The constant evolution of retail energy markets puts the burden of energy procurement and energy risk management on end uses. Such practices are typically not the core business of energy end users, so it is unlikely to find the in-house expertise necessary to effectively manage energy solutions. Areas of energy management include: product structuring, contract negotiation, market intelligence, fundamental and technical analysis trends, and the potential impact of regulatory and/or legal changes. One way for an end user to mitigate energy risk and implement effective energy risk management strategies is through the retention of an advisor who is an unbiased energy expert.
Product Structure
Product structuring is not only a science, but it is also an art, the trading and pricing of energy at both the wholesale and retail levels creates significant energy risk management opportunities and challenges. A properly structured retail electricity contract can create significant value for an end user while a poorly structured one can originate unexpected settlement charges that can substantially increase energy spend. An experienced energy advisor will determine the client’s risk profile and will study the historical energy usage to analyze load profile. Such information will be used to tailor a product structure that is in line with the predetermined risk tolerance. Besides determining which is the best product an advisor should be able to recommend best term, present risk/reward scenarios, and reports savings using objective metrics.
Contract Terms
Energy procurement involves more than simply finding the lowest price per kilowatt hour from multiple suppliers. Selecting the lowest price does not guarantee that an end user will select the best value from the proposed offers. Without following retail markets on a daily basis it can be hard to compare offers on an apples-to-apples basis. Some suppliers take more risk than others, so while some might decide to include certain price components in their pricing, others could decide to pass them through to the client. Therefore, undetected pass-through items could significantly increase the cost of the procured energy down the road. There may also be provisions that can adversely affect the economic value of a contract (e.g. undefined Material Adverse Change language, discretionary Early Termination Provisions). An energy advisor will help end users negotiate master agreements and pricing schedules by identifying provisions which have the potential to impact the final prices.
Market Monitoring
Tracking and managing energy commodity prices has become more complex than ever. For example short and long term natural gas fundamentals are changing. The following drivers are and will continue to affect natural gas prices:
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Influx of new investments from long-term commodity funds in natural gas has provided price support
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Some funds view natural gas as a safe haven
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Increase of demand from all sectors, except from residential
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Future production output
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Future production costs
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Economic Growth
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Natural Gas exports (i.e. LNG)
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Natural gas will eventually shift from a domestic market to a global market
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Natural Gas Vehicles
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AT&T, UPS, and Ryder have already started shifting their fleets to natural gas
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The transportation sector could boost demand considerably after 2020
Sorting through all this information can be a daunting task, and only one commodity was touched. An experienced energy advisor must have the knowledge to analyze these trends and the data to provide end users relevant and reliable information to make the best possible decision. The quality of this advice will have a direct impact on the overall energy costs/savings.
Regulatory/Legal Changes
Retail energy markets experience significant amounts of legal and regulatory changes, meaning that the energy landscape is constantly evolving. Some easy examples of significant regulatory changes include the:
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introduction of a nodal market in Texas in late 2010;
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implementation of a forward looking, localized capacity market in the Pennsylvania, New Jersey, Maryland (PJM) Interconnection; and
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growth in renewable portfolio standards (RPS), which governs the amount of renewable energy which retail electric suppliers must purchase, in multiple states.
Each of these potential areas of regulatory or legislative policy changes can impact the overall costs of energy, as well as the energy risk borne by an end user. A skilled energy consultant will diligently monitor potential legal and regulatory changes and advise their clients on the likelihood that any potential change will become effective as well as the potential impact such a change will have on their overall energy costs.
Conclusion
Deregulated retail energy markets have shifted the burden of energy risk management on to consumers. Most end-users do not have the necessary internal expertise to navigate the challenges created in the deregulated energy environment. Therefore, consideration should be given to engaging an unbiased third party energy consultant to help effectively manage energy procurement risk. A quality energy consultant will have the necessary background and expertise to evaluate each end-users situation and provide nuanced advice as to how best to capture value, mitigate risk and protect the enterprise into the future.
