Did You Lock in Your Electricity Rates at 2013’s Lowest Point?
2 min read
By Troy Williams, National Sales Senior BDM and i2i Samurai
Do you know which day in 2013 posted the lowest power price for calendar year 2014? It was August 9th for the real-time LMP (specifically PJM, ComEd zone) and the NYMEX markets. So, did you lock in your power and gas rates for 2014, 2015 and 2016 on that day? If you didn’t, don’t feel too bad; most consumers were also unaware of this price event because it’s nearly impossible to predict when prices will be at their lowest.
And yet, despite the challenges in trying to ‘time the market’, energy managers and energy buyers continue to send out RFPs and request pricing for all of their power usage for the next year or two on one specific day. This fixed price ‘point in time’ strategy is a textbook case of “putting all of your eggs in one basket.” As an experienced energy professional, I like to educate my customers on alternate strategies that include price and purchasing diversification over time. By diversifying the timing of your energy purchases, you’re able to take advantage of market-based pricing opportunities to manage down costs into the future.
One tactic that has effectively worked for many Constellation customers is layering in multiple fixed prices over time during a downward market trend. This can be accomplished through a ‘programmed’ approach or an ‘active’ approach. An example of a programmed approach would be locking in 25% of your usage for two years every quarter. In an ‘active’ approach, you would lock in percentages of your usage as the market drops or cap exposure to rising market prices.
To better illustrate the potential pitfalls of not using a diversified purchasing approach, I’ll briefly explain a situation we recently encountered.
We were fortunate to participate in a recent RFP process for a large national account. A handful of electricity suppliers submitted initial bids that ranged from approximately $78.05 MWh to $78.84 MWh. The customer was satisfied to receive their three bids and ended up choosing the lowest offer, locking in their price for 24 months. However, over the next two weeks, the power market dropped by more than $4.00 MWh but the customer was unable to take advantage of the lower prices. The customer’s focus on saving roughly $0.80 MWh between three suppliers prevented them from procuring a lower price when the market dropped by 5X that could have resulted in significantly lower overall costs. The lesson here is that there are also many risks in going out to bid at a single point in time and businesses should examine some of the other dynamic approaches to energy cost management. By shifting your strategy to one that blends prices and layers purchases, you can diversify your risk, take advantage of the market and better manage your long-term costs.
To learn more about how blended purchasing strategies compare to fixed price and index strategies download the free whitepaper at www.constellation.com/electricitystudy.