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A Risky Energy Market
The only sure thing in the energy market is its consistent price volatility, roiled oftentimes by sudden and extreme price movements. This fact alone renders energy procurement to be a very risky endeavor with a potential for great financial gains or losses.
There are useful tools to manage and take advantage of price volatility. If all you get from your broker is fixed prices for 12, 24, or 36 months, you are being shortchanged. You do not need a middleman for this – you can get prices directly from suppliers.
Electricity Forward Curves
Natural Gas NYMEX Futures
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Energy Buyers’ Challenges
To avoid disastrous financial results, energy users must consider the following:
| Timing | When is it a good time to lock prices? |
| Quantity | Lock 100% at once vs. layered hedges. |
| Time Horizon | How far into the future should one lock prices |
| Components | Lock just the raw cost of energy vs. including other components into the locked price. |
| Contract Clauses | Which contract clauses define the risks of the end-user, and how do they affect pricing? |
| Local Public Utility Rules | Rules and regulations are different for each utility and provide unique limitations and opportunities. |
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PRI Innovative Strategies
In addition to the option of locking prices at once for 12-36 months, PRI developed a set of proprietary analytic tools used to craft and execute an effective and flexible strategy. We call this strategy “Layered Hedging”. It involves timely and opportunistic short and long-term price locks of “strips” of gas and electricity in incremental quantities over time.
This strategy takes advantage of numerous purchasing options, provides the flexibility needed to leverage market volatility, and can be customized for each location. At its core it is analogous to a diversification strategy in financial markets.
This is a labor-intensive strategy which requires rigorous daily oversight and management. It cannot be properly managed and executed without the proprietary software programs developed by PRI.
PRI’s strategies resulted in savings of $70 Million as compared to locking 100% at once, while mitigating risks and achieving year-to-year budget stability.
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Electricity Procurement
In addition to the overall risks of a highly volatile market, electricity procurement poses additional challenge to the end-user:
- No publicly traded market: Electricity does not have a publicly traded futures market (unlike natural gas which is traded on the NYMEX). Tracking prices is a challenge to property owners and managers.
- Separate pricing per building: Electricity is priced separately for each building based on volume and consistency of usage (Load Factor).
- Contractual clauses: Electricity pricing is affected by contractual clause. Sometimes the cheapest price may result in the highest electricity expenditures because of risks assumed by the end user.
- Comparing apples to apples: When issuing an RFP to suppliers one must ensure that all contractual clauses defining risk are equal, and that the quoted prices include the exact same price components.
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Natural Gas Procurement
While natural gas is traded on the open market (NYMEX), the deregulated market is very fragmented. In addition to the extreme and sudden price fluctuations, the “rules of the game” regarding eligibility, storage options, transportation costs, and specific charges for gas transportation vary widely from one utility to the next, even in the same state. Analyzing the economic value of contracting with a third-party supplier requires thorough knowledge of the rules and regulations for each utility.
A flexible and responsive strategy of making small purchases over a long period of time offers the best chance for mitigating risks and taking advantage of market volatility. The option offered by some utilities, to store gas in the summer, adds both – complexity, but also an additional opportunity to reduce natural gas costs.
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Renewable Energy
With increased interest in clean and renewable energy, PRI now provides evaluations of various Emission Free or Renewable options and looks for suppliers/contractors who can best provide the chosen option. Occasionally, a combination of options can be best suited for a client’s particular preferences, size, usage patterns and financial requirements.
Some options are:
- Option 1: Emission Free Energy Certificates (EFECs)
- Option 2: Renewable Energy Certificate (Green-E REC)
- Option 3: PPA
- Option 4: PPA Aggregations
Some options require lengthy commitments and considerable financial undertaking. PRI attention to detail and proven expertise in energy procurement, render it a valuable partner in selecting the client’s optimal path towards clean and renewable energy.
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PRI – A Level Above
In Addition to our proven strategic purchasing program, PRI earned an impeccable reputation for: outstanding client service.
- Discovering erroneous bills. Clients received refunds of over $1,100,000 due to billing errors discovered by PRI.
- Personal and Responsive Service
- Attention to detail — even the smallest detail
- Qualifying Suppliers – PRI strategy of layered hedging strategy demands a great deal of
- sophistication and software which many suppliers do have.
- Every purchase is supported by data, and you are apprised of every intended move, in advance.
- Advising clients of changing market conditions and recommended actions.
- Relentless pursuit of what is best for the client, not the suppliers.
Prospect Resources is committed to working unwaveringly for the benefit of the client — and to the successful execution of the client’s customized strategic energy purchase plan
“We received a refund of approximately $260,000 from a provider of electricity… PRI helped us dig in to uncover a mistake in the billing calculations… They saw the entire process through to our receiving the refund check.”
Ken Haskins,
former VP at Harbor Group Management Co.