Choosing the Right Energy Procurement Strategy
How to decide between fixed-rate or variable pricing
There’s no perfect solution when it comes to securing the best energy prices for your business. It often comes down to a combination of market factors, usage rates, risk management and a little luck. Here are the steps Curago takes to help our clients choose the best option for their business.
Additionally, Curago Energy provides our clients with information about historical prices and how future rates compare, and the fundamentals that may have a positive or negative impact on future pricing. All of these factors can be used to make educated decisions. Experienced energy professionals, like Curago Energy, monitor market conditions and can help make sure you are taking advantage of favorable pricing situations and avoiding unexpected price spikes.
And market spikes are not the best time to lock into a fixed rate. Weather is hard for even the professionals to predict. Extreme weather and volatile energy prices can destroy a budget very quickly if the customer is on a variable or indexed based price. In the past, customers have panicked and locked into long-term fixed-price contracts at the peak of pricing. Extreme price spikes caused by fundamental reasons like extreme weather tend to come back down quickly. It is usually best to remain on a variable price for the short-term and consider fixing when prices return to normalcy.
When to Lock-in on Fixed-price Energy Rates
Fixed-pricing provides for certainty and the ability to accurately budget for future energy costs. Price stability and predictability is important for some businesses and a fixed-rate contract can address those needs. Of course, there will always be fluctuations due to the impact of weather variations on actual usage. Customers should always begin their process of managing energy costs by looking at past spend and usage. Additionally, customers should factor into their forecast any process or equipment changes that will increase or decrease energy usage.
The next step is to compare that past price to prices available currently for future months and years. You can contract for a fixed-price at any time.
Historically, some of the best times have been in late winter after mild winter temperatures or in the early fall when natural gas storage levels are very high. This is not an exact science; your budget should always be the overriding factor.
Not all Variable Pricing is the Same
Variable energy rates, historically, have been difficult to determine. Energy utilities and some providers continue to follow a practice of hiding pricing and tend to result in monthly variable rates that are way out of the range from where they could be.
Curago works with de-regulated variable offerings that are very transparent. We typically align our energy contracts to a highly visible index point like the New York Mercantile Exchange (NYMEX) natural gas contract. The result is easy visibility into the most competitive pricing available, and confidence we are paying fair-market value for the energy we’re consuming. Otherwise, you can quickly find your business overpaying for energy.
Example of Being Strategic with Energy Procurement
In January 2014, extreme cold weather dropped down into the United States from Canada. The temperatures experienced during the first few months of 2014 were some of the coldest in a decade. Weather forecasters began calling the weather pattern responsible for this cold-snap a polar vortex. Talk of the polar vortex was rampant that winter and ever since this event it has become the standard name given to extremely cold air coming from Canada into the U.S.
If customers were not locked into a fixed-price contract prior to January 2014 it made a lot of sense to remain on a variable or preferably an indexed based variable rate. Prices did peak in February 2014. That month the Nymex natural gas contract settled at $5.557. After this, the cold weather started to dissipate and eventually winter was over. Prices quickly came down.
Nymex for 2014 averaged $4.415, well below the February peak of $5.557. The downward trend continued for the next year and a half. Prices averaged $2.664 in 2015 and for 2016 they averaged $2.457. The absolute lows came during the period March 2016 through June 2016. All four months settled below $2.00, with March being the lowest at $1.711.
In late January 2016, Curago Energy engaged with a sport and leisure company with multiple sites under management on the Columbia Gas of Ohio utility system. At that time, they were on a variable rate and had been benefitting from the downward trajectory of prices. The Standard Choice Offer (SCO), Columbia’s monthly variable rate had been below $4.00 for a while. During the February to March 2016 timeframe, Columbia posted its lowest SCO of $3.00.
Curago Energy recommended this as a very good time to consider a fixed-price because prices were at historical lows and weather forecasters were predicting a hot summer. A hot summer would mean natural gas-fired electric generation would need large sums of natural gas to create electric for air conditioning usage.
As predicted, it was hot and prices began trending upward. Wisely, Curago’s customer had aggregated their sites (more usage, more buying power) and had already made the smart decision to sign a fixed-price contract at $3.60/Mcf for three years starting in April 2016. By pricing the sites all at the same time, the customer received a price quote that was about $.07/Mcf lower than if they priced them separately and the new deals put all the sites on the same contract terms.
Although, they had previously been content with the variable price, they valued Curago’s market insight and made the decision to guarantee themselves low prices and budget certainty. Since inception of this $3.60 contract, COH’s SCO has only settled below $3.60 during April and May 2016. Curago’s customer saved almost $28,000 against COH’s weighted average SCO price of $4.391.