Managing Electricity Costs & Risks with a Smart Buying Strategy
3 min readElectricity is a top five operating expense for most businesses, but prices fluctuate unpredictably every day with supply, demand, and changes in weather. To optimize electricity costs, businesses need a purchasing strategy that balances cost savings and risk mitigation.
Reviewing different purchasing strategies and understanding the benefits of a managed buying approach allows a business to determine the best solution, customized to its unique priorities
Energy experts like Constellation can provide expert guidance on strategies and tools to capitalize on market opportunities while supporting budget and facility needs.
Tailoring Your Electricity Strategy
Every business has different needs and risk tolerances that impact its electricity purchasing strategy. It’s important to understand your organization’s business model, budget goals, and appetite for market risk. Factors like your facility size, operations and flexibility around electricity usage should be considered. Analyzing your specific electricity usage profile, which includes on- and off-peak usage and seasonal fluctuations, is crucial for determining the right strategy for your business. Your energy provider can help analyze your usage patterns to help you understand these details and develop the right strategy for you.
Comparing Electricity Purchasing Strategies
There are three main types of electricity purchasing strategies, each with its own pros and cons:
Fixed Price Solutions
A fixed price solution offers you price stability and simplicity. Make one upfront purchase decision for a set contract term (e.g., 12-months or 24-months). You pay one fixed price per kWh and that price stays the same for your contract term.
Benefits of Fixed Price Solutions
- Cost predictability from locked-in rate.
- Risk mitigation by avoiding market volatility.
- Budgeting simplicity with no rate spikes.
Drawbacks of Fixed-Price Solutions
- Potential to miss savings if market rates fall.
- Inflexibility to change your contract if business needs shift.
Index Price Solutions
With index price solutions, your rate fluctuates based on real-time wholesale market prices. Your costs will move up and down daily with market rates.
Benefits of Index Price Solutions
- Ability to capture savings when market prices drop.
- Price adjusts automatically based on market swings.
Drawbacks of Index-Price Solutions
- Unpredictable price volatility from month to month.
- Peak season spikes bring budget unpredictability.
Disclaimer: chart is illustrative only and is not indicative of actual price data
Layered or Managed Solutions
A layered or managed solution combines fixed and index strategies, taking advantage of market opportunities by locking in prices when they fall. With this approach, a percentage of usage is fixed while the remainder follows variable market pricing. The fixed portion provides budget certainty during high-cost events like colds snaps or extreme heat waves. This blend balances cost stability with market price responsiveness to optimize savings.
Benefits of Blended-Price Solutions
- Balances cost and risk by fixing peak months and indexing savings months.
- Customizable to your business’s needs and risk tolerance.
- Budget stability from fixed portion against rate swings.
Drawbacks of Blended-Price Solutions
- Ongoing management needed to adjust blending over time.
- Partial peak exposure on unfixed usage portion.
Developing an Effective Managed Strategy
There is no one-size-fits-all electricity strategy with optimal year-round performance. Managing or layering strategies help address seasonal demand challenges, often improving pricing and lowering risk.
Key strategy elements include analyzing the organization’s usage patterns across seasons, days and times to inform purchase timing. Purchasing managers can blend fixed rate blocks during peak periods while indexing low-risk months to capture potential savings. For strategy optimization, continual reevaluation and adjustment is essential as business needs and seasons evolve.
Get Expert Guidance from Constellation
Connecting with energy experts enables organizations to customize an electricity procurement strategy, ensuring ongoing optimization and guidance that balances costs, mitigates risks, and avoids pricing spikes during peak seasons. Constellation has proven experience providing strategic energy management tailored to customers’ unique priorities. Learn more about how Constellation can help your business customize an electricity purchasing strategy that aligns perfectly with your unique needs and goals.