The Energy Wiz: Is That A Good Price?
This issue is especially important for pricing beyond two years. Even if a deal looked good the day it was signed, nobody wants to hear his boss say, "What happened? We're paying more than our competitors!"
Pricing for natural gas or electricity may be further complicated (even if subject to competitive bidding) because standard utility service may still be a viable option.
While never an exact science, let's take a look at a few of the criteria used to review forward energy pricing for a mid-sized client.
What's Up With The Demand?Start by narrowing the analysis to just what is needed for a particular customer:
- Which energy sources are of greatest concern? If 95% of the energy budget goes to electricity, paying a consultant to also project gas pricing may not be cost effective.
- What is the time horizon of the request (a year, a decade)?
- How vulnerable is the customer to price fluctuations (e.g., is only firm energy used, or can the organization switch fuels)?
- What is the expected load growth and/or change in load profile during the projected period?
- How certain must the analysis be (is ±15% acceptable)?
- What level of month-to-month price variation is acceptable?
What's Up With The Supply?Next, focus on the customer's energy sources:
- Was the offer unsolicited or a competitive bid?
- Are there any other potential suppliers that should be contacted for comparative pricing?
- Is all pricing still regulated, or will the customer accept alternatives to utility tariffs?
- What is the local impact of weather on utility energy pricing (e.g., is the local electric grid heavily dependent on hydro)?
- Where is the site relative to transmission systems (e.g., is it in an electric load pocket or at the end of an interstate gas pipeline)?
- What types of contract choices are available to the customer (e.g., flat pricing, time-of-use, dual fuel, Btu pricing)?
- If proposed pricing is tariff-based, what weather or wholesale price adjustments are allowed beyond the base rates?
- Are zonal changes in the supply/demand margin expected (e.g., opening of a new power plant or an energy-intensive industry)?
- Is a rate case pending that could alter tariff-based pricing?
- Are any tax issues relevant?
Available Data SourcesData from a variety of informational resources can now be brought into play, including:
- Annual projections by the DOE Energy Information Administration (EIA; www.eia.doe.gov), state energy office (listed at www.naseo.org/members/states.htm) or local public utility commission (PUC; listed at www.publicutilityhome.com/);
- The local PUC and/or utility with regard to pending rate cases, tariff options, and changes due to deregulation or new power plant construction;
- Recent pricing obtained by similar customers (while often proprietary, such information may be available through local customer and professional organizations, such as BOMA, and some trade publications);
- NYMEX (and other) futures market pricing in financial publications and energy trade websites (e.g., www.enerfax.com);
- Forward wholesale price curve assessments found in various trade publications (e.g., www.platts.com, www.bloomberg.com);
- Past retail energy pricing annual reports from BOMA, EEI, and other organizations that assess general trends;
- Data on local weather to compare base years to average years (from a variety of public and private sources, such as the National Climate Data Center at http://lwf.ncdc.noaa.gov/oa/ncdc.html); and
- If a multiyear contract is under consideration, projections of long-term energy price escalation rates may be found at www.nist.gov (look for the most recent Supplement to Handbook 135).
But Don't DawdleEnergy pricing is notoriously volatile. If a proposal is on the table, be ready to make a quick decision. Don't let analysis paralysis cost you a good deal. ES