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All About Energy

How to Guarantee a Beneficial Energy Contract

Jared Crane Jan 23, 2018 3:03:00 PM

A Beneficial energy contract is one that addresses all of the concerns that your company has about energy pricing, risk, and usage. These concerns also apply to your energy contract and pricing strategy that bests fits your risk level and usage needs. Being able to negotiate a contract that addresses all of those points and concerns is difficult. That’s where energy management brokers come into the picture.

Energy procurement doesn’t need to be difficult, but with so many different factors to consider, it does require that you understand what your company needs, the amount of risk that your company can tolerate, and what level of pricing you need. Commercial energy brokers help companies navigate the procurement process every day.

What Does Beneficial Mean to You?

One of the things that you learn quickly in the energy contracting game is that pricing is just one aspect that determines the quality of your contract. Judging the performance of your negotiation is a matter of balancing risk.

Key points include:

  • Wins: As long as you are not in a situation where there are undue restrictions it's a win.
  • What are your Payment Terms? If they are not causing a price increase, then you win. For example, 16- to 20-day payment terms are industry standards, and they shouldn't be a major increase in price or other credit provisions. This is a key point you can negotiate.
  • Normal Contracting is a win: Most stuff is pretty standard until you get into the pricing structure. If your contract is pretty normal, then it is a win. 
  • Normal Costs are a win: Keep your costs within normal ranges by balancing pricing structures with risk and choosing a product that fits those requirements. For example, if there is a major drop in oil prices or your credit rating changes, you may see across the board that the energy supplier will require a guarantee or a letter of credit. These sorts of requirements can cause higher prices and are not beneficial unless there is no other way. 
  • Buy in the Windows: There are limits on when you can trade for energy if you’re on a certain product. Because energy pricing is so dynamic a term that is too long or a volume of energy that is too large will shrink your opportunity to negotiate too far into the future. If you hit the windows at the right time you get the best prices for the volume and term length that you need. Outside of those windows, you increase price or risk. 
  • Billing Structures: There are differences in the way an energy supplier will bill you versus another supplier. Billing structures affect rates or costs, so be sure to choose a supplier whose billing structure matches your needs or with whom you can negotiate terms. 
  • Complete Costs: Energy contracts list terms but always compare what’s included in your energy costs with what is not. What is not included can cause a lot of problems. 
  • Define All Terms: Make sure everything in your contract is explicitly defined; Energy suppliers are not out to trick anyone, but you want to make sure that you select the product type and terms and conditions that work for your business. Defining terms mean that both you and your supplier are on the same page. Understanding is critical for beneficial contracts. For example, what works for a manufacturing company might not work for a construction company. Due to the differences in energy usage, a contract that works well for a manufacturing company could contain provisions that would be costly to a construction company. In energy, there is no set industry standard when it comes to defining terms or contract language. Different suppliers define the same term in different ways. Make sure you understand what terms mean so that you can evaluate how they fit into your company's needs and risk tolerances. 
  • Contract provisions and Language Clauses: A change in law is not a change, but the creation of a new law. 
    • “Change in Law” and “Change in Price” provisions – These are warning flags that allow the supplier to capture fees associated with changes in cost that are not related to changes in price. There is little room for them to capture all the costs of supplying energy with long-term contracts. "Change in Law" helps recover those costs. In short, "change of law" should not include "change of price" for the purpose of recapturing fees. Energy providers have to hedge their costs. Tip: Always look at the language and be sure to read and re-read the contract. This is not specifically a deceitful action, but a precaution that suppliers use. It is a situation that is best handled in the open rather than through subtleties. 
    • Always Look for what the "change in law" means. Make sure it clearly states what is bundled verses passed through. Pricing strategy is about a bundled fee, but passed through costs are outside of what is bundled. By being clear about start and end dates and pricing structures (block and index) and by knowing the limit on trading and transaction helps you find those hidden charges.
    • Bandwidth Billing – When you go outside your bandwidth bracket by either using less energy (selling back at LMP) or using more energy (purchasing at LMP plus an adder) there is a change in costs. Your contract outlines what the settlement provisions are. The language in your contract also provides for guidelines for what and how an energy provider can recapture those costs. Not all suppliers are aggressive in recapturing costs or providing refunds. 
    • Don't chase the lowest price – the amount of money an energy supplier pays to service your account is quite low so a lower price may mean lower amounts of service. Always balance service with need and then pick the service level that matches your need. The pricing is so low that you are better off with services than with saving money. You could spend a dollar trying to save a nickel. 
  • Structure
    • Bandwidth: Largest amount of energy the customer can lock in for bandwidth and usage. 
    • Flexibility in pricing – intermonth or in small increments or large increments and one-time (for locking in price)
    • Clauses that Effect Change in Price - Even if you’re on a fixed price, you may consider taking out a position as a pass-through or adder just to have the flexibility to capture value in a down market; it’s all about looking forward.
    • Structure that Matches Company Needs and Risk - The structure of your contract comes down to what someone is comfortable with since there is no one size fits all. Aim to balance risk and need by price and structure. 
  • Billing terms - Match to Company Need and Price Impacts
    • Days to pay - Payment terms and fees. 
    • How you pay - Cash, Credit card, etc. Larger providers probably won't take credit card
    • Late payment fees and how they are calculated
    • The format of the invoice and the information it contains. 
    • Make sure the invoice meets requirements for transparency. 
    • Look for things that don’t seem right, cause red flags, or that are gray areas. 
    • Always read the contract at least once if not several times before you sign. 
  • Credit

Pitfalls occur as the market changes, but the language of your contract determines how much change you encounter. Ask yourself, what your business is going to look like over time. Will your energy needs ramp down? Is the price structure tied to the price of oil? Are there lots of move-ins move-outs? How stable is usage? If usage is constant, then pitfalls should be lower. If you are adding a lot of energy and riding the upper levels of your bandwidth, then pitfalls are likely higher.

These are all questions that you should evaluate before shopping for energy. Knowing your risks is part of knowing the needs of your company. It is not just about consumption and price but also about the changes that occur within your company and those that occur within the energy production market, such as energy deregulation. 

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Topics: Electricity Rates, Energy Cost