In the first quarter of 2012, near-record levels of natural gas production and unseasonably warm weather across much of the U.S. throughout the winter led to high natural gas inventories. The high gas supply and weak heating demand also pushed natural gas prices down to levels not seen since 2002. These market conditions created an excellent opportunity for energy users to leverage their energy procurement and risk management strategies to take advantage of the low energy prices. If you do not already have a procurement plan, here are five tips for developing an energy procurement strategy:
1) SET THE GOALS OF THE ENERGY PROCUREMENT STRATEGY
All organizations are unique, so it is important to tailor the strategy to fit the organization’s culture and goals. By clearly defining the goals of the energy procurement strategy first, later questions should be easier to answer. Throughout the rest of the strategy development process, continually ask “Does this help achieve the goals of the energy procurement strategy?”
2) DETERMINE ENERGY RISK TOLERANCE
Different energy users can take on varying degrees of price risk. It is very important for an organization to understand how much price fluctuation they can bear without adversely affecting their operations or profit. Energy users need to determine how much of the price of energy should be fixed and how much can float with the market. A series of simple questions like the ones below can begin to frame the risk tolerance for the organization:
- How much of the organization’s total costs are associated with energy purchases?
- Can the organization pass on increased costs?
3) DECIDE HOW AND WHEN TO PURCHASE ENERGY
After risk tolerance is established, it is important to determine how and when energy purchases will be made. Will all energy expenses be viewed as a single portfolio or will they be separated by region? Will the organization contract with many suppliers or limit the supplier base? Should all energy supply contracts have the same end dates or should they be staggered for diversification? How far into the future will the organization purchase energy requirements? How often will the organization fix prices? Tactics are as important as strategy when it comes to energy procurement and they should be well-planned prior to strategy implementation.
4) DOCUMENT AND COMMUNICATE THE ENERGY PROCUREMENT STRATEGY
A strategy is only effective if all parties involved are aware of it. After developing an energy procurement and energy risk management strategy, it should be memorialized in a document that clearly defines the strategy, tactics, and the reasoning behind both. During the documentation process, it is important to ensure that all stakeholders within the organization are in agreement with the strategy and know how they contribute. The energy procurement strategy document should be distributed across the organization for future reference.
5) STICK TO THE PLAN
The most important part of developing an energy procurement and energy risk management strategy is sticking to the plan. Times of rapidly rising or highly volatile energy prices can be very distressing as energy users watch costs increase or profits erode. Although no one can be certain as to when energy prices may begin to rise or become volatile again, by taking the opportunity to develop a strategy now during a time of low prices and low volatility, organizations can relax and make energy purchasing decisions free from emotion when that day comes.