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Is Your Company Making One of These 3 Costly Mistakes When Buying Energy?

By 3p Contributor

By Fielder Hiss

For many businesses, buying energy has been simplified into a regular routine. When your current agreement nears its expiration date, you sign a new contract and agree to the terms and price obtained by your energy broker.

But that 'set-it-and-forget-it' mindset could cost your company money.

All organizations are under pressure to reduce costs wherever possible. But few are equipped to fully maximize the cost-saving potential in energy procurement. The need to reduce costs is especially acute in today’s environment, where energy costs often represent a multi-million dollar line item for most companies. When the executive team starts asking about your strategy to reduce energy costs, you’ll need to be able to show that you’ve done everything you can to get the best price.

Despite their best efforts, some businesses still succumb to several common pitfalls that cause them to spend much more on energy than they need to. Here are three costly mistakes to look out for when buying energy, and what you can do to avoid them.

1. Only buying when the contract runs up

If your business is only buying energy when it’s time to renew your supply contract, you’re likely spending more than you need to.

Energy prices are constantly fluctuating, and you can buy energy far in advance of your next contract. That means businesses that set up their energy supply agreement on a fixed price model can capitalize when energy prices are low and secure long-term savings proactively.

Here’s an example. Let’s say your business is still under its energy contract for another 36 months, but you happen to notice that electricity prices are at historic lows. Your business can buy the energy at that low price and set those rates to kick in when the next agreement starts, 36 months later. Regardless of how high electricity prices climb over the course of your next agreement, you’ll still pay for your energy at the low prices you secured earlier.

Conversely, businesses that buy energy only when their current agreement is expiring are at the whims of the market at that point in time. If electricity prices happen to be particularly high when you renew your contract, you could be paying above-market prices over the course of your agreement.

This is why so many businesses choose an energy procurement partner that provides both the tools and services to ensure your process takes the market into account, year-round. You’ve established a routine energy buying process for a reason—you have other goals and priorities to worry about, and you don’t have time to stay glued to the energy markets. An energy procurement partner provides regular market intelligence updates and can work with your business to ensure you don’t miss an opportunity.

2. Not knowing when to buy

In an effort to leverage low energy prices, some businesses go to market in the spring and fall seasons. Prices typically peak in the winter and summer seasons, due to the increased demand for heating and air conditioning on the available supply of natural gas. Since natural gas is used to generate electricity, low supply means higher prices for natural gas, which reverberates with higher electricity prices for customers.

So you can see why so many businesses would assume the spring and fall seasons are the best time to buy energy. If presumably moderate temperatures during these seasons relieve demand for (and prices of) natural gas, electricity prices will fall as a result.

However, this isn’t always how the market shakes out. For example, electricity prices reached a lower point in February 2016 than at any point in the previous fall. These kinds of opportunities are impossible to predict ahead of time without the right tools.

3. Not knowing who’s bidding on your energy

The market price for energy only dictates part of the final price on your utility bill. The supplier sets the final rate at which your costs are calculated, which will determine the price your business pays each month.

When seeking a new energy contract, your broker (or other procurement partner) will reach out to several suppliers to see what final price they will offer before signing an agreement. That’s how they obtain the price and terms they offer you with when it’s time to sign your next contract.

However, brokers rarely offer visibility into the auction process. Anyone can say they solicited offers from multiple bidders, but how do you know that your procurement partner actually got the best possible price and terms for your agreement? Do you know which suppliers made which bids? How many suppliers bid on your business?

But technology to the rescue. Today, there are technology-enabled procurement platforms like the one offered by my company, EnerNOC, that provides access to hundreds of suppliers and allows you to watch them bid for your business in real-time. You’ll be able to see exactly who shows up to bid on your contract, watch suppliers out-bid each other to drive the price lower, and go deeper to see which suppliers made which offers. So if your boss asks you, “How do you know you got the best price?”— you can actually show them the details from the auction.

It’s never been easier to reduce costs through smarter, technology-enabled energy procurement practices. With the right tools and market intelligence to help you leverage energy markets, your business can take a more strategic approach to the buying process to ensure you got the best possible price for your energy.

Image credit: Pixabay

Fielder Hiss is Vice President of Marketing and Product Management at the energy intelligence software company EnerNOC. www.enernoc.com.

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