Buying energy is not like buying parts, equipment and supplies. Electricity cannot yet be stored in a scalable manner which subjects the buyer to a potentially volatile marketplace. Managing price changes effectively can be extremely beneficial to a budget but the opposite is also true. When energy supply contracts are not executed ideally, customers can experience unnecessary costs. Below are three common mistakes made by energy buyers.
Waiting Until Contract Expiration to Seek New Pricing
Since electricity trades in the forward market, rates can be locked today for electricity that will be delivered in the future. By waiting until an existing electric supply contract is near expiration to seek new pricing, the buyer gives up price control to the whims of the market at that point in time. Conversely, proactively purchasing electricity when the forward market dips gives the pricing control to the buyer. In the past few years, prices within a twelve-month period have fluctuated around 15% and in extreme years, such as the 2014 polar vortex, as much as 25%.
Reducing the spend on energy by 15% to 25% just by proactively purchasing seems like an easy strategy but for some this approach can be daunting. This buying approach requires constant market monitoring which is impractical for most buyers. However, with the use of trusted brokers or suppliers this responsibility can be handed over and the buyer can simply be notified when a purchasing opportunity exists. This teamwork approach brings price control back in the customer’s favor without over burdening the energy buyer.
Soliciting Too Few Supplier Proposals
There are dozens of competitive electricity suppliers licensed in Ohio. Although not all these suppliers are actively providing offers for every utility and customer class, there is a robust number of suppliers who are more than willing to compete for business. The pool of active suppliers is very dynamic due to new market entries, mergers and acquisitions. Also, the appetite and competitiveness of suppliers change constantly as business development goals adjust within their organizations.
Even though contract terms, billing accuracy and good customer service are important, many customers find price to be king. The difference in pricing between suppliers can be to be as much as 10% to 15% for the same customer. This variation can be attributed to many things such as internal cost of capital, margin goals, risk assumptions and market knowledge. Soliciting all the active suppliers gives the energy buyer the power to choose the most competitive and best offer available.
Not Planning for Contingencies
Deep within the terms and conditions of most supply contracts is language that can cost significant dollars to customers if not managed properly. Early termination fees, notification of account closings, material consumption variances and auto renewal language are all areas where unexpected costs can bite an energy buyer. Most of the time these situations occur because of unusual, and often times undesirable, business conditions that the customer is experiencing. During these stressful times, the last thing that an energy buyer wants to deal with is an unforeseen penalty for electricity supply.
Understanding how a supplier handles extraordinary events ahead of time can limit the impact of the potential charges. Regularly scheduled conversations with your energy broker or supplier can help identify operational changes that may impact the economics of the electric supply agreement. Charges may not be avoidable but understanding the potential impact ahead of time will allow for better cost management within the energy buyer’s organization.