Drive Cost Savings through Energy Management
By Nick Henn
By Nick Henn
It is important that businesses do not overlook one of the simplest ways they can have a positive impact on their bottom line: managing their energy costs. Companies who manage their energy strategy are aware of the financial benefits; 70% of companies that manage their energy do so with the desire to cut costs, according to a study conducted by Deloitte LLP. By understanding where and when businesses consume energy and implement appropriate energy strategies, companies from all industries can expect to see a more predictable energy budget. Management of this key expense can provide companies with a competitive advantage.
By Nick Henn
Strategic energy management should be as holistic as possible, taking advantage of conservation, load shifting, demand response and the price per unit consumed. The key is to take control of your energy costs and understand how you can impact them as part of your overall business strategy. In Ontario, the Region of Peel left the Regulated Price Plan and developed a long-term Energy Management Plan which maps out how the Region will purchase, consume and manage their energy use over the next 40 years. As a result, the Region gained greater control over its energy costs and fiscal budget forecasting. This helped to save $3.86 million through its partnership with Direct Energy Business.
When considering how to best manage energy costs, it is important to understand that each company has a different energy usage pattern. Any energy procurement strategy should be tailored to fit that particular usage pattern and volume. Different offers are available to suit variable consumption profiles (versus those with more predictable consumption patterns. In addition, a company’s risk tolerance can help dictate how much of its energy usage it is prepared to expose to wholesale market fluctuations and how much it would like to lock-in to certain pricing and for what period.
While the whole concept of developing an energy hedging strategy may seem complicated and time-consuming, there are a few simple steps that companies can take to help them better understand their energy usage and how they can manage their energy costs more effectively.
1) Analyze your energy usage to gain control
Get a clear pattern of your energy consumption. At the highest level, this would include total annual consumption in both natural gas and power. However, a more useful analysis is to understand the extent that your consumption varies according to seasonal factors, by week, by day and by hour. It is equally useful to understand the degree of predictability of consumption: does last month look like this month and did last Monday behave the same as this Monday? Is consumption highly predictable or vary greatly from one day to another? Do the patterns vary due to weather, occupancy, production schedules or other unknown factors?
After analyzing energy usage, companies will have a better understanding of potential opportunities to change operations or schedules to avoid spikes in consumption during high-cost hours. In addition to avoiding price spikes, consumption profiles are instrumental in energy purchasing decisions. The usage profile of a restaurant will be quite different from a big box retailer or a hospital. For businesses with operations across multiple locations, if advantageous; individual consumption profiles can be aggregated to create an overall pattern of consumption.
2) Understand your attitude to risk and market fluctuations
Understanding consumption is a first step, but understanding your risk tolerance is equally important. Employing an energy hedging strategy is no different from choosing to manage the cost of a raw material. The development of any sound strategy will include isolating what proportion of your operational costs is tied to energy and whether you are managing the risks around energy costs. Also, it is important to consider your appetite for risk and your ability to absorb or pass on to customers fluctuating energy costs.
In Ontario, competitive energy retailers are able to provide sophisticated products and customized energy strategies, allowing businesses to choose the product that best suits the needs of your facility. The products and strategies work collaboratively to create an efficient and predictable energy plan.
Facilities of all sizes, from a car manufacturer in Alliston to a vineyard in the Niagara region, have the ability to control their energy costs, or at an absolute minimum, understand them. While consumption varies greatly by season with consumption clearly being concentrated in the summer, most of the consumption is driven by rides and that vary little by degree of utilization. However, on hot sunny days, the province wide power consumption rise drives up power costs.
However, if this natural hedge doesn’t exist in your business, you might want to talk to an expert.
3) Think about speaking to an energy expert
If you do not have the time or the inclination to work your way through your consumption profile as well as a view into your appetite for risk; in varying degrees and approaches, this will be step one for most energy experts.
There are a wide variety of products available for natural gas and electricity ranging from very simple fixed price arrangements to customized solutions. The real synergy comes from understanding your energy patterns, your risk tolerance and marrying the two with prevailing market conditions. An expert should help you understand the strength of the fit of any particular recommendation.
While most people are familiar with higher electricity prices during the day and lower prices during off peak hours (holidays, nights and weekends), there are more factors to contemplate such as the degree of price volatility. Historically, prices vary more during the summer months than during the annual average. Also, hourly prices have historically fluctuated more during on peak time than off peak hours. Depending on your profile and risk tolerance, a customer might benefit from more on peak price protection than off peak and choose to buy a pricing package that satisfies this requirement.
With extensive product possibilities and significant advantages to managing energy costs, businesses should start thinking about strategic energy management as early as possible. Cost savings can be used to fund other activities including facility and equipment upgrades or operating profit growth. The key is to recognize the importance of strategic energy management and devise and implement a plan.
Nick Henn is vice-president, Canadian Operations, for Direct Energy Business, a North American energy supplier. CLICK HERE to visit them online.