Author: Dan Levin
Real Estate executives are all too familiar with those “lowest price at the moment, buy it now” cold calls from energy brokers trying to sell supply contracts. What that broker or consultant (or property manager or supplier) may not be sharing with them, are the answers to key questions like: “what’s behind that price” and “how does the energy supply contract affect the management of my properties?” These are important questions, especially since energy supply contracts are often valued in the hundreds of thousands of dollars.
Below is a guide to helping you avoid common and costly mistakes before you sign your next energy supply contract.
Have a Plan
- Define your goals and purchasing strategy. Proactive energy procurement has numerous operational and financial benefits, which can be difficult to attain without clearly defined goals and strategy. Some questions to consider include: Are you more comfortable with the budget control provided by a fixed rate or are you looking to achieve the lowest rates with a risk-tolerant variable-rate product? Do you want each building or legal entity to have a customized strategy, or achieve economies of scale in aggregating your portfolio?
- Set your benchmark. Give yourself something to compare against. Do you want to beat last year’s rates, find a number that fits annual or long term budgets, or try to perform well against the utility supply rate? Pick one or two benchmarks for comparison, and then move forward using them. Over several years and contracts, these benchmarks will help put your costs and processes in context.
- Give yourself time. Since energy markets move on a daily basis and market fundamentals such as weather, supply and demand affect long term price changes, when you buy is as important as what you buy. You or your representative should be watching the markets, and advising when the time may be right. Begin the process 4 to 6 months in advance of the contract end date, and give yourself more flexibility.
Read the Contract and Ask Questions
Insider terminology can make energy contracts confusing and difficult to grasp. However, since the contract creates financial and operational obligations for your company; you should always know the impact of what you’re signing. Energy supply contracts not only identify price, building lists, and payment structure, but also provide instruction for a number of “what if” scenarios.
- What if I sell a building? Every contract has an Early Termination Fee (ETF). If you know a building will be sold during the contract term, exclude the building or ensure the new owner can assume the contract. Alternatively, a short-term and well-timed fixed rate could add value by lowering operating costs before the sale.
- What if there’s a large change in energy usage at a building? Energy contracts can contain provisions that impose penalties when usage changes outside of a specified range, such as due to efficiency upgrades, installation of new equipment or a period when the account will be off line.
- What happens upon contract expiration? Most energy supply contracts typically continue indefinitely with the supplier after a contract expires, but the rate and terms post-expiration can be hidden and unpredictable. These post-expiration terms should, at least, be made clear to you. In practice, you and your broker or consultant should be developing a new plan for renewal months ahead of expiration.
- Which accounts are included? As obvious as this sounds, it very often it isn’t clear. A contract addendum should include account numbers, service address, rate class and annual usage.
- What is the swing or bandwidth? In the cold winters of 2014 and 2015, many Northeast retail energy buyers were hurt with high usages and extra charges. Having a negotiated “swing provision” provides insurance that the supplier will provide the correct amount of energy at the agreed upon rate structure.
Avoid Racing to the Bottom
When someone jumps out and tries to “beat a price” that’s your cue to step back and closely evaluate. Those “great deals” often come at a hidden price and can create an uneven playing field. Many times, what is falsely advertised as the “lowest price” isn’t actually favorable, as suppliers or brokers will add hidden fees and pass along unnecessary risk to the customer in the contract fine print. A trusted “lowest price” is the one which results from your designed process. If you can develop a plan and achieve your benchmarks, you can comfortably execute agreements for your organization on your final RFP contracting day.
In summary, there’s a lot to think about when you’re buying energy. And there are, unfortunately, a lot of people in the energy business who profit on not sharing complete information with their customers. So remember to take the time to: create and execute a plan, read the contract and ask questions, and don’t just jump at what someone says is a great price. Of course, Bright Power’s Energy Procurement Team has a wealth of experience in these areas and is always here to help you.
Attention NYS Electric Customers:
Beginning April 1, 2017, New York State Zero Emission Credit (ZEC) charges will be assessed to all NYS customers’ electric bills. The purpose of these charges is to help NYS meet clean air goals set by the Clean Energy Standard (CES). ZEC costs will support cleaner electric generation by purchasing Renewable Energy Credits (RECs) and by keeping certain nuclear generation plants in service. These initiatives support the two NYS goals of reducing Greenhouse Gas Emissions by 40% and of requiring 50% of electric generation to be from renewable sources by 2030.
ZEC charges represent a cost increase of $.003 to $.005/kwh to the electric supply cost for all retail (ESCO) and utility supply customers. This adds approximately 2% to a typical Con Edison electric customer’s bill, when you factor in both supply and delivery charges.
New York State Steps into a Leadership Role
In the last year, the establishment of the CES has helped reinforce NYS as leader in supporting clean air, renewable energy, and slowing climate change. As we enter into a time of uncertain environmental leadership from the federal government, New York continues to move toward a future of energy largely being produced through clean and renewable methods. At Bright Power, we feel these initiatives are in sync with the long term needs of our customers and our planet.
Hydraulic fracturing for oil and natural gas extraction (a.k.a fracking) has definitely become a mainstream discussion topic across many parts of the US. The fracking boom has reinvigorated the energy industry in the US, moving us from a country with a rapidly declining energy supply to a potential large scale net energy exporter. While many fracking debates have focused on serious concerns around waste water injection and the potential contamination of drinking water, less focus seems to be put on the potential for fracking to cause earthquakes, at least until now.
A recent report by the US Geological Survey (USGS) appears to have tied fracking to increases in earthquakes for the first time. While the report hedges considerably with blanket statements such as “USGS’s studies suggest that the actual hydraulic fracturing process is only occasionally the direct cause of felt earthquakes”, the data supports a fairly clear picture of the impact. Using Oklahoma as an example, a recent New York Times article included glaring evidence of the connection between fracking operations and earthquakes. The two maps below document the rise in earthquakes in Oklahoma between 2004 and 2014, an increase of more than 8000% since the region’s uptick in fracking. As the data continues to support the connection between fracking and earthquakes, the industry once again finds itself pegged as a serious threat to public health and safety.
Fracking operations cover many square miles and in some states impact a very large portion of the whole state. Oklahoma’s politicians are seemingly at a loss for a solution to the earthquake problem, given that their only recourse is to restrict future permits or put an outright ban on fracking – options that amount to political suicide for many of them. The entire fracking situation makes me wonder, if toxic drinking water and earthquakes aren’t scary enough to force action, what possibly could be?
Reeling from the icy burn of 2014’s Polar Vortex, everyone wondered how 2015 would compare. Twelve months later, now that it seems like the worst is behind us, we can finally get down to business and determine which winter hit us harder, from an energy perspective of course. To do this, we’ll look at three factors: heating degree days, natural gas prices, and electric prices.
When did we need more heat?
During which winter did New Yorkers crank up the heat more? We can find out by looking at the Heating Degree Days. Heating Degree Days is a measurement of required heating demand based on the daily number of degrees below 65 degrees Fahrenheit. For example, if it’s 60 degrees outside, that equals 5 heating degree days. These add up over the course of the winter months. You can see in the chart below, in November 2013, there were 585 heating degree days. This measurement also makes an excellent guide for gauging the impact of a cold winter, or polar vortex, as we now call it. The table below shows the monthly heating degrees days for NYC for the past two winters.
What do we see? The short story here is that while we started the 2014/2015 winter on the milder side, February 2015 takes the cake for the highest heating demand over the last two winters. In fact, it was the coldest February on record in NYC and about 23% colder than the previous winter. 2014: 0, 2015: 1.
When did we pay the most?
The Polar Vortex isn’t just about cold temperatures. Businesses and consumers also paid a lot for natural gas and electricity in the winter months due to high natural gas demand and limited pipeline capacity. But which winter was worse? The impact on prices can be seen in the spot/cash market (the daily energy market) where energy is bought the day before it is used, where the volatility is most evident and where natural gas prices have a direct impact on electric rates. The two graphs below show the local spot/cash market for last winter and this one:
These local wholesale prices typically stay in the $2.00/DTH to $4.00/DTH (DTH = dekatherm) range, but under pressure from winter demand these price rose close to $120/DTH in January 2014 and only to about $40/DTH this winter. So even though February 2015 was colder in temperature, the winter of 2013/2014 was rocked by all-time high natural gas prices. We’re giving this one to 2014. It’s a tight race. 2014: 1, 2015: 1.
And what if we look at NYC electric prices? Well, what we find is that the electric prices echo the pattern we saw in the natural gas market. The graph below compares the NYC wholesale electric prices over the past two winters.
The chart clearly shows that winter 2013/2014 was much more expensive in terms of wholesale electric (energy only), with prices reaching over $0.20/kWh (kilowatt hours) while this year’s prices peaked at approximately $0.16/kWh. Like natural gas, the cost of electricity hit us hard in 2013/14, and we have a winner. 2014:2, 2015: 1
There you have it. Despite extremely cold temperatures this year, winter 2013/2014 actually cost us more and we’re dubbing it the true polar vortex. However, given the surprise snow storm last week, are we jumping the gun on this call? Did we leave out any factors that might swing the results? Tell us what you think!
Can you remember what was going on in your life exactly one year ago? I sure can because the energy markets were nuts. At this time last year, we were in the middle of a winter that brought historically cold temperatures, incredibly high natural gas consumption, and record high energy prices. The result was record low amounts of natural gas in storage. Low storage levels – a storage deficit – leads to high prices and high volatility. We reasonably expected that storage levels would recover slowly over a 36 month period, as would price volatility. This prediction was blindsided by a mild summer with low electric demand (requiring less natural gas-fired generation) and unexpected, record-setting natural gas production. Natural gas prices gradually declined until a large sell-off in late December led to natural gas prices falling off a cliff to a new, lower trading range (see Chart One).
Economics 101 tells you that with a storage deficit, we see an increase in prices while a surplus causes prices to decrease. The two charts below show historic and forecasted storage levels. The lower portion of each chart – the red bars – shows the relative deficit and surplus levels. The reversal of market conditions is evident by looking at the regions circled in red. In March 2014, storage deficits were expected to continue well into 2016, but by January 2015, storage deficits were erased and are expected to continue that way for quite some time, even showing a slight surplus by November 2015.
The unforeseen improvement in storage levels has reduced natural gas prices from the high of approximately $5.00 per dekatherm (DTH) to the current low of $2.65/DTH (50% decrease). On the electric side, we have seen accounts that received 12 month fixed-price offers of $0.12 per kilowatt hour (KWH) in April 2014 receiving the same contracts at a rate of $0.085/KWH. The past year has perfectly demonstrated the impact that natural gas storage has on energy prices. The question is no longer how did we get here, it’s where are we going?
Dan Levin, VP Energy Markets
What the Energy Efficiency World Can Learn from Winter Storm Juno
As I awaited the ‘historic’ blizzard in my central New Jersey apartment, I went over my preparedness checklist in my head. Car tucked away from the street, check; all of my electronics charged, check; enough food, water, and flashlights for a few days of “roughing it,” check, check, check. The hours ticked by. “Any minute now”, I thought.
Fast forward to Tuesday morning. My anticipation quickly turned into disappointment. I had prepared for a blizzard, and although I probably should have been relieved that the conditions were not dire, I was honestly let down. Where was all the snow?! I had studied the weather reports, watched public transit as it was preemptively shut down, and heard our Mayor De Blasio declare it “one of the largest storms in the city’s history.” So what gives?
It turns out that despite huge strides in recent years, weather is still one of the most difficult things to predict. Forecasting the weather involves taking into account variables such as temperature, pressure, wind speed and direction, clouds, precipitation, and that’s just the beginning. Throw in ground temperatures, sea temperatures, ocean currents, sea ice, and the effects of climate change, and the weather models still tax our best super computers and meteorologists.
This notion of unpredictability is also applicable to the field of energy efficiency. Take my day-to-day work where I spend my days analyzing the energy data of buildings. I have all of this great data, from physical building attributes to energy consumption to completed energy-saving retrofits. With this I can create very useful predictions and models, but occasionally the actual energy usage at a building charts its own course.
Just like in meteorology, there are outside factors that contribute to the unpredictability of energy models. Retrofits are installed by real people, equipment is run by real people and these buildings are occupied by, you guessed it, real people. Simply put, there is no energy model that accounts for all aspects of human behavior.
Luckily, unlike meteorologists, we do not have to sit back and just observe as the storm unfolds (or doesn’t….sigh). While we might not be able to predict the unpredictable in buildings, we can monitor it and respond with corrective action in real time. It is a sad fact that even the best energy efficiency projects can fall victim to “energy creep,” where retrofits show savings for the first few months, then slowly creep back to their pre-retrofit inefficiencies. Thankfully, with the advent of smart meters, sensors, and the “internet of things” we can see when this is happening in time to fix it.
This proactive technology is the equivalent of a meteorologist being able to bend Mother Nature to their will. While this ability might sound like complete and utter magic in the world of weather forecasting, for buildings it just requires care, diligence and the experience of knowing what to do when the building veers off course. It is magic we do every day.
I always find it interesting when non-energy publications try to tell an energy story. The results are usually mixed. Earlier today, this short article about nation-wide electric price increases in the first six months of 2014 says just that. However it leaves out the meat of the story, the meat being why electric prices were so high. The answer lies in how the electric markets work.
Natural gas is the price setting fuel for electric generation in many parts of the US, particularly on the East Cost. This just means that because it is the main fuel source consumed, the price of electricity moves with the price of natural gas. Historically, wholesale natural gas prices are lower in the “spot” (a.k.a. cash) market where prices are determined shortly before the commodity is needed (say less than a month or even on a daily basis.) Electricity generators know this all too well and so they do not hedge very much of the supply. As a result, when natural gas prices spike as they did this past winter, the increase in natural gas costs are passed along to the electric market in their bidding process.
For consumers, this materializes in a price spike from both ends: heating costs and electric prices soar at the same time. With so many variables, it can be difficult to understand why these two seemingly-unrelated spikes would occur in unison but it’s actually because they are inherently related. Natural gas is calling all the shots.
Vice President, Energy Markets
Don’t let the energy markets take you for a ride.
If you’re looking at your utility bills from this past winter, chances are you’re not too pleased. Not only did you face skyrocketing energy prices, but also angry tenants and shareholders demanding answers. Does that ring any bells? So why was this winter so jaw-dropping? Blame it on the rain (and the snow and the cold). Unforeseen storms and temperatures sent demand through the roof, severely depleting our country’s natural gas reserves. The drastic decrease in storage created a volatile market which is still in recovery. And, because electricity prices follow natural gas prices, your electric bills shot up, too.
But you don’t need to be so exposed to the wild fluctuations of the energy markets. You can stick with your local utility company to cover your energy supply and ride the energy market rollercoaster… or you can work with a valued partner to bid out to multiple Energy Supply Companies (ESCOs), find competitive rates and develop pragmatic strategies to accommodate your energy needs and protect you from future price spikes. For example, by buying your energy ahead of time – at the right time – you can mitigate risk for you, your building, and your tenants and shareholders.
How can Bright Power help? Bright Power’s newly expanded Energy Procurement team will evaluate your past, present, and projected energy usage. That assessment, along with a deep understanding of the energy market, will form the foundation of your customized energy procurement strategy. Our trusted advisors are continually monitoring the markets to seize opportunities to save while simultaneously managing and reducing risks on our clients’ behalf. Start preparing for tomorrow, today.