Three Keys to Strategic Energy Management

How to reduce energy costs while mitigating risk


Energy management providers like my own company, U.S. Energy Services, can offer valuable assistance with creating competition between suppliers. Energy management providers break down the natural gas buying process based on the three components of service: commodity supply, long-haul transportation and local distribution. By focusing on each component separately, they are able to provide businesses with the lowest possible prices.

First, energy management providers arrange contracts and credit with three to five suppliers. This allows them to see the prices each supplier is offering and choose the lowest price. Since most energy management companies only deal with suppliers that offer a quality product, price is much more of an issue that the product itself.

Once the natural gas is purchased, it needs to move through the interstate pipeline. Energy management companies work with businesses to determine their flexibility in procuring energy. If a business can tolerate some interruptions, they will be able to pay a much lower price for the interstate transport and distribution services. But if a business has an extremely high reliability level that needs to be met, then the energy management company will find a more reliable service.

The last step is working with the local distribution company. Generally, companies take the posted price, but there are some situations where energy management companies can work with local providers to get a discount on natural gas distribution services. For example, if a client is located near an interstate pipeline, it can perhaps tie directly into the pipeline and bypass the local distribution company or get a discount from the utility in exchange for not bypassing.

Along with market activity, determining delivery costs is another important variable to consider. Specifically, businesses should examine the cost of moving energy from the commodity point to the consumption point. In the case of natural gas, businesses should compare what they are paying to the Henry Hub, a point on the natural gas system in Louisiana that is used as the pricing point for natural gas futures contracts traded on the NYMEX.

If a business transports natural gas from Henry Hub, then it simply needs to look at the cost of moving the natural gas through the interstate pipeline. However, most businesses are not physically served with gas from Henry Hub, in which case there is a basis differential that represents a combination of the value difference between Henry Hub and other liquid pricing points and the transport costs in getting natural gas to the delivery point. For example, a business that obtains most of its natural gas from the Mid-Continent area or Canada should closely examine the value of gas coming from both sources and the transport costs. The objective should be to manage price volatility in the supply basin and work to push down transport costs to the lowest extent possible.

3. Cost-cutting Best Practices

Being aware of the essential issues involved with energy management is important, but equally as critical is implementing processes that can help businesses optimize their energy budgets.

Assess utility tariff options: It is up to an individual company or its energy management provider to determine whether it is paying the lowest possible tariff. Utility companies generally have no obligation to ensure that energy users are receiving their best tariff. As tariffs change and operating parameters within companies are altered, businesses need to examine alternative tariffs to make sure they are on the one best suited for them.

Keep an eye on government regulations: Many states have already passed regulations on carbon emissions, and many industry observers believe that federal carbon legislation will soon be a reality. An increasing number of businesses are taking this seriously and have begun preparing themselves for a carbon-constrained world. Your company should have an idea of how potential – but sweeping – regulations may affect it, and what you can do now to cut emissions and save money in the future.

Evaluate demand response programs: Within the last few years, electric utility and power pool operators have developed programs that provide incentives for businesses to curtail their energy uses during times of high demand. In exchange for cutting back on the energy they use, businesses receive monthly payments from the utility. Such programs are basically interruptible electric programs, but the ability to manage the programs has been greatly enhanced with better meter and control technology. There are a growing number of businesses signing on to demand response programs, and it is beneficial for almost any plant to consider this approach.

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