Supply Side
Energy Price Management Strategies
Energy prices today have an element of volatility due to the tight relationship between supply and demand. For an energy management strategy to be completely effective, procurement strategies need to be examined closely. Use the guidelines below to develop a plan that best fits your business.
- Define the Objectives
As with any plan, it's important to establish written purchasing objectives, as discussed in step three of goal setting for demand-side energy management. Some relevant business questions to ask at this stage are:
- When do I buy?
- How do I buy?
- Who do I buy from?
- How much do I buy?
- What is my cost being measured against?
| Answering these questions will help you craft a plan that will effectively address your energy needs.
- Create Your Plan
With your supply side purchasing objectives set you can now build an energy pricing plan that will keep you prepared for changes in the market. Your plan should include the following components:
- Determine your risk tolerance level -- how much risk is acceptable for your business?
- Define program objectives
- Create a policy and procedure document
- Identify the procedures for executing the plan -- what market conditions will trigger your price plan?
- Define internal controls and execution guidelines
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- Develop a quantifiable hedge strategy
- Obtain senior management approval
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- Monitor the Energy Market
Creating a price plan that meets your organization's risk tolerance and program objectives in order to monitor the energy market movement:
Price Triggers
Price triggers help you determine value and set volumetric goals at various price points
Time Parameters
In the event the market does not meet price triggers, set time parameters for purchasing
Pricing Tools
Determine appropriate pricing tools to achieve a diversified portfolio |
- Execute your Plan
Pricing alternatives can help you acheive a balance between market sensitive price and price stability. This requires implementing one or a combination of the following:
Index Pricing
The buyer or seller will fix the price at a monthly/daily index based on posted cash price or Nymex price. Currently the commodity used pricing mechanism for many regulated energy providers. It is a viable pricing tool for energy purchases when prices are at extremely high levels or energy sales when prices are at extremely low levels. The rationale behind index pricing is to avoid fixed pricing that results in a loss.
Fixed Pricing
A company will fix prices for multiple months or seasons up to several years. Short-term fixed price contracts are attractive when a company wants to lock in prices during volatile price periods such as winter or shoulder months. The price of the contract may be structured so that the cost is the same each year, creating a base price with a yearly escalator. A long-term fixed price contract is attractive when prices are at extremely low levels that are not expected to hold for a long period of time.
Caps
Buying a call option that gives the buyer the option of purchasing energy at a predetermined maximum strike level without the obligation of buying at that level. The buyer pays a premium similar to an insurance premium. |
The companies that have the most success plan ahead. They define specific program objectives. Additionally, they develop a quantifiable pricing strategy that meets their risk tolerance levels as an organization. This positions them to maintain structure and discipline. Successful companies practice proper interpretation of the hedge plan results and apply lessons learned into their go-forward execution strategy.
Return to How to Build an Energy Management Strategy.
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