Author: Ben Wallack
When you buy printer paper, you are likely buying something like 500 sheets of 8 ½ by 11 white stock. You know what it is and know exactly what to expect. Paper is a tangible product that has pricing and product choices that are relatively stagnant. And it doesn’t revolve around markets that move every minute. Energy does.
Why Energy Procurement Matters
Buying energy isn’t like buying paper. Multifamily building owners in New York City can spend 20-30% of a building’s annual operating budget on energy. But through energy procurement, owners can lower supply costs, solidify building budgets, and hedge the risk of inevitable market fluctuations. It’s particularly important for our clients who own and manage multiple buildings in a portfolio. Large portfolios can often receive reduced rates by bundling energy purchasing contracts for multiple properties.
Having an Energy Purchasing Strategy
Electric and gas costs are large expenses but they can be strategically controlled by having an energy purchasing strategy. There is no set standard for buying energy as there is for paper. There are many options available, to match differences in energy consumers’ preferred terms and exposure to price risk.
The most common product is a fixed rate. However, it’s a common misconception that a fixed rate is a price that is fully locked, or that it is the best (or only) energy purchasing strategy in every situation. A fixed electric rate from an energy supplier may or may not include a dozen or so cost components like capacity costs, line loss, and GRT tax fees. Each of these costs can represent a significant percentage of your total energy cost. Plus with a fixed rate, your supplier is taking some future price risk, and there is a cost to that baked into the rate.
A trusted energy procurement consultant can help you navigate this complex process and make a decision that is right for you.
What’s the Best Option for You?
With one of our commercial clients, the lease structure indicated that tenants pay our client each month for the electricity they use, at the market rate (the utility’s varying price) for that month. The best product for this client was a floating rate contract to ensure they can achieve a consistent margin on submetering their tenants’ contract each month.
In contrast, through our BEPI aggregation program, we help some of NYC’s largest supportive and affordable housing owners procure energy to create budget certainty. Operating with extremely tight budgets, they need to focus on operating their buildings and providing valuable services for their residents. For them, fixed-rate contracts captured at low dips in the market are the best procurement option.
Find an Expert
Energy procurement should be a seamless and efficient process that leads to results and operational benefits for your buildings. It’s a key tool for managing budgets now and in the future, though it may require a trusted expert, like Bright Power, to help you achieve those benefits. Done right, buying energy can feel almost as easy as purchasing paper – with all the unknown variables handled and monitored for you.
Continue to learn more about energy procurement and best practices by following our blog posts. Want to keep reading? Check out:
Over the last few years, energy consumers and building owners have been confronted with several internet and phone scams. An “agent” will impersonate a utility company, or reaches out representing an unqualified Energy Supply Company (ESCO). These methods have been successful, in part, because these agents can be quite convincing and often use energy jargon to appear knowledgeable and reliable.
Identifying the Utility
A New York City client of Bright Power recently received a phone call from someone claiming to represent Con Ed, a local utility company. As our client describes, “We had past experience with Con Ed concerning overdue or misapplied payments. This made the extremely aggressive demand for a $2,000 cash payment to prevent a power shut off in less than an hour, actually sound plausible. Our first response was to seek the immediate and helpful assistance of Bright Power, who quickly investigated and confirmed the paid status of our accounts. The administrative assistant, who received the original call, confirmed thereafter that there was no shutoff pending with Con Ed.”
We were able to quickly identify the scam and avoid a $2,000 false charge. To help protect your business from these claims, here are a few basic red flags:
- Be wary of requests for Tax IDs, credit card numbers, utility account numbers or protected information.
- Question sudden or pressured monetary requests. Utilities and most reputable businesses do not operate this way.
- Verify employee IDs prior to providing information or payment. Con Ed employees, for example, are required to have company IDs accessible.
Buying With a Reputable ESCO
There are many trustworthy Energy Supply Companies (ESCOs) that Bright Power works with that prove to be valued business partners in controlling energy costs. On the other hand, there are many unreliable ESCOs and energy brokers that use tactics that inevitably cause consumers to pay more in the long run.
Recently, a Bright Power client was approached by an ESCO and convinced to sign up for “a great rate for three years” over the phone. The client asked us to review the contract after the fact, and we identified some major issues. Luckily, we were within the three day cancellation window and assisted our client in withdrawing from the costly supply contract. We then locked them into a better rate via a transparent and market-based bid process, resulting in a savings of $18,000 from the original phone contract.
Always be careful with any phone call from an unfamiliar ESCO or energy broker. Unscrupulous agents have been pushing clients to contract their accounts through recorded sales calls and rushed decisions. Some will even enroll the account without your consent, a practice also known as “slamming.”
Pressing pause on an energy purchasing strategy until you feel confident and knowledgeable in your direction will lend to a favorable outcome.
How to Protect Your Accounts
- Designate one or two of your employees, who are well informed, to discuss all energy matters with the utilities or ESCOs.
- Consider using experienced and reliable consultants or brokers that can provide guidance, support, and clarity in this jargon-filled and continuously changing energy supply world.
- Check out Con Ed’s #STOPSCAMS for more helpful information on protecting your energy accounts.
Have you ever heard the old adage, “Sell in May and go away”? It’s a popular one among stock traders since prices often dip during the summer months, but it’s not a rule to live by, especially when it comes to energy purchasing. We prefer the saying, “Prep in October, before winter gets closer”. Now, yes, we did make that up, but for good reason!
Winter weather can impact multifamily real estate owners on so many levels. From site-level crises like freezing pipes (and residents) to portfolio-level energy costs, the only way to manage the changing seasons is to plan ahead, early and often. For tips on how to prepare your actual buildings for winter weather, check out our checklist. For energy purchasing, getting ahead of the weather is key, however, that means your strategy heavily depends on forecasting, historical data, and taking action.
In the last few years, volatile winter weather has rocked New York City and national energy markets on a number of, often cleverly-branded, occasions. In 2014, Con Edison electric supply prices climbed to $.22/kWh after a string of single digit degree days – popularly known as the northeast’s Polar Vortex. In this past, extremely mild winter, Con Edison prices dipped to $.05/kWh. Owners who allow the price they pay to float with the market are susceptible to unexpected swings like this, which is why a pre-season contract often makes the most sense.
Heading into the upcoming winter, energy market prices are looking unstable. Due to an extremely hot summer in 2016, prices are no longer trending downward. Natural gas production has begun to level off and is expected to fall short of consumption in 2017, leading to a deficit in the storage system.. As always, prices are heavily influenced by fluctuations in weather, available supply, and expected demand. In the winter, extremely cold temperatures will cause the use of heaters to rise, drain natural gas supply and, inevitably, prices will go up. In turn, warm weather during the winter months will preserve natural gas and keep prices low. If only we really knew what to expect from Mother Nature!
Accuweather and the Farmers Almanac predict relative warmth in the South and Southwest but a colder-than-usual stretch in the Plains and Northeast.
The NOAA predicts warmer than usual weather across the map.
Ultimately, how you decide to budget and strategize for winter energy spending depends on how much risk you’re willing to take and able to handle. If you are more conservative and want to make sure that your budgets are set and secure each year, locking in a fixed rate for your energy supply before the winter would be your best option. This strategy is very typical in supportive or affordable housing and Co-ops or condos. If you have more ability to take on risk, and have enjoyed the recent low rates in 2015 and 2016, there are a variety of flexible and aggressive strategies to implement that can help you get the lowest rates possible.
No matter which approach you take to energy procurement for your buildings, one thing is certain: now is the time to act.