Posted by Phil Cerria on Oct 22, 2015
The price volatility of energy commodities – along with the forces of the global economy, climate change, rapid trading and expansion, regulations and new commodities – has the power to put your company out of business.
To control energy costs, your business must be committed to the following two strategies, which are critical to surviving any number of energy-related economic disturbances:
may then consider strategies to help you manage commodity price-risk.Volatility of commodity prices presents the greatest risk to businesses. To effectively manage commodity price-risk, you first have to assess your utility bill supply costs over time.
The supply charge on your bill is the cost of both the generation and procurement of the commodity. Once the level of risk (a cyclical snapshot of price fluctuations) has been identified, you
Cost-reduction strategies for managing price-risk exposure vary greatly, depending on your company’s objectives. As a consumer, you’re likely concerned with purchase price variances created by
market volatility and deregulation. Many businesses develop a cost-reduction strategy through procurement.
Procurement Strategies: Fixed-Rate Versus Variable-Rate
A common procurement strategy is to enter into a fixed-price contract with your energy supplier for a length of time. While this eliminates the need to constantly manage financial risks, you have to be careful. Vendors may not always offer you the most attractive pricing.
Price Protection: Your rate is locked in, so you aren’t subject to rates going up at a moment’s notice.
Budget Stability: If you’re on a fixed budget, you are assured the rate stays the same for the duration of the contract.
Flexible Terms: You don’t have to sign up for a three-year contract – shorter terms are available, sometimes as short as six months.
Higher Rates: If commodity rates fall, you’re stuck paying higher rates for the length of the contract.
Exit Fees: If you terminate your contract before the term expires, you will incur a penalty from your provider.
The reduced flexibility of a fixed-price contract could leave you with a higher cost of energy. Another common procurement strategy is to take advantage of a variable-rate plan, where your rates fluctuate based on wholesale prices.
Potential Cost Savings: Over an extended period of time, variable cost ends up being the less expensive option.
Provider Flexibility: Since contracts are month-to-month, you may switch providers any time you want with no penalty.
Price Spikes: With a variable rate, you are subject to market price spikes, which may be too burdensome for some businesses.
This is where we are in 2015, and beyond, and businesses are now strategizing for the future of rising energy costs. The good news is that there are sound, proof positive ways to mitigate the risk associated with erratic utility bill fluctuations.
To fight market fluctuations, it is highly recommended that you partner with an energy expert to develop a customized commercial energy management plan. An energy expert helps you align business goals with a realistic plan to control energy costs.
Ready to create a strategic commercial energy management plan? Schedule your 15-minute, no-cost consultation with an Energy Advocate at South Jersey Energy today.» Schedule My Consultation