If you know your power factor, you would have a good idea of how efficiently you are receiving your power. Power factor is calculated as a ratio; an ideal power factor would sit at 1 or 100%. To determine power factor, the ratio between kW (actual load) and kVA (apparent load–or what is arriving at your location pre-consumption) is taken. Bigger manufacturing and industrial firms often fall victim to lower power factors or “dirty power.”

Why should you care?

There are several reasons it is integral to be aware of power factor. Primarily, electricity providers can tack on tens of thousands of dollars to your electric bill if you have a low power factor. Furthermore, a low power factor means your equipment could be running inefficiently which could cost you quite a bit of money on repair or even replacements. I have seen one particular client being charged over $15,000 a year. That added nearly 25% to their total yearly energy spend.

OK, so what should you do now?

Not everyone has a low power factor. Many companies have installed capacitors to avoid being penalized by providers and to protect their fixed investments. Chances are you should still find out your power factor and have someone discuss your options moving forward. An energy consultant can help you determine whether it is beneficial to you to work on improving your power factor. Usually, these types of services are provided with simple contract procurement. Remember, your energy consultant should be working for YOU.

Feel free to contact us with any questions/concerns!

While finding an ideal price is important, you also have to consider several other factors besides the rate you see up front. Here are several questions to ask yourself before taking the plunge:

When is your lease up?
If you don’t own the location in question, make sure your lease doesn’t end mid-contract. If you are unsure about renewing a lease, look into pursuing rollover or termination options in your contract. Certain suppliers work better than others with these types of deals.

Do you have tenants moving in and out?
Many property managers do not want to deal with procuring energy and distributing bills amongst tenants. However, during vacancy periods, the power needs to keep flowing and switching meters on and off can be very costly if the right contract is not in place.

Do you tend to pay bills late?
While this may be a miniscule issue, some suppliers have no mercy for late payers. Whether you have fallen into late bill pay habits or your overhead bill pay is timed late every month, you need to be sure your contract allows for late payments. Penalties add up and can be substantial depending on the supplier.

Does your electricity usage vary significantly?
When I was signing up for my personal electricity contract last month, I saw a $.086  rate and a $.089 rate, both assuming monthly usage over 2500 KWh. With the lower rate, if my usage drops below 1000 KWh, my price actually jumps to around $.11. With the “higher rate” I was looking at around $.091. How often will I use over 2500 KWh living alone in an apartment? Probably never. You will encounter this “fine print” situation in both residential and commercial situations. Furthermore, with commercial contracts, some suppliers will actually charge penalties for not using as much power as anticipated.

When contracting for electricity, it’s not as black and white as winning a pricing war. You need to consider many things besides just the price of your electricity. Many businesses’ needs can be very complex and it is essential for your consultant or broker to understand your business before prompting you to make a move. Often, when you come to understand the importance of conveniences and cost avoidance measures to your business, it makes sense to go for a slightly higher price to limit risks of high penalties and fees.

Like investing, this is a risky approach. Because of the volatility of energy markets, prices cannot be predicted with any consistency. Thus, market timing is a form of gambling based on pure chance. Sometimes it might pay off, while it also might end up costing thousands of dollars

A better plan is to develop a long-term energy strategy, based on your time horizon, your goals, and your tolerance for risk. Then follow that strategy when making buying decisions.

While you could probably develop and execute your own energy strategy, just like investing, you may benefit from the help of an experienced professional. The expertise, experience, and discipline provided by an Energy Consultant can, like a financial planner with investments, guide you through the process, and help you avoid costly mistakes, manage risk, save time, and improve your overall results.

By developing an energy strategy, your business needs — not energy market gyrations — will dictate the benefits you realize from competitive energy markets.

Posted from the road

Every industry, service, and product is different but one thing is certain: You do not want to put your company in a costly and unfavorable position. Electricity and natural gas are involved in very volatile markets and prices can be guaranteed only as long as they hold, meaning price can change any minute. This is why it is integral that negotiating and market-watching start EARLY.

Often, it is possible to lock in rates as far as 18 months in advance. Is this always the best case? No. Is it smart to be aware of where the market stands so you can strike at the right time? Yes, but you probably do not have the time to worry about that (it’s only money, right?). That’s what a trusted Energy Consultant is for (learn more about those guys here).

Now we have the issue of timing. If your contract is up next week, you are obviously in a time crunch to get it done (and have not adequately planned for this). This situation makes you a hostage to whatever price is determined by the market at that time. People do not know that it can take almost a week to truly get a competitive price, especially if you use a larger amount of electricity (typically over 300 MWh annually). Throw in some unexpected weather or unforeseen spike in Natural Gas, and you are dealing with an unfavorable electric contract.

On the other hand, if you started looking ahead 5-6 months prior, you would have had the time to take advantage of dips in the market and can sometimes even set a realistic target price. $5-10/MWh can make a difference long term, and these simple savings can be reached if you value the importance of controlling your overhead costs.

So, if you cancel your contract early, your supplier will will most likely send you a bill for “early termination fees” or ETFs. These ETFs can be expensive as they typically cover the supplier’s costs for all of the “unused” energy remaining on the contract.

Of course, you may ask, if the energy is “unused,” how can the supplier have costs?

Here’s an analogy:

Assume Tom wants to buy apples. He goes to Apple Co. and agrees to buy 10 apples a month for 3 years (360 apples). To ensure it can meet its contractual obligations to Tom, Apple Co. contracts with a wholesale apple grower to buy 10 apples a month for 3 years. The grower then plants trees and buys equipment so he can supply Apple Co. with the apples.

Now assume, 12 months into the contract, Tom decides to stop buying apples. while he thinks he is just stopping his contract for future, to-be-grown apples, he is really starting a cost chain-reaction. Tom stops his contract which, in turn, causes Apple Co. to stop their contract, which causes the wholesale grower to lose the money he invested in his apple orchard.

This then results in a financial boomerang – the wholesale grower bills Apple Co. for the revenue they lost on the remaining 240 apples (24 months x 10 apples per month) Apple Co. agreed to buy. Apple Co. now has costs they must recoup from Tom.

Energy markets work the same way.

Because energy prices are volatile, when you sign a contract with a supplier, they contract with a wholesaler or generator to “lock” in the price they pay for the energy you are anticipated to use over the life of your contract. This ensures you get the price you want and the supplier makes the profit they need. In the meantime, the wholesaler or generator takes the steps necessary to ensure “your” electricity is available when required.

Whether or not you use the electricity, costs are incurred and typically it’s you, the end user, who pays. Sure, you might save $0.01/kWh by canceling your contract, but you may pay thousands or even tens of thousands of dollars for the “savings.”

Think before you act (and get a new ABC!).

Unlike monopoly-governed markets, competitive energy markets give companies the freedom to:

• Contract for energy prices for specific periods to match their business plans and needs, including locking in energy prices well into the future
• Choose the amount of energy price risk they are willing to bear
• Be rewarded for managing the costs of their operating practices

Since then, natural gas prices have fallen to new record lows.

This drop in price has been a great opportunity for companies in competitive energy markets to hedge their electric and natural gas costs by locking in contracts at comparatively low prices.

Why is this relevant to you? Since natural gas prices drive electricity prices in many competitive markets, and these natural gas prices are set by volatile, short-term spot markets, companies are now exposed to risk with regards to their electric costs.

And, with the prospect of even more regulations on pollution and fracking, and potential decreases in supply as producers try to control price, natural gas prices could again climb. Will we see $6/MMBtu, $8/MMBtu, or even $13/MMBtu natural gas anytime soon? No one knows.

Since electricity is an essential costs to most businesses, it makes sense to manage your risk by hedging your costs and locking in favorably low prices. To maximize your opportunity, it pays to work with someone who understands the market and can act quickly for you on your energy management strategies. It pays to hire an energy consultant.

Contributors:

David Booty, President
Brian Mente, Portfolio Analyst
Sami Hage, Business Development Analyst

Often, many energy brokers merely shop around for prices for their clients and then move them to the wayside until a few months before the next contract expiration date. Strategic planning, contract terms, and supplier reliability are not top priorities for many “small shop” brokers. While many small clients can get by with this, as savings on small energy usage are limited, for larger clients, this could mean thousands or even hundreds of thousands of dollars in lost savings or penalties. Unfortunately, not all brokers have clients’ interests in mind – they are more concerned with making a quick commission and moving on.

Long term fixed rate or heat rate? Demand response? Float the market?

How do you ensure your energy broker is working for you and not your commissions? They are more than just your broker; they are your energy consultant. They get to know your business so they can help educate you as to what is the best solution based on your company’s needs. They ask not only about getting you the best price, but also about your company’s tolerance for risk and what contract terms work best for you. They know the industry, know the suppliers, and work for your best interests.

Energy competition can benefit any company’s business plan. If used poorly or incorrectly, it can also hurt it. Hiring the right adviser will help you realize the full potential of energy competition – just make sure they are working for you!

This is where the “ABCs” (Aggregators/Brokers/Consultants) come in. These companies evolved to fill gaps in the energy markets where buyers do not have the expertise. ABCs provide knowledge and experience to help buyers navigate the available options and mitigate any risks related to these choices.

• Aggregators- typically acts as a broker, representing a specific group or groups of buyers. Aggregators “bundle” groups of (usually smaller) like-minded buyers – franchisees, churches, etc. – to leverage the larger, combined usage to get a better price from the suppliers.
• Brokers – typically act as middle-men or negotiators between the supplier and the buyer where price is the primary determinant. They can either represent the buyer or the supplier. In either event, their main driver is getting the deal closed quickly.
• Consultants – typically work with the buyer to develop and execute an energy procurement and management strategy. This process best works for larger buyers with more complicated energy needs.