Ten Steps to Energy Cost Savings

Managing an organizations’s energy supply is a difficult and complex undertaking in the best of times. When energy management parameters change dramatically from week to week, facility to facility, and market to market, it can become a mind-boggling task to know where to start attacking rising energy costs and volatility.

In the past year alone, natural gas costs have skyrocketed from $3.50 per million cubic feet to $8 before going back down to $4.70. Electricity supply costs can vary from three cents per kilowatt-hour in one part of the country to more than nine cents per kilowatt-hour in another. If energy managers are not taking measures to control these cost fluctuations, and they are not taking advantage of competitive pricing in deregulated markets, they literally are burning through taxpayer dollars.

For organizations with multiple facilities running on increasingly tight margins, the ability to cut energy costs can make a huge and positive impact on budgets. With this in mind, EnergyWindow’s experts have prepared recommendations for a step-by-step approach that can help achieve cost savings quickly and efficiently—and quite possibly turn an entity’s procurement team into the heroes of the day.

Because the upfront investment necessary to realize savings may involve just a few weeks of effort and because savings can begin almost immediately, the payback period can take place within several months, and the return on investment can exceed 1,000 percent.

Step 1: Make a list of facility locations, then cross-reference them with competitive energy markets.

To research deregulated markets through the Energy Information Agency of the U.S. Department of Energy, visit: www.govinfo.bz/5196-525 or www.govinfo.bz/5196-526. For specific insight into which state markets are active at any given time, access the EnergyWindow Focus! database on their Web site: www.govinfo.bz/5196-527. Approximately 16 states boast potentially active electricity markets that offer competitive energy prices. Even more states have competitive prices for natural gas.

Step 2: Develop a priority list of markets and facilities with the greatest possibility of achieving cost savings quickly.

To justify actions to management, do a cost analysis that shows, conservatively, how much money might be saved if energy costs were cut by, say, 15 percent at target facilities. Once senior-level managers understand the positive financial impact that could be achieved, purchasers are likely to get a “full-speed ahead” directive. Keep in mind that upfront investment does not require a financial commitment—just several weeks of effort to pursue the top one or two market opportunities.

Step 3: Gather data that will be required to pursue competitive energy bids for priority facilities.

When requesting pricing for energy service contracts, remember that energy suppliers will require a substantial amount of data regarding past energy usage for each facility. To save time and ensure fast action in achieving energy savings in time-critical bid periods, make sure this information is readily at hand. A good request-for-quote (RFQ) will generally require between 100 and 120 data elements per facility. Make sure the information is ready to go, and know where it is stored. Also, be prepared to update the information at request for bid (RFB) time.

Calculate the default energy supply cost—the cost of supply from the local distribution company—for comparison with competitive bids. Obtain default rate information from the local distribution company customer service representative or state public utility commission.

Step 4: Define risk tolerance before starting the energy procurement process.

Consider sources of risk and diversification in priority markets. These include suppliers, geography, regulated versus deregulated markets, price magnitude, and volatility. Understand that an entity should seek a balance between cost savings and cost predictability. For the markets that have been identified as key opportunities for cutting energy costs, thoroughly research the suppliers in those markets and determine which ones meet the entity’s needs for price structure, financial strength, energy source reliability, preferred contract terms, and experience. To save time, consult with an energy management firm or with energy consultants who already have that information on a market-by-market basis.

Step 5: Watch priority markets and facilities for fast-breaking opportunities.

Fast-breaking opportunities can occur because of market pricing, regulatory changes, seasonal fluctuations, and more. Often, offers for better energy prices can come and go in a matter of weeks, even days. Not signing up during these windows of opportunity may mean losing the lower prices for another year. Again, having pertinent energy information readily available, plus having a clear idea of contract terms and the price structure that is best for the entity will allow purchasers to act quickly to take advantage of energy cost savings opportunities.

Step 6: Do not wait until the last minute to seek out deals or negotiate contracts.

Changing energy suppliers usually requires a 60- to 90-day, end-of-contract notification clause. Without notification, an entity can not change suppliers. Build a spreadsheet that outlines the various energy contracts in place for facilities targeted as potential money savers. Research each contract to determine the cancellation notification requirements, and prepare to act at least a month in advance of those deadlines for each contract to be switched.

Step 7: Automate the RFB process by using an online procurement system.

One of the main reasons entities do not pursue competitive energy supply bids is they do not have time to deal with the associated paperwork and research. With an online RFB system, many of the required tasks are automated. An online system speeds an agency’s ability to get information and make informed decisions. In an online system that specializes in energy procurement, many of the previous steps, such as data gathering, supplier research, and selection, will be handled automatically.

Step 8: Wait until after completing a bid process to bring in attorneys.

Many entities try to negotiate or review agreements before requesting bids. Ultimately, this costs more in legal fees as agencies try to qualify more than one bidder and set terms. Typically, the better approach is to wait until after the bids have closed, select the first choice, then begin negotiations.

Step 9: Plan the types of energy procurement contracts that work best for the entity.

Many energy suppliers have their own contracts. Standardized contracts are not yet the norm. To aid negotiations, it is wise to brainstorm ideal contract terms that fit the entity and procurement practices, then include them into both the initial bid request and subsequent negotiations.

Step 10: Weave energy procurement plans into the strategic sourcing plan.

An informal, private-sector survey of large national retailers working with EnergyWindow indicates that energy costs can rank as high as third highest among operating costs. With that in mind, it behooves every public-sector entity with multiple facilities to make a concerted effort to build a strategic energy management plan that dovetails with an overall strategic plan.

Editor’s Note: EnergyWindow is a Boulder, CO-based company that offers information technology-based tools and energy industry expertise to help entities manage their energy supply cycle. For more information, visit: www.govinfo/bz-5196-527.

Competitive Contracts Save Postal Service $2.6 Million in Energy Costs

On behalf of the U.S. Postal Service (USPS), Boulder, CO-based EnergyWindow conducted a multi-state electricity procurement campaign. The online auction technology (specifically developed for energy procurement) allowed the USPS to purchase electricity for USPS offices, plants, and distribution centers in five states in the eastern United States.

“Included in the Postal Service’s Transformation Plan is a detailed sourcing strategy created to expand the use of Supply Chain Management (SCM) processes by employing techniques designed to leverage our buying power and online procurement through reverse auctions, which reduce cycle time and capture true market pricing,” says Keith Strange, Vice President, Supply Management for the U.S. Postal Service. “EnergyWindow’s online sourcing technology enables us to achieve key goals, improve organizational efficiency, and reduce costs by nearly $2.6 million.”

EnergyWindow’s work with the USPS has generated impressive results, including:

• Successful electricity auctions in Maryland, Pennsylvania, New York, Maine, and Massachusetts, with plans to conduct similar events in Washington, D.C. and Ohio;
• Roughly one billion kilowatt hours of electricity closed;
• 2,467 USPS facilities covered by the closed contracts;
• Estimated savings of roughly $2.6 million for the USPS; and
• A completion time of less than one month for the bulk of the procurement process.

According to Chris Wiederspahn, EnergyWindow’s Vice President of energy markets, “Due to the speed and power of our technology, we were able to move quickly, allow the USPS to take advantage of favorable prices before they increased, and begin to achieve savings related to energy purchases quickly.”