Energy costs for small to mid-sized businesses have and will always be a hot topic of conversation.
Energy comprises a significant part of a small business’ budget, making the extreme volatility of the ever-changing energy market a serious concern for today’s entrepreneurs.
To combat this, many small businesses are turning away from their standard utility company and looking to alternative suppliers to assist them through a formal process known as “energy management”. To understand the opportunities that can be unlocked with a well-run energy management program, such as achieving savings, improving risk management and mitigating price volatility, we’ll first need to look at four critical steps and actions that make up a well-organized plan:
#1 Turn to an expert
First and foremost, a small business should look for a trusted energy manager who has the resources and market experience to make good decisions, both short and long term. Understanding what is affecting the market today, but also having insight into longer-term windows of 1, 3 and 5 years is the foundation for mitigating risk in a volatile energy environment.
#2 Process to a thorough energy assessment
An effective energy management plan needs to start with the development of a baseline energy assessment. Understanding when the business uses energy, where it uses energy and how it uses energy are all critical questions that an energy manager must find out in order to define the baseline components of any energy profile.
#3 Identify areas of significant savings
Once the baseline energy profile is completed, energy management plans can easily identify areas that unlock significant savings through:
- Demand reductions: Using updated technology and empowering employees with the knowledge to change their behavioral use of energy can greatly reduce energy consumption.
- Cost reduction: The time of use and adaptation to the local utility rules and regulations consistently drive significant cost reduction.
- Technological upgrades: Technology and equipment efficiency such as upgrades in business equipment, lighting and other products can yield 50% in savings or more.
#4 Involve your operations team
While efficiencies can unlock significant saving through demand reduction, the most significant part of a good energy management is proper handling of the unit cost of energy. Improving risk management and reducing price volatility are imperative in lowering expenses through demand reduction. It is a collaborative effort that brings the energy manager into the operations of the small business entrepreneur.
A standard energy management plan encompasses at least a 3-year scope of active price management. An additional flexibility to add incremental timeframes as market changes offer forward pricing opportunities. Most energy commodities trade forward a minimum of 36 months; affording the small business ample time to acquire prices that meet or exceed budget requirements.
There are a number of ways in which an energy management plan can decrease risk , but typically, dividing historical energy use and needs into annual increments of ¼ and then capturing price based on those needs at different times, yields the best results.
A local manufacturer uses 100,000 units of natural gas a year; his price goal is $5 per unit. The plan should divide the purchase volumes into 25,000 units, with a price target of $5 or less. These volumes should be established for a period of 3 years. As the price target is reached, a financial hedge would be executed to provide price surety for the small business. An energy manager should focus on having 100% of near month price and volumes locked up the closer a month gets to the actual physical delivery month while allowing for flexibility of future price transactions as the market moves up or down. By having this flexibility and by dictating to the market what price the small business is willing to pay, most business owners can expect significant reductions in their price volatility and thus reductions (or stabilization) of their unit cost. In return, this process will aid in the capitalization of demand reductions providing greater ROI for the small business.
Keep in mind that energy management is a complex process that should be flexible and adaptive to meet the unique needs of each business.
A one-size fits all approach will not work; a small business needs to understand that a good plan must be designed to its specific circumstances and needs. The plan must be collaborative, but more importantly, entrusted to a company that has the resources and knowledge to make it work.
Matthew Lanfear is CEO of Great Eastern Energy, an alternative supplier of energy headquartered in New York. With over 20 years of developing energy management plans for small business entrepreneurs, Matt has unique insight into plans that can help businesses “THRIVE.”