Chapter 1: The Fundamentals of Commercial Energy Procurement

What is commercial energy procurement? Why would a business make the switch? And who's in charge of doing so?

This chapter addresses these energy procurement basics, including what organizations should expect when seeking wholesale energy vendors, what contracts exist and who’s involved in every energy procurement step along the way.

What Does Energy Procurement Mean? 

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Commercial energy procurement is the process of sourcing the fuel or electricity a business needs to power its operations. This can be done by purchasing fuel from retail suppliers or from a utility company.

Many states are rolling back restrictions and allowing businesses to source energy from private retailers. These changes present an alternative to utility company-monopolized contracts — trading traditional gas, oil, and electricity models for deregulated, competitive, and transparent retail partnerships.

Managed proactively, energy procurement with a retail vendor can bring businesses a list of advantages, including:

  • Reduced energy costs

  • Increased operational efficiency

  • Improved operational sustainability

  • Greater peace of mind in running your business

Utility procurement is another term for energy procurement. This is the process by which businesses look for the most favorable energy contracts providing the services they need. Energy procurement involves finding an energy supplier that has lower pricing and, often, a solution that meets your needs specifically. Many businesses have special requirements for their energy. Pairing with the right supplier delivers greater efficiency.

Who Is Involved in Business Energy Procurement?

It's common practice for businesses across industries to shop around for the vendors best suited to their unique needs. But many don’t shop for energy in the same way.

In deregulated states, businesses can now vet regional energy retailers to find the right fit. In these states, finding the right energy provider is no different than shopping for the right raw material or service provider.

So, if businesses can shop for energy, who does that shopping? That process typically involves the following players:

1. The Energy Purchasing Customer

Many people don't realize they have a choice in where to buy natural gas and electricity. Shopping for the right vendor can be a powerful way to achieve savings and increase the amount of support your company receives.

Who is typically involved in this process? You don't need to have the word chief or senior at the beginning of your title to start the energy procurement conversation.

However, there are five roles in most today's business hierarchies with particular stock in energy management. These five energy stakeholders are referred to in this guide as energy procurement managers. They include the following:

  • Facility managers

  • Fleet managers

  • Supply chain or purchasing managers

  • Small business owners

  • Chief financial officers (CFOs)

While energy procurement managers may have different titles and overall responsibilities, one business objective remains consistent — achieving greater cost-savings for the organization through effective energy purchasing plans.

2. The Vendor or Supplier

Suppliers are the private, wholesale, retail energy companies providing energy to customers. An alternative to utility company contracts, suppliers procure energy from a variety of power plants and sources. They can then turn around and offer competitively-priced, individually-tailored energy packages to commercial businesses seeking more energy control and better pricing than off-the-shelf offerings from the utility company.

3. The Broker

As a third-party participant, energy brokers play a similar role to that of a real estate broker in the property buying process. Energy brokers bring buyers and sellers together, namely working with energy procurement managers to understand their organization’s needs and then reaching out to suppliers who can best meet them.

Energy procurement managers can choose to work with a broker or not. Depending on their industry or the nature of their business processes and operations, brokers can answer questions and provide additional support while a business vets potential sellers.

4. The Utility Company

Utility companies still play a role in commercial energy procurement, namely in generating and delivering power. While deregulation allows other companies to sell energy, utility companies can continue to sell it, yet they also remain responsible for the infrastructure delivering power.

Utility procurement can assist you in finding better pricing while still using your utility company. Your business's bills will continue to come from the same place. The distributor's name remains on them. Energy procurement means shopping around for a supplier that will provide more favorable pricing than your utility company or another supplier you may have been using. You can benefit from the competitive energy products on the market.

Hear from real businesses about the doors an effective commercial energy procurement plan opened for them.

What Type of Organizations Can Use an Energy Procurement Service?

Energy procurement services are beneficial to nearly every type of business. All companies have overhead energy costs. When you use utility procurement companies, you stand to reduce those costs and may also even find more favorable packages that include other perks as well. You can also get easy access to green energy, which delivers on your company's desire to use more environmentally friendly sources.

It's difficult to think of a business that couldn't benefit from energy procurement strategies. Some of the types of businesses that employ this service include:

  • Nonprofits
  • Small businesses
  • Industrial and commercial organizations
  • Governments
  • Schools

Your company can benefit, too. Any company with a focus in any area can enjoy savings when you switch your supplier, and energy procurement services make the process easier. You can feel confident you're getting the most favorable deal when you have analysis and research behind your decision.

Why You Need a Commercial Energy Procurement Plan

Having the right energy procurement strategy in place can save you money. Such a strategy puts you in control of your company's approach to energy. That power allows you to tailor your plan to your needs, not the needs of another business.

You can decide on a pricing structure that matches your unique requirements, for instance. You may prefer fixed pricing or market pricing. Perhaps you want to try blended pricing for the opportunity to receive more potential savings. Since every business is different, not all will benefit from these strategies. You can pick and choose what suits your individual needs.

Commercial energy procurement can also simplify things for your company. For instance, you might receive just one bill for your gas services instead of getting a bunch of bills for different facets of your operation. This makes it easy for accounting and bookkeeping. Taking the strain off those in your organization and making things flow better is one major benefit of using energy procurement.

You can also delve into questions that could save you more money in the long run when you have an individualized plan. Some things you may want to consider include:

  • Are there any partnerships or consortiums available?
  • Are alternative fuels available?
  • Can you negotiate on pricing or other aspects of the deal?

The Fundamentals of Energy Procurement for Your Business

1. Energy Contract Types

There are many ways to structure today’s energy purchasing contracts. However, several primary contract types exist for customers to adopt through their chosen energy vendors:

  • Fixed Contract: Fixed contracts lock in a rate for supplied energy over a set period. Customers pay that fixed rate (and only that rate) regardless of energy market fluctuations. Fixed contracts are attractive for risk-averse customers. They allow for price stability, predictable billings, and easier budgeting, insulating businesses from rate increases. On the flip-side, fixed contracts can lock customers out of savings when market prices go down.

  • Fixed contracts have an important caveat: projected usage swing. Let’s say your company holds a fixed-rate contract with one partner supplier. In your contract, you agree to a certain fuel or power volume plus a “swing” percentage outlining how much you can under or over that volume (for example, ten percent). That swing percentage means your business’ fuel prices are fixed as long as you remain within ten percent of contract volumes. However, should your usage vary by more than ten percent, your per-unit fuel costs can increase substantially.    

  • Variable Contract: Variable contracts contain bill-to-bill rate changes. These fluctuations reflect the energy market's trends and disruptions. Variable contracts are for customers willing to risk price hikes to see significant savings when prices dip back down. They gamble that these lower prices will extend over longer periods and earn them greater gains compared to what they spent during peak rates.

  • Indexed pricing: Indexed pricing is a type of cost-plus-differential contract often used for liquid fuels suych as propane, diesel, gasoline and oil. Cost-differential contracts allow the customer, for example, an energy procurement manager, to negotiate the price differential they provide suppliers on top of a fuel’s wholesale market price. For example, say a company in Hershey, PA negotiates a cost-plus-$.30 indexed price to source diesel from their nearest terminal, located in Highspire, PA. If the market price for that diesel at the Highspire terminal on a delivery day is $2.00, then the company will be billed $2.30 for each diesel gallon delivered.    

  • Blended Contracts: Many customers opt to combine fixed and variable rates for a blended contract. The goal of blended contracts is to provide customers a comfortable level of predictability while also enabling them to benefit if wholesale energy costs decline. For example, a business with a blended contract may lock in 70 percent of its fuel volume on a fixed rate yet leave the remaining 30 percent to variable. If market prices do decline, cost-savings would apply to that 30 percent of assets, while market-price increases would affect only 30 percent of usage.

2. Understanding Fuel Types

Developing a custom energy procurement plan for your company starts with understanding fuel types.

Tailored retailer plans can include all, a few or just one of the following fuels:

Energy procurement managers should take a deep look at which fuel types and amounts their operations use. Compiling this information creates your energy portfolio. Brokers can step in to help customers navigate potential vendor offers and market prices in these early auditing stages based on their portfolio.

Alternatively, commercial customers can work directly with energy retailers to get quotes and tailor contracts serving their complete commercial fueling needs.

Why You Need a Commercial Energy Procurement Plan

There are many benefits to better controlling and sourcing your fuel. Some businesses fixate on energy as a commodity — an untouchable overhead expense that should only be purchased based on the lowest price. The right procurement strategy turns this energy into a competitive advantage.

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How can retail energy providers better serve your business? A customized procurement plan allows your business to experience benefits it simply couldn't from a conventional utility contract, including:

1. Increased Peace-of-Mind

A well-planned energy procurement strategy can add certainty and dependability to operations including the following components:

  • Scheduled deliveries, and potentially fixed rates means contract commitments and action plans with very few surprises.

  • Minimize the risk of encountering unforeseen charges, hidden feeds and costs.

  • More informed load forecasting based on research and monthly usage reports sent to you by your vendor.

  • A reliable source of fuel — essential for industries like construction, manufacturing, transportation and healthcare.

  • Custom-tailored energy-management advice from independent brokers and/or your vendor.

2. Greater Energy Autonomy

Customized energy procurement plans give your business greater autonomy, letting you:

  • Have proactive, not reactive, control over fuel costs, fuel types, financing and billing schedules.

  • Call the shots with contract specifications, financing and fuels sourced.

  • Create a commercial energy partnership with new tiers of personalization, flexibility and organizational goal alignment few utility companies can match.

3. Simplified Vendor Relationships for All Energy Needs

An energy procurement plan can consolidate your vendors, providing you with:

  • A one-stop-shop for energy documents, billing, questions and concerns.

  • Simplified, organized delivery schedules and transaction management, often through one digital system.

  • Dedicated account managers who know your business needs and how to help you succeed.

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