Top 3 Tips for Energy Purchasing Contracts
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.