As 2014 Electricity Prices Escalate Above 6 Cents, Calendar 2015-2018 Rates Are Still Available Below 5.5 Cents As Buyers Rush To Lock In Savings.

Electricity price spikes this winter should sound an alarm bell for
energy users in every region of the country that relies on natural
gas-fired generation as its marginal source of supply. The last few
months have seen record electricity prices in several regions
including Texas, where hourly prices briefly reached as high as
$5,000/MWh and 2014-2015 Commercial rates are now offered over 6
cents/kw for most medium-sized companies.

What lessons should be drawn from these events?

First, the good news: nationally, the natural gas market remains
adequately supplied. As all of us who have lived through winter
weather this year can attest, this winter has seen some of the
coldest days in the past twenty years. Further and of particular
importance for energy buyers despite the price spikes this winter,
the price strips for Calendar 2015 and beyond have barely budged
and are still priced at very attractive levels, enabling buyers to
mitigate longer term risks.

Second, the bad news: while prices have started to pull back, this
winter’s Arctic blasts are likely to keep natural gas and
electricity prices substantially above year-ago levels for much of
the rest of this year and potentially even to the end of next winter.
This potential for elevated prices, however, will not end when winter
weather fades. During this year’s injection (storage) season, from
mid-April through October, the market will be faced with a herculean
task, in order to replace the massive amounts of natural gas
withdrawn from storage this winter. This could result in continued
upward price pressure all spring and quite possibly into next summer
for both gas and electric rates.

Finally, the really scary news that every energy buyer should take to
heart: This winter’s natural gas price spikes are only a small part
of the story. This winter has revealed a major risk factor developing
in electricity markets in several regions of the country- a lack
of adequate natural gas pipeline carrying capacity to serve total
demand for natural gas during periods of high demand, in a market in
which use of natural gas for space heating is continuing to grow,
coal and nuclear-plants are being retired and natural gas is
increasingly becoming the dominant fuel for electricity. It is this
huge infrastructure gap, not traders and speculators that have
caused natural gas prices at constrained hubs to set new all-time
records and caused severe price spikes in electricity prices in large
areas of the country. Further, absent immediate action to address
these infrastructure issues, this problem could become much worse as
additional coal-fired plants are retired and utilization of natural
gas continues to increase.

Conclusion: The magnitude of these risks should not be
underestimated, but do not yet appear to have been priced into
Calendar 2015- 2018 electricity futures in most regions. We urge
buyers to strongly consider covering a portion of their requirements
further out in time while a favorable buying opportunity still
exists.

Texas Hourly Electricity Prices Reach $5,283 MWh Amid Freezing Temps

Texas Electricity Tops $5,000 MWh. Would A Capacity Market Have Made A Difference?

The Texas power grid narrowly averted rolling outages early Monday as frigid temperatures gripped the state, forcing the grid operator to take emergency steps to meet rising power demand for heating. Electric supplies became tight after more than 3,700 megawatts of generation was forced to shut overnight Sunday and early Monday. About 1,800 MW of the 3,700 MW of the forced outages were weather-related, including two large power plants in north central Texas, and came on top of nearly 10,000 MW of generation that was already shut for the season or in planned maintenance. As a result, wholesale electricity in Texas topped $5,000 a megawatt-hour for the first time in ERCOT’s history, prompting the grid operator to avoid rolling outages by calling on about 1,600 MW of demand response (programs under which some customers are paid to curb power use) and import 180 megawatts from Mexico and another 800 megawatts from the Eastern US just to keep the lights on.

“Energy Only” or Capacity Markets, Which is Better for Texas?

Monday’s emergency is sure to complicate the debate about the need for more generation in Texas, which has divided the Public Utility Commission and raised concern among state lawmakers. Scarcity price caps of $5,000 (2013), $7,000 (2014) and $9,000 (2015) assumes that competitive firms will enter the market as needed to maintain the right amount of reliability in response to these prices. But consumers could still be paying much more than necessary because this mechanism develops a price stream that is highly variable year-over-year. Sure, equity investors will earn a reasonable return over the long run, but the key issue concerns debt. Lenders are going to look at yearly cash flows and ask what are the chances of a year, or even multiple years of little or no scarcity prices? What about the risk of unseasonably cool summers that can occur about 20% of the time and recessions can happen a few years every decade?. These are the questions that will be asked by lenders because they are not worried about average returns, but instead about the ability to make debt payments in bad years. Any system that makes it harder for energy companies to borrow money drives up the costs for all consumers.

While an “Energy Only” structure isn’t perfect, a Capacity Market might not be the answer either as congestion problems can often remain unresolved. This particular problem is a challenge for all short-term capacity markets to date. Where transmission congestion is a problem, prices will be high in the constrained region, but the addition of the needed capacity in just the right place can often result in the prices collapsing and the supply that solved the problem is no longer compensated. Just like with scarcity pricing, once the problem is solved the premium is gone. But from the customer’s perspective it’s even worse: They have to be happy with a structure that charges them extra for an unreliable system where the extra money they are spending does nothing to solve the problem. As we’ve seen in other markets where capacity charges exist, more that 90% of the payments made to date (totaling over $50,000,000,000) has not resulted in the building of any new generation..

What Can Texas Consumers Learn From This?

Whether we go to a Capacity Market or stay with an “Energy Only” market, high prices are an indication of a problem, but do not provide the right incentive to fix it.

Is Your Texas Electricity Rate Below 5.3 cents/Kw through 2017?

Where are 2014-2017 Commercial Wholesale Rates?

With ERCOT fixed-price, all-inclusive retail rates offered below 5.3 cents/KWh through December of 2017, what is your company risking by not acting on it?

Risk #1: Historically Low Rates Are Unlikely To Last
After last year’s glut of cheap natural gas- the major power plant fuel here in Texas- low but rising gas and wholesale power prices have commercial buyers quickly moving to lock in low, fixed-rate, all-inclusive contracts through 2017 while they last. But with 2013 natural gas prices up over 50% from 2012, and the wholesale energy cap now set at $7,000 MW for 2014 ($7.00 KW Retail) and $9,000 MW for 2015, the market seems poised for higher prices. Adding additional fuel to the fire, recent estimates by consultants to the Texas PUC suggest that wholesale prices need to move up at least 30-40% in order to reach pricing levels where someone would be able to secure the financing to build new generation.

Risk #2: Your Company Is Technically “Short”.
As anyone experienced in the ERCOT market knows, the high demand and volatile prices during peak summer periods can easily make or break a company’s energy budget, and effective strategies to manage costs during such volatile periods are critical to maximizing a company’s overall financial performance. Where we see a company’s greatest financial risk is in how it views it’s future energy needs. It’s our opinion that it should be viewed just like every other commodity or raw material you buy to run your business.. with additional benefits. Having no storage fees, no interest payments, no payments until AFTER you’ve already consumed it, and the ability to lock in today’s historically low price fore the next 5 years, most sophisticated commercial energy buyers would consider this a “hedger’s dream”. At the other extreme (from a risk management position), if a company hasn’t yet locked-in and bought power beyond it’s current contract needs, but plans to be in business and consume power in the future, then they should consider themselves as carrying a “net short” trading position in electricity…. the world’s most volatile commodity, in ERCOT… the world’s most volatile market. When viewed in that context, is your company comfortable holding that position and willing to assume those budgetary risks?

Risk #3: You Miss The Opportunity By Waiting Until Your Current Contract Ends.
If your business is a fixed-price, all-inclusive buyer, we highly recommend contracting your electricity needs for at least the next two to three years of exposure. If prices fall even further you can always blend it down, having already made the smart decision and essentially bought insurance, and if the market continues to rise as it has done the last year, then you’re a hero. Given where today’s prices are offered when compared to where they’ve been and where they’re projected to go, the greatest risk to your company’s budget is probably to the upside.

Risk # 4: Inability To Identify The Lowest Cost Providers
Although the table below shows current wholesale prices, the wholesale component can typically account for about 65% of your total retail costs. All Retail Electric Providers buy and sell in the wholesale market daily and add their respective profit margins to come up with the final price you’re offered. But, electricity is electricity and nobody makes a better version that will make your lights burn brighter of your machines run faster, so why pay more than you have to? With almost 150 Retail Providers to choose from, why is it that over 95% can’t or won’t offer rates below 5.3/KW? It’s simply because they need to make a greater profit, value future risk higher, or they’re just not as aggressive and prefer to go after the higher margin, less sophisticated buyers. However, it is our professional opinion (as someone active in the wholesale and retail markets every day) that a medium-sized commercial buyer should look to pay no more than 5.3 cents/Kw for any fixed-price, all- inclusive products (including “basis” and “congestion” charges”) for any terms through December 2017.

Where are 2014-2017 Commercial Wholesale Rates?

Note:
1) All prices shown are in $/MW and represent the wholesale price component only. 2) The “Current Percentile” represents where today’s price falls within each contract period’s range from the start of trading. 3) Retail prices are generally between $10-$20 higher depending on the amount of profit/risk margin the a Retail Provider adds. 4) To convert “Wholesale” (MWh) to “Retail” (KWh) divide by 1,000. Example: Cal 2014 at $37.80/Mwh= 3.78 cents/Kwh or a rate of .0378/Kwh.

Note: 

1) All prices shown are in $/MW and represent the wholesale price component only.  2) The “Current Percentile” represents where today’s price falls within each contract period’s range from the start of trading. 3) Retail prices are generally between $10-$20 higher depending on the amount of profit/risk margin the a Retail Provider adds. 4) To convert “Wholesale” (MWh) to “Retail” (KWh) divide by 1,000. Example: Cal 2014 at $37.80/Mwh= 3.78 cents/Kwh or a rate of .0378/Kwh.        

 

When Is The Best Time Of Year To Lock In Your Long-Term Electricity Contract?

As shown in the chart below, there’s historical proof  that long-term, fixed-price electricity contract rates tend to go down during the fall and spring season each year as natural gas prices move toward  their seasonal  lows.  Today, with natural gas prices at low levels, more and more energy suppliers are using natural gas as the primary source to generate electricity. The increasing percentage of natural gas in electricity generation production has caused commercial electricity rates and natural gas prices to be highly correlated; A rise in natural gas prices is sure to be followed by a rise in forward electricity rates. This means that when you look to lock in long term fixed electricity, the forward natural gas price will have the greatest  effect on the final price for power.  Since electricity pricing is based on future forward contracts fixed rates are highly correlated with natural gas future contracts.

So how exactly does gas set the power price? In most regions of the US, the price paid for electricity from the last power plant fired up (to meet the last unit of demand within a given hour) sets the wholesale price paid to all previously dispatched units within that region. And since gas-fired power plants are usually the quickest to start (and most expensive to run) when compared to nuclear, hydro, wind and coal they tend to be fired up last, thereby setting the hourly price.

With natural gas prices at or near seasonal  highs, buyers who rely solely on the bias of a sales person more interested in timing the close of the sale (and his commission), instead of timing the market  will usually end up making a  poor buying decision that can  affect the company budget for years.

Market conditions like seasonal highs and lows play a major role  in determining how varying contract term lengths are priced.

The graph below reflects the seasonal pattern of  natural gas since the start of trading over 22 years ago. The addition of a most recent 15 year period (solid line) helps to show how the seasonal pattern has evolved over time.  The graph reaching  0 represents the seasonal low (the time of year when prices are most consistently low) and the graph at 100 represents the seasonal high.  A reading of 20 represents when prices have tended to be in the lower 20% of the year’s eventual  price range.

So then, how can you take advantage of the seasonal lows in electricity prices when your contracts don’t expire at the right time? It’s really a lot easier than you think.

First, ask for your next contract to have a  “customized ” term (of any length) that would put all  future renewal dates at or near the spring or fall season.  Most retail electricity providers can quote customized term lengths outside the normal 12, 24, 36 & 48 months commonly used.  Once your renewal dates are  in sync with the gas market,  then all  future quotes can then be requested in standardized terms lengths.

Second, even  if you’re not able to time the renewal dates as described above, you should always  look to price and lock-in all your energy contacts during the annual lows (regardless of expiration dates) as all months in the forward curve will generally be lower during this same period.

Third and most important, ask yourself why your current broker or consultant hasn’t suggested this strategy in the past?  Could it be their knowledge or experience level?  Sure, there are a lot of brokers out there. Some of them are talented, hard-working, honest business people, and some just don’t have the industry experience and know-how as those of us directly in the business.   With over 22 years experience in electricity, very few are as tested and successful as we are.  We know the commercial electricity market, and we know how to help our clients develop and execute an energy strategy that can save money and reduce risk.

Is This 2013’s Last Opportunity To Lock In Year-Over-Year Savings?

As Energy Prices Head Toward Their Traditional Seasonal Highs, Is This Your Last Opportunity To Lock In  Year-Over-Year Cost Savings?

It’s just a simple fact.  All electricity contacts only satisfy  your company’s needs for the term of the contract, and until your facilities close you’re always in need of electricity.  With seasonal energy prices about to head higher as they normally do, now is your final  window of opportunity to save money compared to your present rate, especially if you’re coming off a 24 or 36 month contract or within a year of your  next renewal date.   While waiting longer could result in lower prices, we believe there’s a much greater risk of  higher pricing given that the market is already skewed to the upside due to normal winter demand and mandatory coal plant retirements required by the EPA.

As the chart below shows, over the last 22 years natural gas (which is the primary fuel used in power plants) has tended to provide it’s lowest annual pricing in August and September, and this year looks no different.  Historically, prices have consistently tended to rise into October and November as the industry tries to build it’s inventory to meet cold-weather demand, with an additional increase into April as warm-weather distributors accumulate their own inventory to generate electricity and meet regional cooling demands.

Where are we historically?

The chart below exhibits two seasonal patterns: the most recent 15 years (dotted) and the entire 22 years of the Natural Gas contract (solid line).  The graph reaching zero represents the seasonal low (the time of year when prices are most consistently low); the graph at 100 represents the seasonal high (when prices are most consistently high).  The graph at 20 represents when prices have tended to be in the lower 20% of the year’s eventual range.

 

 Where are we today? Need More Confirmation?

Now look at  the chart below. It was taken today (8-2-2013) and shows that this year’s seasonal price movements have followed their traditional patterns almost 100%. It is our opinion that the next few weeks will provide the final opportunity to lock in the lowest electricity rates we’ll see in the next  6-12 months. Now is the time to act!

Already Use a Broker?

Just because you currently utilize the benefits of a broker does not guarantee that you’re seeing  the lowest rates available. With over 100 licensed retail electric providers in Texas alone, doesn’t it make sense to utilize all available resources to be sure you’re really seeing the most aggressive rates?  Why not let someone else  also compete for your business?  You have nothing to lose.

In closing, the opinions expressed above are strictly my own based on over 25 years of trading experience in the wholesale energy market.  Unlike most brokers and consultants who prefer to stay neutral in order to “never be wrong”, I believe that  clients need more than just “numbers and choices”.  Anybody can supply that. Has your current broker called and offered such information and advice?  Have they really earned your business?

 

 

Electricity Procurement 101: How “Doing Nothing” Becomes A “Net Short” Trading Position

Today, every business enterprise uses electricity in one form or another to manufacture their product or deliver their service. Whether they “buy, transform and sell” or “buy, add value and deliver” they need to be equally good at all three aspects if the business is going to be successful. Resources are needed at one end of the business just as much as customers are needed at the other as long as your facilities are operating.

Despite significant challenges and economic pressures to improve performance, many organizations still seem satisfied if their electricity procurement efforts simply deliver value through cost savings. But with the recent doubling of natural gas prices from 10- year lows, there will no longer be an opportunity to reduce electric costs and save money.

It’s been my experience lately that most buyers are simply not willing to commit to higher priced contracts (and lock in higher budgets), denying the organization the opportunity to minimize future cost increases.

Today, most energy buyers I contact are so focused on managing the day to day procurement needs in front of them that they fail to realize (or fail to accept ) what’s going on behind them in their energy supply chain. With greater and greater frequency I hear the response: “Thank you, but we’re happy with our current contract, try back in a year”. Unfortunately, that response addresses none of the organization’s future needs. Entering into an electricity contract only satisfies the need for the term of the contract and until your facilities permanently close you’ll always be in need of electricity. But the time period after  the contract expires is just as important to manage since that’s where your budget risks really lie.

Based on the information presented below I’ll attempt to show how the risk of doing nothing today is far greater than risk of being wrong tomorrow.  Ignoring the current opportunity to secure future energy needs at near all-time lows could be putting the entire business at a competitive disadvantage if your competitors seize the chance. In fact, put another way, those organizations that do not lock in future electricity costs are unconsciously taking a “net short” position in the most volatile commodity on the planet. Is your procurement strategy really a trading strategy? Is that officially authorized?  Electricity is the world’s only commodity that is manufactured, transmitted, distributed and consumed all within the same second. Considering that most organizations don’t have an energy expert in the procurement position, that’s the business equivalent of  “playing with fire”.

Measuring the Risk vs. Reward of “Doing Nothing”.

Today, the price of natural gas directly affects the production cost and offer prices of gas generators in the wholesale electricity market.  Because natural gas-fired generators are the price-setting suppliers in most hours, the price of natural gas strongly affects the market-clearing price for electricity. The chart below shows recent Texas electricity prices and natural gas prices, demonstrating the close relationship between natural gas and electricity prices.

Gas Price Risks of “Doing Nothing” 

Today, although Natural Gas prices are trading just over $4.00, they’re still about $9.00 below the 2008 high and just $2.00 above the all-time low. Despite the recent surge in prices, natural gas is still close to the $4.00 estimate that S&P believes would cover the discovery, development, and production cost of natural gas. Are you willing to risk your energy budget to get a lower gas price given that the odds are so low against it?  Do you know something the Gas Industry doesn’t ? Given the greater odds of higher vs lower prices what are you waiting for?

Electricity Price Risk of “Doing Nothing”

Today, a generator’s basic requirement is that they can expect future revenues to be high enough, often enough, to cover the costs of building and operating a plant, including a return on capital commensurate with risk. The August heat wave of  2011 (shown as the blue spike in the top chart) led to the use of energy emergency procedures 6 times and 19 hours of prices at the $3,000 price cap. While this year’s cap is now set at $5,000 (2014 is $7,000 and 2015 is $9,000) Higher prices are needed to encourage companies to build more power plants to keep up with the expected population growth in Texas. Industry experts say generation companies that operate the state’s power plants are losing money because prices are too low for most of the year and they only make money during the hottest summer and coldest winter months.  According to The Electric Reliability Council of Texas, which oversees the wholesale real-time market in Texas, prices for electricity in the region have averaged only $25 a megawatt (wholesale) hour since the beginning of the year.

Most generators have commented that 2013 and 2014 futures are probably under-priced relative to what actual spot prices will be. Further, they believe the futures market may not fully reflect new rules whose implications for prices are difficult to model.  When measured against recent price history (shown above), is the limited reward of prices moving slightly lower worth the unlimited risk of  prices moving  increasingly higher?  Better yet, is the right person in your organization making the call?

In closing, the opinions expressed above are strictly my own based on over 25 years of   trading experience in the wholesale energy market, which includes managing trading on behalf of TXU. Unlike most brokers and consultants who prefer to stay neutral in order to “never be wrong”, I believe that clients need more than just “numbers and choices”. Anybody can supply that. Has your current broker called and offered such information and advice? Why’s that?  Are you simply going to call them now and ask them for quotes? Have they earned your business? Probably not.

 

Decision Time: Buy A Higher Priced Electricity Contract Today or Wait?

Since the economic downturn in 2008 most electricity consultants and brokers could do no wrong by selling “savings”, and everybody knew somebody who knew somebody that was “ in the business ”. Inexperience quickly became expertise as prices went lower and budgets looked better year after year.

Today, corporate energy buyers are facing the prospects of locking in their electricity contracts at higher rates or waiting for something better. For those of us with years of experience, it’s nothing new as markets go up and markets go down. But for those with less experience or new on the job, paying more for anything can make it difficult to feel confident that you’re making the right choice at the right time for your business. When it comes to energy procurement, experienced professionals know that energy buying is not always about saving money as much as it is about losing less money.

As your company’s energy buyer you now have to chose a product and energy strategy that suits and supports your business objectives. These products and strategies are designed to help business owners parlay the inherent volatility and direction of the wholesale electricity market into opportunities for future cost control or the support of other business objectives. But, to take full advantage of these opportunities businesses should learn to look beyond the simple comparison of rates.

First, you should understand the variables that affect market pricing. The system is complex and subject to continual change, ranging from traditional seasonal cycles to periods of extreme volatility. Your understanding of both current and anticipated market conditions can help you choose the right strategy for your business.

Electricity Procurement Choices: Fixed or Index Rates

Your goal is to select a product based on both external factors (such as market behaviors) and your own business needs (such as long term profitability goals, monthly budgets, risk tolerance). Successful cost control requires a full consensus on the strategy selected and an agreement that the ultimate objective is “predictive profitability” over the long term.

A) Fixed Price Product

What it is: A fixed price product provides a set rate per kilowatt (kWh) for the supply portion of your electricity bill. Your bill will vary by usage, but the rate you pay for electricity will remain constant no matter what happens in the market. Currently, this product is selected by over 90% of commercial accounts.

What it offers: A fixed rate is often preferred by business with a low risk tolerance and/or very little budget tolerance. Through this approach you gain a level of budget certainty which can help you control operational costs. Cost control should not be confused with immediate cost savings, although a well- timed purchase can produce cost savings over time or at moments in time. Timing is important. You want to lock in when rates are low (on a historical basis) for the time horizon you are considering and you must weigh the value of waiting for a dip against the risk of waiting too long. Although there might be a forward premium to be paid in comparison to your current rate, recognize the bullish risks that justify this long term premium and that are likely to be sustained.

B) Index Product

What it is: Indexed priced products provide electricity at a rate that is linked to a transparent and published index. While fewer than 5% of businesses use this product as a long-term strategy, there are instances where the index can provide opportunities for cost savings. However, your company’s risk appetite for price volatility should be carefully considered in your decision.

What it offers: This product allows you to avoid the price premium that may be charged for fixing a long-term rate. An index priced product may also provide flexibility to take advantage of short-term market opportunities until market conditions are considered more advantageous to lock in a long term contract.
Conclusion: With summer starting this is your last chance to lock in remaining forward pricing without being exposed to summer price volatility and it’s effect on future pricing. Recognize the value in the long –term despite it’s premium. After hitting all-time lows last year the markets have all rallied, especially Calendar 2013 and beyond. While waiting longer could result in lower prices, it also increases the risk of a market surprise, which is mostly skewed to the upside on a historical basis.

Although prices are higher than your current contracts, recognize the risks that justify this premium (and that are likely to be sustained) and don’t become paralyzed if the bottom of the market is behind us.

Texas Electricity Price Outlook for 2013-2016

 Going into the 2013 summer season, electricity prices in Texas have the potential for some considerable upside movement. While fixed prices for forward electricity still remain low based on long-term history, they are higher than a year ago as the futures  price of natural gas, the primary fuel source in power generation, has risen  over 100%  from last April’s low.

   Although year-over-year savings may not be available, it’s important to consider the huge upside risk of the spot market now that the ERCOT offer cap has been raised to $5,000/MWh beginning on June 1, 2013 ($7,000 on June 1, 2014 and $9,000 on June 1, 2015). Remember, it was just two summers ago during the 2011 July heat wave that the ERCOT market hit its cap of $3,000/MWh for approximately 20 hours. With tight emergency reserves and the risk of higher than anticipated summer temps, there is always the possibility that the market could reach the new  $5,000/Mwh cap, resulting in much higher future prices as generators rush to price in the increased risks of future spikes.

 2014-2015 Outlook:

In considering longer term contracts, although prices for 2014, 2015 and 2016 are higher those offered today, they may still be worth considering. While 2012 may have been a market low, there is no going back. It’s our opinion that the impacts of the changes in natural gas production (due to reduced rig counts), a shrinking storage surplus (due to a colder winter in the Northern US) and lost coal generation (due to both economics and EPA regulations) support higher prices for the long-term.

Forward Commercial Energy Markets Pointed Higher 2013-2016

 In the post-shale world, even though the electricity and natural gas markets are more closely intertwined than they were in the past,  when assessing future trends for both electricity and natural gas, the single greatest uncertainty is always winter weather. While deviations from normal weather in spring, summer, and fall have a significant impact on total consumption, they pale in comparison to winter deviations—even during the summer air conditioning season in Texas.

With this winter’s heating season slowly drawing to an end, we now have some considerable clarity into how the forward price curves for electricity and natural gas are likely to move during the remainder of this year. Contrary to most expectations of late-winter and early-spring, prices for most regions have continued to rally over the past few months.  Now with the combination of hurricane season and summer price volatility around the corner, the best buying opportunity of  2013 is likely to come in the just next few months. After spring, the probability of a very hot summer—increased substantially by the extreme drought conditions still enveloping a sizeable portion of the country—is likely to help lift both near-month futures and the Calendar 2014 and 2015 strips. Later in the year, prices are again susceptible to upside risk as a winter premium is slowly built in ahead of the possibility of a very cold winter.

With both near-term and longer term futures prices likely to remain near today’s levels we suggest  that large-scale commercial and industrial electricity purchasers should be prepared to take advantage of any opportunity to lock in any uncovered positions for the remainder of 2013 and for calendar years 2014 and 2015.

Fixed Price Buyers:

As the risk of higher peak pricing events in ERCOT increase, customers with index-based products might consider other options such as converting to a fixed-price product. While fixed-price transactions are likely offered at higher prices than where current index prices are settling, they also avoid the potential risk that real-time prices will spike more frequently and thus result in monthly invoice volatility and minimal predictability for business budgeting purposes.

Since being able to lock in year-over-year savings are no longer possible, it’s important to recognize the value in the long term despite its premium. Additionally, while waiting longer could result in lower prices, it also increases the risk of a market surprise which is now mostly skewed to the upside.

Portfolio and Index Buyers:

Based on our experience, the market appears to already  have hit it’s bottom for the year  and overall volatility appears to be on the increase.  Remember that prices are still considered very low from a long term prospective despite last year’s gains. For baseload hedges, be careful using February and March lows as price targets since waiting for this could expose your entire portfolio to summer risk and leave you without any value in the market.

Dramatic short term price spikes during 2011 cause by extreme temperatures demonstrated the risks of riding an index product un-hedged. Even if your company has a higher risk tolerance than most you should certainly consider applying hedges for certain time periods in certain regions, specifically in ERCOT now that the price caps have been raised to $5,000Mwh.

With summer just a few months away, now is the time to put any defensive hedges in place before the hurricane season and summer heat are upon us.  Although a fall price drop could provide another buying opportunity, the chances have been diminished by the recent storage trends.

 Bottom Line:

As we head into the generation maintenance season the relationship between power and gas prices can become less reliable, and it becomes even riskier to rely on just natural gas prices as the basis for your electricity procurement strategies. Recognize the fact that further gas declines, which are not likely as of this writing, may or may not result in lower prices and more importantly, don’t become paralyzed if the bottom of the market is behind us.

The Benefits Of Utilizing A Broker For Commercial Electricity Procurement

Energy is Energy.

Nobody  sells  electricity that will make your computers run better or your lights burn brighter. It really makes no difference who you buy your power from. When you flip the light  switch—the lights will turn on.  So, if the only real difference is the price, why would your company ever pay more than it has to?

Whether it’s the energy industry, the insurance industry, or the banking industry, brokers provide a valuable service to the marketplace by generating competition that can reduce prices to the end user while also offering suppliers the opportunity to bid on customer business they may not have seen otherwise. In fact, in the case of the energy industry, energy suppliers consider brokers to be a valuable channel to the retail energy markets, allowing suppliers to have smaller in-house sales and marketing groups. This saves them the overhead costs associated with maintaining these employees as well as the marketing cost associated with acquiring customers. In fact, brokers can account for almost 75% of the volume of some energy suppliers.

 Reason #1

When energy suppliers are forced to compete for your business, you save money. It’s just  human nature that whenever somebody is selling a product, their  offer price is usually driven lower by the prospect of competition. If they feel that they have no competition…..the price offered will be higher. It’s just a fact that a knowledgeable and experienced broker can increase competition.  Many suppliers will offer a lower price to a broker as compared to giving a customer a price directly,  simply because they know they have an experienced broker involved in the negotiations and now  have to  compete harder  for the business. This  added competition  can serve to drive the suppliers margin, as well as your final price, downward.

 Reason #2

Another reason that suppliers are more likely to give a broker a better price than that of an individual company going directly to the supplier for pricing is due in large part to the fact that an experienced  broker  can place many large customers with a  supplier over the course of time.   As a result,  the  supplier is much more likely to give a more competitive price to the broker, not only because they know they are competing for the business, but also because they know competitive pricing through a broker will get them the opportunity to  compete for more of the brokers future business . When a customer goes directly to a supplier, this “volume discount” is not usually realized by the customer. The supplier doesn’t necessarily feel the need to price as aggressively because the customer’s one contract may come up for renewal only once every year or two. Compare this to brokers giving them the opportunity to bid on dozens of customers per month. So, who do you think is more likely to get the better price?

 Reason #3

Some brokers can also offer consulting services that go far beyond the scope of what a supplier can offer. Most suppliers are only interested in giving a price to supply electricity, which is their core business. They simply don’t have the time or experienced salespeople that can  provide  the market knowledge or strategy suggestions  that can reduce your costs.  If your company’s situation in “non-standard” in any way, experienced  brokers can help you structure and request quotes on  unique product offerings that most suppliers  usually reserve for only the largest and most sophisticated  clients.

 Reason #4

When faced with the prospect of shopping for electricity on their own, most companies would be hard pressed to name more than two or three  electricity suppliers to solicit pricing from. An experienced broker  can solicit bids from  a dozen or more suppliers, increasing the probability of lower, more competitive pricing for you.

Reason #5

Unless you follow the energy markets daily like we do, it can be difficult  for customers to properly and effectively compare the results of bids received from multiple suppliers.  A suppliers bid is based in large part upon market prices for electricity which change by the minute.  So a price received from a supplier on one day, is not directly comparable to a price received from a second supplier on another day. This makes comparing results very difficult.  Furthermore, the contract terms and conditions for each supplier are usually different.  As an educated buyer for your company, you need to understand the subtle differences between the contracts.  Some differences can materially affect what you pay. An experienced broker will have extensive experience with contract language, maintaining and reviewing all supplier contracts on a regular basis.

 Reason #6

Not all pricing components might be included in the “all-in” price you receive from a supplier.  This will make their price appear lower than it really is. For example, some suppliers will quote prices which do not include certain taxes or ancillary fees. Some will add monthly fees for each meter served,  while most  will  impose bandwidth restrictions or a  material change clause  that can have a huge impact on your overall costs.  An experienced broker will  review all supplier offers  for all pricing components, making sure all items are included so that the price you see is truly an “ all-in” price.

Finally, so who pays the broker for their service?

The broker is paid a small fee by the supplier in return  for the business that they bring to the supplier. This is similar to the fees paid to car dealers by banks for having the customer finance their car with a particular bank. It is also very similar to the way you purchase insurance. In the vast majority of instances, even with a fee added, the total cost you pay for your energy service is still lower than anything you might have received by dealing directly with a supplier. The fee paid to the broker for the business is reflective of the fact that the supplier is avoiding the employee overhead and marketing expenses normally associated with acquiring the customer through their own in-house sales force. In essence, the broker is simply being compensated for the marketing and employee expenses associated with customer acquisition for the supplier.