Understanding the Basics of Energy Procurement
3 min readEnergy procurement is a critical aspect of business operations, especially in competitive markets where every decision can impact your bottom line. Mastering the fundamentals is essential for making informed decisions that align with operational and financial objectives. By understanding the basics, businesses can optimize their energy strategy and achieve greater financial stability.
Navigating Competitive Energy Markets
Competitive energy markets allow consumers to choose their energy supplier. These markets are overseen by independent organizations called regional transmission organizations (RTOs) and independent system operators (ISOs).
There are numerous benefits of competitive energy markets, including lower energy prices, more product options and better customer service. Both businesses and households benefit from the stability and predictability of retail contracts, making them suitable for long-term planning and budgeting. Businesses can tailor their energy procurement strategies to their specific needs and circumstances, including meeting sustainability goals by purchasing clean energy through long-term agreements or energy attribute certificates (EACs).
Essential Energy Procurement Concepts
Energy procurement requires a fundamental understanding of industry terms to effectively navigate the market. A few key concepts include:
- Load Profile: Typically refers to the pattern of electricity usage over time. Think of it as how and when you use electricity. Your unique pattern of energy consumption over a given period of time is influenced by a variety of factors, such as the type of building or facility, number of occupants, weather conditions, time of day and the day of the week. By evaluating your energy usage pattern, we can develop a tailored solution to manage your energy costs and may help identify areas for efficiency improvements.
- Capacity: Capacity markets were introduced to ensure that electricity supply meets peak demand and ensure there is enough generation (or load-management capacity) in the system to cope with times of stress on the network, such as a surge in demand. The objective of the capacity market is to achieve long-term supply adequacy. Typically, auctions are held by the ISO to set capacity prices and provide grid reliability, and power generators offer their resources for a payment for electricity generated. For customers, capacity charges are typically added to your energy bill proportional to your specific demand charge – typically set on the hottest day of the year.
- Day-Ahead and Real-Time Markets: Day-ahead markets are set to meet forecasted demand one day in advance and influenced by many factors, including weather, day of the week and planned power plant outages. The real-time market updates pricing in shorter intervals, such as 15 minutes, based on real-time market conditions.
- Load Response and Curtailment: Reducing electricity consumption during high demand or grid stress periods. Load response or curtailment programs offer financial incentives for businesses to reduce their load during these times.
By understanding these concepts, businesses can make informed decisions that align with their operational goals and effectively engage with suppliers to negotiate energy contracts.
Supplier Dynamics in Competitive Markets
In competitive markets, businesses have the flexibility to choose their energy suppliers and negotiate contracts that best meet their needs. Suppliers purchase electricity from the wholesale market and sell it to consumers in the retail market. This allows businesses to select from various energy contracts, which differ in pricing models, contract length and additional services.
These contracts can be categorized into three main types:
- Fixed Contracts: Lock in a set price per kilowatt-hour (kWh) for the duration of the agreement, providing budget certainty and protection against price volatility.
- Variable Contracts: Prices fluctuate based on market conditions, offering lower prices when market rates drop and higher costs during peak periods.
- Layered/Managed Contracts: Combine fixed and index pricing by layering purchases over time or managing the contract to adapt to market conditions, offering a balance between price stability and market responsiveness.
Choosing the right contract requires an understanding of a business’s energy consumption patterns, risk tolerance and financial goals. At Constellation, our energy professionals can provide valuable insights and help businesses navigate the complexities of energy procurement.
Benefits of Sustainable Energy Procurement
In addition to cost considerations, businesses can make a significant impact by choosing suppliers with energy solutions that align with their corporate sustainability goals. By implementing energy strategies that minimize their carbon footprint, businesses can enhance their reputation and demonstrate their commitment to environmental responsibility. Sustainable energy procurement not only supports environmental goals but also offers potential long-term cost savings and compliance with regulatory requirements.
Let Constellation Simplify Energy Procurement
At Constellation, we offer a range of services to ensure that you have the flexibility and stability required to optimize your energy strategy. Our commitment to sustainability means we can help you achieve your corporate sustainability goals while managing costs effectively. Contact us today to learn how Constellation can enhance your energy procurement strategy.
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