PUBLICATIONS / NEWS

BUSINESS INTEREST ARTICLE
Companies Can Take a Bite Out of High Energy Costs and Volatility – Supply Side Management

Companies who are paying perhaps their highest energy bills in history may find relief, predictability, and piece of mind by refreshing and retooling their internal supply management procedures. Typically, the reflexive response to high prices and volatility has been concentration in cost cutting measures aimed at reducing the amount of energy consumed – Demand Side Management.

Much activity and investment has been allocated to systems and processes in recent years, resulting in energy efficiencies being at very respectable levels. What more can be done?

Good news. There is still room for additional efficiency and cost control. Further opportunity lies with Supply Side Management.

Supply Side Management is focused on energy procurement
and associated processes. The procurement process and related functions are tasked and performed at different organizational levels in today's companies. For one it may be a purchasing function, another finance, and still another engineering. While it is easy to verify past expenditures, it can be much more difficult to undertake the formation of an energy plan, budget, and controls that foster performance monitoring and ultimately, proactive measures in securing the company's energy requirements.

The rewards of Supply Side Management are reliant upon pertinent data analysis, hedging tools, and accurate forecasts to create a strategic energy procurement plan. An effective plan will have process and procedures, strong controls, contingency plans, predictable expenditures, and will be proactive.

An experienced and qualified independent energy consultant can bring together the essential internal company, external market, and regulatory elements. The internal ingredients should include historical metered data, consumption, utility bills, supply and distribution contracts, rate schedules, plant utilization, improved efficiencies and more. External elements include historical and forecast weather, world and economic events, forward price shapes, energy supply-demand balance, monitoring the energy infrastructure, regulatory environment, and other pertinent market intelligence.

Aggregating and properly warehousing both static and dynamic data are critical to verify data integrity as well as easy accessibility into quantitative models. The result is "actionable" data – information that supports a forward view of expected outcomes. Too many companies today still struggle with the fact that 70% of their time and effort is directed at locating and manipulating data and only 30% on effectively analyzing the data.

Before this forward view is converted into a plan, it is essential that the company understand its own risk tolerance and culture. Risk crosses many categories such as performance, operational integrity, earnings, and public image. Quantitative data analysis can be applied to reveal probabilistic outcomes and exposures. Next, price certainty (hedging tools) – if approved as part of risk mitigation – must be funded, documented, and fully understood. Additionally, short-lived market opportunities require distinct, predetermined, authorized designees and approval levels for expedient decisions and execution. Ultimately, the organization should develop risk procedures and controls that are well documented, measurable, and well-understood within. Finally, contract provisions and compliance risks should be exposed and quantified.

An executable strategic procurement plan can now be created, containing specific action items, timing, and contingent provisions in response to changing circumstances. Forecast expenditures can be confidently presented and relied upon. The plan can be explained, supported, approved, and implemented. Ongoing analysis of internal and external factors affecting the energy program will insure proactive – often predefined - responses to change.

The validity of the organization's assumptions under the plan is monitored via monthly reconciliation of activity and invoices. Did the invoiced charges reflect the estimates that were modeled and predicted? Was the actual energy consumption within a reasonable tolerance of the load forecast? Performing a detailed variance analysis a) enhances the budgeting/forecast process, and b) indicates where models and assumptions must be calibrated for improved future accuracy. Finally, management reports designed around meaningful, measurable metrics can be produced with full explanations on a regular basis. The loop of the supply management cycle is closed as the validated data output is warehoused, complimenting the existing historical quality information for future analysis.

The bottom line: Supply Side Management requires a disciplined approach to selecting pertinent data, managing its integrity, and reviewing information from a strategic perspective. It enhances internal process controls and slashes avoidable costs. The organization is proactively and intellectually empowered to control its short and long term energy costs, thus avoiding the volatility traps of uncertainty, paralysis, panic – and ultimately – the risks associated with inability to predict the impact of the energy market.

- - - -

About the author: Andrew Coppola, President of AC Energy, LLC in Plymouth, Michigan, specializes in Supply Side Energy Management Services. During his 24 year career in the deregulated energy arena, he has held senior and executive positions with leading industry companies. Mr. Coppola has been responsible for purchasing up to $500 million annual energy supply and has provided energy management services to utilities, large industrials, schools and associations, and residential and commercial customers. For questions about an energy management program for your organization, please call (734) 667-4188.