Addressing Volatile Energy Costs through Supply and Demand

Posted on December 20th, 2011 by

Energy is playing a larger role in business profitability than ever before – and it’s growing more complex by the day as sourcing options get more difficult, and energy costs continue to be highly volatile.  During the past five years alone, natural gas has ranged from $8.12/Mmbtu to $3.31/Mmbtu while crude oil has moved from $58.80/barrel to more than $100/barrel.  As conditions change in energy and sustainability markets across the globe, windows of opportunity to tap new energy sources are continually opening and closing, and keeping track of these moving parts can be a time-consuming and data-heavy venture.

Traditionally, energy, efficiency, reliability, procurement and sustainability initiatives have been addressed by installation of more efficient operational assets, such as lighting, HVAC and building control software. However, with today’s perpetually rising energy costs, along with outside influences from consumers to Wall Street, and sustainability reporting requirements, companies are considering additional innovative ways to expand on the capabilities of operational assets by managing costs through smarter energy management on both the supply and demand sides.

How it Works

Supply – Simply put, intel about energy supply costs and regulatory landscape can help companies buy energy in a smarter way. In a deregulated market, purchasing energy at the best price can be a complex endeavor. It’s not enough just to issue a Request for Proposal (RFP) and choose what may appear to be the lowest price. To get the highest value for each energy dollar, it pays to take a more strategic approach to energy procurement, taking into consideration market dynamics, rate and data analysis, supplier and utility negotiations, budget concerns, risk strategy, market intelligence, contract terms and more. Focusing on these areas, an organization can take a proactive approach to buying energy, which ultimately will better control costs.

Demand – As discussed in a previous article addressing demand response (DR) programs authored by Schneider Electric’s Donald Rickey, smart grid technologies have evolved to allow a bidirectional flow of information regarding energy use and demand between end users and the electric utility. Over the past several years, demand response, or the ability for energy consumers to manage energy consumption in response to supply conditions, has evolved from a reliability tool used in peak emergencies to a solution for actively managing energy use. For example, energy pricing fluctuates throughout the course of a day, based on the demand the grid is experiencing. As a result, participants in demand response programs can monitor these costs and run energy-intensive business operations during times when costs are the lowest.

Traditionally, the operating model for energy supply and demand activities has always been conducted in a siloed manner, resulting in fragmented decisions regarding energy resources within an enterprise. In connecting the supply and demand pieces of the energy puzzle together, organizations can now be equipped with an end-to-end, holistic approach to overall energy procurement. This method not only allows comprehensive visibility into energy prices (along with the ability to better procure and manage costs associated with water, gas, electricity, steam and power), but also provides cost savings that can be redirected from energy bills to the business – positively impacting the bottom line.

How to Implement an Integrated Energy Model in Your Organization

Creating a model for effective energy management begins and ends with a comprehensive energy management lifecycle strategy that aligns with the goals of the organization and allows users to optimize energy purchase and use over time. When creating an integrated supply and demand energy management model, the following steps should serve as a guide:

1)     Measure Current Energy Use: Get access to water, gas, electric, steam and other associated energy invoices to evaluate what is being spent today. In addition, consider an energy audit and use metering technology to gather information about how the organization is using energy. All information gathered through this process will provide valuable data and insight into the areas that need to improve to achieve lower energy costs.

2)     Define a Strategy: With better visibility into the organization’s energy spendings, the next step is to create a comprehensive plan to meet and align with the company’s overall energy goals, risk appetite and budget.

3)     Evaluate Partners: Seek out an energy management partner to implement a cost-effective solution to achieve the integrated supply and demand energy strategy.

4)     Control Energy Use: Monitor operations to ensure reliability, uptime, power quality and billing accuracy.

5)     Train Internally and Externally: It is important to make sure the people that are using the energy supply and demand systems – internally and externally – are properly trained on any new software, hardware or management tools. Without proper knowledge of how to utilize these technologies, the system may not operate at its full potential.

6)     Continue to Optimize Performance: Utilize support services and reporting software to ensure that the organization is continuously achieving optimum energy cost and consumption now and in the future.

The Future of Integrated Supply and Demand

In the future, we will see integrated supply and demand models continue to evolve as more technology is introduced to the marketplace. In the short term, advances in handheld device applications will allow facility managers, company stakeholders and even CEOs to tap into crucial information regarding energy procurement and the company’s carbon footprint anytime, anywhere. The smart grid will also evolve to better include these devices, including mobile phones, to ensure that customers are making the smartest decisions about their energy use and procurement at any given time.

However, one thing is certain – in the future, energy prices will continue to rise, and organizations that do not choose to implement an energy supply and demand strategy will be making a decision that could potentially cost them valuable budget resources that could be applied to benefit other areas of their business.

Written by James Potach, senior vice president, Energy Solutions, Schneider Electric; Potach is responsible for energy management and procurement, power management and performance contracting.

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