence, it’s allowing customers to make the choice and that balance of risk and reward. Our job is to make sure that they understand what the risks are, what those rewards are, so they can find that perfect balance for their business.

Just as a wrap-up, what do you guys think are the top benefits that this service gives our clients?

I think, for any client, it’s assurance. It’s letting them know that their energy contracts and procurement have been done professionally. That we are helping them comply with their legal obligations through their commercial supply contracts. That they really have adopted the very best tools and approach to achieve those specific goals that they have in their business.

Yeah, what our customers like to do is make sure that they’re as competitive as possible with their operational expenses. So if your competitors are doing this, and you’re not, then you’re at a disadvantage.

Thank you very much, you guys for digging into that a little bit more. So just to recap, we are going to have a separate podcast, it’s going to talk about getting value from regulated utilities, and what the opportunities are to do that. And we’re also going to have a separate podcast that’s going to be very specifically focused on dynamic risk management. This is the process where, as I mentioned previously, you have a supply contract, where you can both fix and unfixed energy to really find that perfect balance of risk for your organization. So, we’ll have a couple of podcasts coming up on those specific topics in the near future. But in the meantime, we thank you very much for joining us. And thank you, guys.