Tag Archives: energy management

[BLOG] Managing the Risk of a Volatile Natural Gas Market

What does an effective natural gas purchasing strategy look like?

by Ben Saunders, ISG Enterprise Energy Solutions

The natural gas market has experienced two major shifts over the last decade. The first shift has been the development of major production centers across the country, creating a more robust supply network outside of the traditional Gulf producing region. The second shift revolves around changing policy, infrastructure, and energy consumption trends which have created new demand drivers for the fuel. Natural gas production is currently at an all-time high as demand for the commodity continues to aggressively trend upwards. In fact, in 2017 the U.S. became a net exporter of natural gas for the first time since 1957 due in large part to an increase in pipeline exports to Canada and Mexico and the rapidly growing LNG export market. Moreover, a growing demand for natural gas by power generators will continue to result in a closer correlation between gas and power prices.

So what does this mean for your utility budget? Six out of the last 10 years, national gas prices have fluctuated by more than 20 percent. With commodity costs accounting for about 70 percent of a utility budget, these types of year-over-year changes can be devastating. And even though we are still in a low price environment, prices on a month-to-month and day-to-day basis are still experiencing significant volatility. Spot prices during peak demand season and during utility restrictions, can break an annual budget due to one volatile month.

The main risks to be addressed by an energy manager are price, service requirements, and counter-party risk, all of which can be addressed through a strategic and proactive procurement approach, best-in-class contracting practices, and disciplined sourcing execution.

  1. Price – Customers are ultimately market takers, and of course, commodity prices rise and fall over time. The goal for a company should not be to beat the market or to expect price decreases every year, but to determine realistic goals based on their businesses needs and market expectations. Does your company value price certainty and budget stability? Is it important that your utility prices are not out of market for any given fiscal period? A company should consider its appetite for budget movement and time horizons for planning when making these decisions.
  2. Service Requirements – Tied closely to price, poor service requirements can alter a budget for scenarios that are not addressed in contracting. A common mistake we see during contracting is that companies do not address pricing and obligations for all volumes and delivery periods throughout the contract. Do your contracts explicitly state pricing points for all volumes? How will your supplier perform during utility curtailments? What communication do you have established with your supplier during adverse market conditions? All of these factors can and need to be addressed during the contracting and award process, and suppliers should be held accountable for maintaining their obligations.
  3. Counter-Party Risk – Low price levels and volatile markets in recent years have caused financial strain for many providers, resulting in significant vertical and horizontal consolidation across the energy retail supply chain. There are two problems that stem from this environment. The first is that market consolidation results in more restricted markets for retail customers. Fewer competitive, reliable supplier options require more unique contracting structures and greater transparency to maintain price competitiveness. The second problem is that financial strain on suppliers can result in unforeseen changes to contract obligations. Changes in ownership and calls for credit from suppliers can reduce the total value of the contract to the customer.

Procurement Strategy: Addressing Risk

Proactive Purchasing: Although customers must deal with both rising and falling markets over time, customers can work to mitigate budget fluctuations from year to year and work to hit internal targets. Many customers have the practice of extending contracts 30 to 60 days from termination. In order for a purchasing strategy to be effective, the market must be monitored constantly for opportunities to achieve internal goals: executing price reductions, hitting budgeted targets, avoiding additional cost increases. Moreover, the strategy should consider how far in advance the business is willing to act and what portion of volume needs should be executed with each purchase. By consistently monitoring and executing prices throughout the year, customers can minimize swings in their budget and reduce the risk associated with each purchase.

Best-in-Class Contracting: Another common mistake is allowing price value to deteriorate through poor contracting practices. Several contracting mistakes include not addressing or understanding a supplier’s delivery obligations, not addressing pricing for all delivered volumes and cost components throughout the term, and allowing for unfavorable extension terms.

Disciplined Sourcing Execution: ISG Energy promotes competition in almost every sourcing event. Creating cost transparency and challenging suppliers to contribute value through creative product offerings, empowers companies to drive the decision process and ultimately retain long-term value. The value created through price competition and transparency shouldn’t be lost because of a lack of understanding of the total value of the contract. Customers should develop the habit of reviewing suppliers’ credit requirements, financial health, operational footprint, and roles with other parties in the supply chain. This will help avoid unforeseen events throughout the term of an engagement that reduce value for the customer.

The natural gas market is at the center of changing policy, regulation, and infrastructure in America. The volatility and risk that this creates for commercial and industrial customers is an unavoidable issue. Customers must be proactive in developing and executing a purchasing strategy that best positions them to effectively manage this cost line item.

Interested in evaluating your current natural gas strategy?

Contact our ISG Energy experts to find savings within your natural gas spend.

[BLOG] An Environmental Response to BlackRock’s Letter

How your corporate energy strategy can demonstrate a commitment to sustainability while driving savings.

by Mike Muoio, ISG Enterprise Energy Solutions

BlackRock CEO Larry Fink, co-founder of the firm that has since become the largest asset manager in the world, made waves in January with his latest annual letter to CEOs. In the letter, Fink urged executives to acknowledge the societal impacts of their businesses and to use this understanding to inform their shorter-term decisions.

Fink argues that companies without a sense of purpose – those that are unwilling to respond to broader social challenges – will succumb to short-term pressures to distribute earnings, and forgo investments needed for long-term growth. This message from BlackRock coincides with a trend of increasing awareness in the larger investment community of the value in incorporating environmental, social and governance (ESG) factors into investment decisions.

As an investment strategy, ESG analysis is largely a risk management tool that weighs exposure to important societal issues, including employee relations, data privacy, carbon emissions and much more. From a business perspective, exercising leadership on these issues is an opportunity to manage risk, drive investor confidence, improve brand image and build strong relationships with employees and the community – all of which are conducive to long-term value creation. The rise of ESG investing, together with growing demands from shareholders and customers for businesses to embrace social responsibility, will have lasting impacts on how companies make operational decisions.

“Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we adapting to technological change?”
– Larry Fink, Black Rock CEO

While the challenges that Fink alludes to in his letter are exceedingly broad in scope and are in no way limited to environmental sustainability, our clients are already receiving pressure from key customers to address environmental concerns in particular. In the past two months alone, companies such as McDonald’s, Walmart and P&G have each made formal announcements of plans to significantly reduce emissions throughout their supply chains by 2030. As these aggressive targets are rolled out across their operations, the suppliers that exist within these value chains will be heavily impacted by these policies and must begin to plan accordingly.

The good news: incorporating sustainability no longer requires forfeiting returns. For most businesses, the ways in which energy is purchased and consumed is the primary source of carbon emissions. In recent years, the cost of energy projects that address these concerns have plummeted due to falling technology prices. Since 2009, wind farm costs have decreased by 67 percent, while utility-scale solar has seen an 86 percent decline – and corporate renewables procurement has surged in response. The steep drop in prices for renewable energy and energy efficiency technologies has created nationwide opportunities for high-return projects, which can often be structured as cash-flow positive agreements that shield customers from operational risks.

Today, over 130 companies around the globe have committed to going 100 percent renewable, and almost half of the Fortune 500 have set renewable energy or carbon emissions reduction targets. As this market shift continues to unfold, rapid technological advancements and financial innovations are challenging the outdated perception of sustainability and cost-reduction as strictly competing priorities.

*Wood Mackenzie, Limited/SEIA U.S. Solar Market Insight
*Wood Mackenzie, Limited/SEIA U.S. Solar Market Insight

Fink suggests that executives should include social responsibility in their corporate strategy, and energy-driven emissions reduction initiatives are a logical place to start. Executing on high-return projects with positive environmental attributes should be viewed as a crucial first step towards ESG excellence for any business. Many companies understand this reality but lack the resources and expertise needed to translate a conceptual appreciation of sustainability into real projects – especially those with a compelling ROI.

New opportunities for reducing costs and improving sustainability are emerging across the country; however, the profitability of these projects can be quickly eroded if managed ineffectively. Identifying the right projects for your firm with the right team of energy experts in place to guide implementation will ensure that returns will not be compromised.

Interested in learning more about cost-effective energy projects?

Contact our ISG Energy Experts for a comprehensive energy assessment!