1 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 1 Energy Sourcing BEST PRACTICES WHITE PAPER
2 ABOUT THE AUTHOR Adam Dench Adam Dench is a Senior Strategic Energy Advisor at Nania Energy. With seven years of experience in the energy industry, Adam specializes in helping organizations procure electricity and natural gas supply. Adam has also coordinated efficiency projects and demand response programs. Adam received his bachelor s degree from DePaul University in Chicago, Illinois and he is a Certified Energy Manager (C.E.M.) putting him in an exclusive group of approximately 10,000 C.E.M.s in the country. NANIA ENERGY Nania Energy has more than a decade of experience helping clients purchase commercial natural gas and electricity in the Midwest and Mid-Atlantic markets. Nania Energy s goal is to find the best ways to minimize risk and increase savings on energy buying programs. As part of the commitment to our customers, we will: Listen to your needs Provide solutions that are customized to fit your company Manage your risk so you don t have to do so Communicate product and market information to keep you informed Make it easy to transition from your current energy supplier or utility provider Be there for you when you need us Uphold our promise Energy made very simple Adam can be reached at: (630) x308 ABOUT THE PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION (PRSM) PRSM is the authority on retail and multi-site facilities management. Since 1995, PRSM has been the leading membership organization empowering retail facilities professionals by delivering industry best practices, education, forums and partnerships. PRSM has an actively engaged community of multi-site retailers and reputable vendor partners who value business relationships, lifelong learning, industry credibility and recognition. Members depend on PRSM to help them achieve success and a competitive advantage through quality programs and resources. WHO SHOULD READ THIS? If your organization has locations in states that are deregulated for electricity, this information may be helpful to you. States that have passed electricity deregulation allow choice in your electricity supplier for commercial end-users, which allows you to choose an alternate supplier instead of buying from the local utility. The size, number of locations or type of retail facility does not matter. Anyone in a deregulated state has an opportunity to achieve savings. The type of strategy used to maximize savings may differ; however, the material covered in this paper can apply to all. While we will be focusing exclusively on electricity in this paper, the same principles should be applied when purchasing natural gas.
3 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 3 CONTENTS 2 Who Should Read This? 4 Electricity Deregulation, What Is It? 4 Impact of Deregulation 5 So What Does This Mean For Me? 6 What Makes Up Your Electricity Rate? 8 So What Can You Control? 9 How Can You Control It? 10 Market Timing 11 Conclusion Copyright 2013 by the Professional Retail Store Maintenance Association (PRSM). All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the publisher. The information in this publication is meant for informational purposes only and is subject to change without notice. All information in this publication is provided as is, without guarantee of completeness, accuracy, timeliness or the results obtained from the use of this information and without warranty of any kind, express or implied, including but not limited to warranties of performance, salability, merchantability for any particular purpose, and noninfringement. All statements about persons, companies or other entities described in this publication are the subjective opinions of the author(s) based on his understanding from personal observations, research, and interviews. Others may disagree with these statements. PRSM Association and the authors assume no liability or responsibility for any errors or omissions or for any decision made or action taken based on information contained in this publication or for your relying on its accuracy. Under no circumstances and under no legal theory shall PRSM Association, the authors, or any other party involved in creating, producing, or delivering this publication s contents be liable to you, your company, or any other person for the indirect, direct, special, incidental, or consequential damages arising from your review or the review of this work by others. Unless stated, the observations, opinions, findings, interpretations, and conclusions expressed in this publication are those of the author(s) and do not necessarily represent the views of PRSM Association or the reviewers of this work. Published by: Professional Retail Store Maintenance Association 5000 Quorum Drive, Suite 700, Dallas, TX
4 4 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION Source U.S. Energy Information Administration restructure_elect.html WHAT IS ELECTRICITY DEREGULATION? In the early 1990s, it became apparent that the regulatory approaches of the electric and natural gas industry were not working well. Utilities, which held a monopoly in their respective territories, were routinely raising rates due to the lack of competition. Soon, state legislators and utility regulators started implementing deregulation in states such as Illinois, Texas and Pennsylvania among others. This implementation allowed customers to switch from utility supplied default rates to competitive supplier rates at a lower cost. The power was still delivered to their door by the regulated utility as it always had been, however the power itself was supplied by a company other than their utility. IMPACT OF DEREGULATION In the early stages of electricity deregulation, sometime between the mid-90s to mid-2000s, the power to choose your electricity supplier was reserved for only large commercial and industrial organizations. Those companies experienced extremely large savings versus the default utility rates they had been paying for years. Finally in the mid- to late-2000s, deregulation had expanded greatly and most companies were able to participate and have a choice in who supplies their power. Today, in most states that have a deregulated electricity market, nearly all large companies participate in choosing a supplier. Using Illinois as an example, since restructuring in 1998, Illinois has gone from paying on average one of the highest electricity rates in the nation to one of the lowest and has saved Illinois businesses and residents an estimated $31 billion.
5 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 5 Restructuring Source: Regulation & Relevancy: Assessing the Impact of Electricity Customer Choice ~John Domagalski & Dr. Philip R. O Connor SO WHAT DOES THIS MEAN FOR A RETAIL COMPANY? In short, deregulation has opened the door to competition for your energy supply needs and has helped to lower costs and save organizations and households billions of dollars. You, most likely, are already taking part in this and are buying power and/or natural gas from an alternative supplier for any locations you may have in deregulated states. This does not necessarily mean you are maximizing the opportunity for savings! Electricity is a complicated commodity and there are several items that you pay for in your electricity rate that are outside of the actual commodity. Items such as transmission and capacity costs that are present in many deregulated states can comprise nearly 30 percent of your total supply bill. There is a lot to consider when buying power. It is not as easy as it may seem to get an all-in rate from several suppliers. Many of you likely go out to bid for energy supply and choose the lowest all-in rate that appears at the bottom of the quote. What you think is an all-in quote may not actually be what you are getting back. Different suppliers include different items in their quotes and it may not always be clear what is actually included in their all-in rate. Asking the potential supplier to break out the different components that are included in the price and rate per kwh for each component will help you to better understand the quote. Once you are comfortable with what is included in the quote, there are a number of things to consider: Are you using the right product for your business? Do you need an all-in fixed rate or can your business handle some volatility in bill amounts to achieve an overall lower cost? Some products are riskier than others and pass price risk onto the buyer instead of the seller. Is the product you are currently buying meeting the objectives for your organization or are you over-buying and paying for premiums you don t need? Are all of the components fixed or can the supplier pass through costs? What exactly does all this mean when looking at and comparing prices? We will explore some of these components here as well as define some product options that might help make sense of all this. The Supply portion of your bill typically accounts for percent of your total cost which may allow for more control over your costs than you think.
6 6 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION WHAT MAKES UP YOUR ELECTRICITY RATE? There are three main parts to everyone s electricity bill regardless of whether you are in a deregulated state or in a state that does not allow choice in suppliers. In this paper, however, we will only discuss deregulated states. Your Electricity Bill is made up of these sections: 1. Delivery The delivery portion of your bill is what the local utility charges to distribute the power through the grid to your door. You cannot affect these charges and have no control over who delivers the power to you. These are charges everyone pays. 2. Taxes Taxes, of course, are not controllable and are paid typically as state taxes, municipal taxes and sometimes special programs such as smart meter recovery costs or environmental project recovery costs. 3. Supply As it relates to this paper, we will focus on the one piece of your electricity bill that you can control - the Supply portion. This portion of your bill typically accounts for percent of your total cost which may allow for more control over your costs than you think. While every state and region have slightly varying supply cost components, there are generally four or five main components to your supply bill. These are rates that are generally charged to you by multiplying your Kilowatt Hour (kwh) usage by your contracted rate. 1. Energy Supply the actual commodity running through the lines percent of your total bill 2. Transmission Charges these are costs to maintain the regional grid (e.g. PJM in Illinois or the MidAtlantic, or NYISO in New York.) This regional grid is comprised of the big tower lines that carry power in extremely high voltages across long distances and between utilities. 5-7 percent of your total bill 3. Capacity this is a charge that recovers the cost to build generation to account for peak demand on the system. The grid needs to have enough capacity to support whatever the yearly peak demand could be AT ALL TIMES percent of your total bill 4. Losses a certain amount of energy is burned off as it travels from generation to your front door. According to an article from National Geographic, About 7-10 percent of the power put on the U.S. grid is wasted due to electrical resistance enough juice to run 14 cities the size of New York. 1 ~5 percent of your total bill 5. Ancillary Services these support the reliable operation of the transmission system as it moves electricity from generating sources to retail customers. ~5 percent of your total bill When looking into buying power from an alternative supplier, it is critical that you understand what is being included in the rate being quoted. 1 National Geographic, To Capture Lost Power, Super Solution Sought com/news/2010/03/100319/lost-power-super-solution
7 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 7 1. Supply 70.02% 2. Capacity 13.35% 3. Transmission 7.17% 4. Losses 4.12% 5. Ancillary Services 4.12% 6. RPS 1.23% WHAT MAKES UP YOUR ELECTRICITY RATE? In addition to the main cost components represented in the graph above, a growing trend in many states is to mandate the purchase of renewable power. This is known as the Renewable Portfolio Standard or RPS. Using New Jersey as an example, every end user of electricity in the state, regardless of their supplier (or the utility) is REQUIRED to buy upward of seven percent of their power from renewable sources in This number is ratcheted up every year until 2021 when everyone in New Jersey will be required to buy at least 20 percent of their power from renewable sources. As you can imagine, the cost to the end user will increase steadily until that point. Not all markets and not all suppliers use the same terminology. Some may bundle two or three of these components such as capacity and transmission into one, and call it a Grid Cost or a Line Charge. Some may be passing these costs through to you without markup, but not including it in their quote. A few regions, such as Texas, do not even have a capacity market. When looking into buying power from an alternative supplier, it is critical that you understand what is being included in the rate being quoted. All of these components affect your rates and your overall cost of supplying power to your business. A retailer should first understand its own risk tolerance before choosing the right program to help control its energy costs.
8 8 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION SO WHAT CAN YOU CONTROL? Which pieces of the pie you can directly control via fully locking, partially locking or passing through the rate may differ from region to region. Generally each of these components has its own market that suppliers must go to in order to figure out their cost to supply your power. Then the supplier must assess the risk between what they will pay and what they will recoup from the customer in their monthly bills. In addition, each of the components will have parameters or laws around them that dictate how you will be charged which are called tariffs. For example, in the PJM regional grid (IL, MD, PA, NJ, DE, etc.) your capacity costs, which comprise about percent of your total bill, are based upon a three year forward auction for power generators. Generators bid into the auction for the ability to generate enough power to meet the regions peak demand three years from now, on an ongoing basis. Once that auction settles, a base price is set for everyone in that region. Your capacity cost is then determined by taking that base price and multiplying by your account s specific Coincidental Peak Demand, which is your facility s demand during the time when the grid, as a whole, is at its highest level. It may seem that you can t control that piece of your bill, but you can. There are many things a retailer can do to lower their Peak Demand, such as peak shaving or load shifting which would in turn lower the capacity charge. Also, there are options to lock up your Peak Demand where it is now for forward years. For instance, if you are a Big Box store that has plans to expand a store by 10,000 square feet in the next six months and consequently your usage is increasing, you might want to lock up your capacity charge at the current demand level on a long term contract. Conversely, if you ve done some efficiency projects such as lighting or Variable Speed Drives on air handler units, you might consider passing through your capacity costs as your peak demand will be going down and you want to realize the full value of the projects you ve done and not pay based on your current demand, two years from now. The same concept applies to transmission. With most suppliers, you have options on how to lock or not lock your transmission rate. Whether you do so or not depends on your specific situation and should be treated on a case by case basis similarly to capacity. The biggest piece by far of all the components is your commodity cost, or Supply Rate as most call it. This piece comprises percent or more of your total bill and is entirely controllable. You can lock some or all of your usage at a fixed per kwh rate. There are three main types of programs you can elect to use for your facility. Each of these products has both advantages and disadvantages and varying degrees of risk to an organization. 1. Fixed Load Following Rate - Every kwh consumed is billed at the fixed rate agreed upon regardless of how much or how little you use. Typically (unless you are a very large user), there is no penalty for using more or less than you historically have used. 2. Index Pricing - You can float on the index market so that your rate changes every hour based on your regional grid s posted hourly prices and you are billed based upon what you used at each of those hours specifically. 3. Block and Index / Hybrid Typically used for more sophisticated buyers and bigger box end users, this is a blend of fixed and index pricing. You will be billed for a certain amount of usage on a fixed price and anything above that amount you will purchase from the hourly index market as described above. For example, if you do a 50 percent block and index product, each month you will be billed for 50 percent of your estimated usage at the agreed upon fixed rate and whatever you use above that amount will be on the index.
9 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 9 HOW CAN YOU CONTROL IT? How do we go about choosing which options to lock or pass through, now that we know a little about what we can control? What type of commodity program should you choose? A retailer should first understand its own risk tolerance before choosing the right program to help control its energy costs. 1. How big of an expense is your energy cost related to your other overhead costs? 2. Are you budget conscious? 3. Would you rather know exactly what you are going to pay and possibly pay a bit more in order to know that, rather than being aggressive and shooting for the lowest overall cost? 4. Would a spike in your energy costs for a couple months create a disaster in your organization? 5. Can you pass through any increase or decrease in the cost of energy into your product? Once you understand these variables as an organization, as most already do for other costs, it is fairly easy to know what type of electricity product might be best for you. If you are an extremely budget conscious organization where it is imperative to stay within the operating budget throughout the year, the all-in energy rate will most likely become the best option. If you want to know your costs thoroughly, but can afford a bit of volatility, you may be able to be a little more aggressive and try and achieve a lower cost. The hybrid, or block and index, program might be a good way to go. If your energy bills are a small piece of your costs as an organization and you can afford swings in pricing over the long term, the index program is historically the lowest cost program. However, at any point in time you are at the mercy of the market. There are risks that an event such as a heat wave, a hurricane or even a threat of an impending military strike may trigger a short term price spike.
10 10 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION Wholesale Forward Curves 20 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 HISTORICAL WHOLESALE POWER PRICES To get an idea of market volatility, review the Historical Wholesale Power Prices graph above. This graph represents wholesale power prices over the last eight years. As you can see, there is great variance between prices from one year to the next. Looking at 2008 to 2009 prices dropped about 50 percent overall. It is this volatility and risk that you have to weigh when choosing what type of product is right for your business. MARKET TIMING TO PURCHASE ELECTRICITY The chart on the left shows that your price can vary dramatically over short periods of time. Timing the market is far and away the most important piece of the puzzle to realize the lowest cost scenario for your business. When getting a bid from suppliers on a bid day, those suppliers may vary anywhere from 2-5 percent in their price on any given day. The actual commodity market, however, may move 5-10 percent in a single day. If you chose a bid from a supplier that was 2 percent lower than anyone else s rate but the market fell the next day by 5 percent, Did you really save 2 percent or did you lose 3 percent? So, how do you know when is the right time to buy? The fact is that NOBODY knows absolutely. If anyone knew absolutely where the market will go in the next week, they wouldn t be at a desk in a cubicle or office talking to you about your company s hedges. Too often, companies review their electricity supply agreements three months before expiration. No matter the state of the market at the time, that is just what they do. What if an event occurred four months before your contract expired and prices shot through the roof and looked like they would continue upwards for the next few months as a result? Now you HAVE to decide before your contract expires and you are looking at elevated prices. The best results will come from continually monitoring your forward pricing. You don t have to do this yourself by any means. A good supply partner should be able to do this on your behalf and keep you informed. That information will lead to timing the market properly for your business.
11 PROFESSIONAL RETAIL STORE MAINTENANCE ASSOCIATION 11 The best way to do this is to align yourself with a supply partner that you trust and offers good relevant information specifically for your business. As part of your energy purchasing strategy, you should have pricing targets that you d like to hit and your business partner should monitor those targets at all times and inform you if and when you hit them. As an example, let s say your current rate for power for 2013 is fixed at.05/kwh for all kwh consumed. After discussion with your team and your supply partner, you d like to stay on a fixed rate (because you are a budget conscious organization). You speak to your supplier, as of today your rate to lock up for 2014 would be.053/kwh. Looking at the trends over the past year, you d like to be a little aggressive because you have some room in your operating budget if prices were to move up further. You can set a target to lock up 2014 s power if and when it gets below.05/kwh. Most reputable suppliers will have built in technology to constantly monitor the market on your behalf and automatically notify you when your price target has been hit. CONCLUSION Buying electricity would seem to be an easy process. You are not getting different, or better, power from one supplier or another. What this paper hopes to illustrate is that energy buying actually is a complicated process. Understanding that and knowing there are a number of ways an organization can take better control over their costs will be invaluable to an organization during the buying process. The most important thing you can do to ensure you are doing the right thing for your business year after year is to develop an energy buying strategy by determining your risk tolerance and understanding your goals for your energy spend. Once you have a strategy that works for your business, partner with a trusted advisor that can help you meet those goals and stay in line with your organizational strategy. This is the only way to get consistent results for each and every supply contract that you enter. Remember you don t necessarily have to sign on the dotted line when you hit that target. Maybe the market has been in a free-fall over the past week and you want to see if it continues, you absolutely have flexibility to do what you think is best. However, being notified that the market is where you wanted it to be can become an invaluable tool to put it on the radar and not put it off until three months before contract expiration. Timing is everything in buying commodities. "The best results will come from continually monitoring your forward pricing."
12 November 2013 LinkedIn linkedin.com/company/professionalretail-store-maintenance-association Facebook facebook.com/prsmassociation Twitter PRSM Video Channel vimeo.com/prsmassociation 5000 Quorum Drive, #700 Dallas, TX t f IndProg001 v1 IPV1 Revised: 11/2013