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Ask An Advisor: What Is Your Risk Tolerance?

 

Video Transcription

Hi! I’m Mike, and I’m a Senior Energy Advisor here at Nania Energy Advisors. One question we get asked all the time is: “How do I go about choosing the right energy product?”

In today’s video, we’re going to discuss one of the first factors to consider when choosing an energy product. And that is: Risk Tolerance.

4 Levels of Risk

When it comes to choosing an energy product, it’s not “one size fits all.” Fixed all-in isn’t always the best choice for everyone.

Each product type comes with its own level of risk. On our website, you can take a survey which will determine your organization’s energy risk tolerance. Based on those results, you’ll be classified into one of four risk tolerance levels:

  • Low
  • Mild
  • Moderate, or
  • High.

Low

So let’s talk about each level. The first is Low. If your organization has a low risk tolerance, we recommend a fixed all-in product. And here’s why:

  1. You probably have to adhere to a pretty strict budget. You want to have a pretty good idea of what your monthly energy spend is.
  2.  Having the same fixed rate makes budgeting and accounting easy from month to month, with little or no involvement from you.
  3. You can set it and go. You choose a rate, and you can rest easy knowing that there won’t be a big change in your rate despite a change in usage.

So, if you have a low risk tolerance level, look for a fixed all-in product.

Mild

The next level is Mild. For customers with a mild risk tolerance level, we recommend a managed product.

If you have a mild tolerance for risk:

  1. You can afford to go 10% over budget without major consequences.
  2. If you enroll in a managed product through a supplier, they’ll lock different portions of your usage every month until 100% of that volume is locked. They use market opportunities and logic in order to determine how much to lock and when.
  3. It’s another set it and go option. You don’t need to be involved in the process.

So, if you have a mild tolerance level for risk, consider a managed product.

Moderate

The third level is Moderate. If you have a moderate risk tolerance level, then a layered product might be a good fit for you.

Moderate risk tolerance means:

  1. You’re not a budget-driven organization.
  2. A layered product is different from a managed product by involvement level. With a managed product, the supplier makes all the purchasing decisions for you. With a layered product, you need to be actively involved in the buying process so you can decide when to lock.
  3. And, you need to actively monitor the market to decide when the best opportunities are.

So, if you have a moderate risk tolerance and the time to devote to the energy buying process, look into a layered energy product.

High

Our last risk tolerance level is High. An index product is a good option for you if you have a high risk tolerance level.

You most likely:

  1. Have little to no budget
  2. And you’re comfortable with market fluctuations. You can survive the extreme upticks of the market.
  3. Although an index product does not require you to lock, you should remain alert and be ready to act should an opportunity present itself in the market.

So, if you have a high risk tolerance, an index product might be a good fit for you.

Other Factors to Consider

Risk tolerance isn’t the only factor you need to consider when choosing an energy product. Other factors to consider are:

  • How much is your annual spend on energy?
  • Do you have any energy efficiency projects planned?
  • And how much time do you want to devote to monitoring the market?

Use this video and our survey as a guide, but please consult with an advisor or broker for a more detail conversation on choosing an energy product. Keep an eye out for a future video when we dive deeper into the 4 types of energy products.

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5 Common Natural Gas Questions — Answered

By Mike Eckenroth

When you look at natural gas bids, it can be a struggle to accurately compare pricing between suppliers. There’s no standard offering for natural gas pricing.

Which can lead to a lot of questions. The 5 most common natural gas questions we’re asked are:

  1. What’s the difference between Citygate and Burner Tip?
  2. Which delivery option is better: Citygate or Burner Tip?
  3. What is swing percentage?
  4. What’s different about 100% swing?
  5. Which swing percentage is best?

Below, we’ve answered these questions in a way that will boost your natural gas knowledge and give you the confidence to make a better buying decision for your company.

What’s the Difference Between Citygate and Burner Tip?

“Citygate” is the physical location where natural gas is delivered to a local distribution company (such as Nicor or BGE) via pipelines. “Burner Tip” refers to the point at which the gas is used as fuel.

When it comes to your natural gas rate, the difference between the two lies in how a supplier charges for gas that is lost during transport.

This about it like this:

Imagine you pour exactly 1 gallon of water through a hose. When you measure the amount of water you get on the other side, it will never measure out to exactly 1 gallon. It’ll be close, but it will always be less than 1 gallon because some of the water will leak out or stick to the inside of the hose.

The same thing happens with natural gas. When gas is transported through pipelines to your facility, a small portion of it is lost during the trip due to leaks. This gas is called “lost and unaccounted for gas,” or LUAF.

A Burner Tip rate includes an additional charge to compensate for the lost gas — Citygate does not. Therefore, the supplier with the Citygate rate will charge you a fee separate from your rate to compensate for the losses.

If a supplier does not specify whether a bid is Citygate or Burner Tip, ask!

Which Delivery Point Is Better: Citygate or Burner Tip?

From a performance standpoint, one option is not better than the other. However, you need to know which delivery point a supplier is using for their bid so you can analyze the rates.

If a supplier is presenting a Citygate price, add 1-3% to the price to have an accurate comparison to a Burner Tip quote.

What Is Swing Percentage?

Swing percentage is a component of natural gas pricing that dictates how far your usage can deviate from your monthly contracted quantities without incurring incremental charges. The most common swing options are 0%, 10%, and 100%.

How does my bill differ with each option?

The price for any usage deviation depends on which swing option you choose. Prices for swing options greater than 0% include risk premiums.

Below is a table that highlights how each swing option affects the price you pay.

What Is Swing Percentage?

 

What’s Different About 100% Swing?

With a 100% swing product, suppliers charge you the same rate regardless of how much natural gas you use. If you use significantly more or less natural gas than expected, the supplier bears the burden of purchasing or selling additional quantities at the market rate.

Because of this risk, suppliers will charge you a premium for 100% swing that’s included in your rate. The premium charged is a function of the amount of variability in your month-to-month natural gas purchases.

For example: If you mostly use natural gas for heat in the winter months (like a condominium association), your premium will be higher than the premium for a customer who uses the same amount of gas every month (like a manufacturer).

A supplier’s bid for a 0% swing product could appear lower than a bid at 100% swing. That difference is at least partially due to the premium included for 100% swing.

Which Swing Percentage Is Best?

To decide the swing percentage that’s best for you, you need to know your company’s risk tolerance. If you can tolerate risk and have a very predictable usage profile, your can choose a lower swing percentage and achieve a lower overall price than someone who opts for 100% swing. However, that is not a guarantee.

Budget-conscious organizations that use natural gas for heating, such as associations and non-profit organizations, benefit from a 100% swing product. They can set their budgets beforehand and plan for the year.

Organizations with more predictable natural gas usage, like manufacturers, are typically more risk tolerant and can stand to benefit financially from taking a lower swing percentage.

Know the Ins and Outs of Supplier Bids.

Understanding Citygate, Burner Tip, and swing percentage can drastically change how you analyze supplier bids. Knowing how these components impact your rate empowers you to become a better natural gas buyer. Keep in mind that not all suppliers can provide all options.

It’s important to get an apples-to-apples comparison — you should work with an energy advisor to include any necessary adjustments that will align supplier bids and ensure an accurate comparison. An advisor can also answer your questions and help you create an energy strategy that matches your risk tolerance and meets your goals. Give me a call to discuss how you can optimize your natural gas purchase.

 

About the Author

Mike is an energy professional based out of Baltimore, Maryland, with a strong engineering and purchasing background. His specialties include energy efficiency and strategic commodity procurement. Growing up in the shadow of the Three Mile Island nuclear power plant, Mike has an intimate stake in a grid with safe, reliable, and cost-effective energy generation — which he leverages into an energy strategy that provides security for his clients.

You can reach Mike via email at meckenroth@naniaenergy.com or phone at (717) 679-3663.

The Secret to Timing Your Energy Purchase

By Sarah Rousseau

When it comes to buying energy, decision makers usually go by two rules of thumb:

  • Wait to buy until rates are at their absolute lowest, and
  • Only buy in the “off-months” (winter for power, summer for gas).

These strategies may have worked in the past, but they aren’t conducive for today’s evolved energy market.

Here’s why:

  • Current energy rates are near historic lows, and we seem to have hit a price floor. Although it’s possible for rates to dip back down, chasing that mentality can leave you unhedged and vulnerable to an upward trending market.
  • The monthly time windows no longer exist, especially as consumers switch to electric heat and natural gas continues to be used to generate electricity. In the graphs below, the lowest electric rates occurred between June and September, and the lowest gas rates were seen in January.

electric timing your energy purchase

gas timing your energy purchase

There’s no longer a “perfect” time to buy energy — so how do you know when to buy?

The secret: Always Be in a Buying Mindset.

Here’s how:

1) Know your company’s risk tolerance.

Waiting for the lowest possible rate could cause you to miss out on current savings and leave you exposed to the upside of the market. If the market turns, you’ll be forced to pay a higher rate and face buyer’s remorse or management scrutiny.

To avoid this, set price triggers for rates above and below the current market price that match your risk tolerance, then execute when one is reached. In today’s backwardated market, the trigger price could be for a 36- or 48-month term, offering your company long-term protection.

2) Understand your company’s purchasing process.

Knowing how long it takes you to get a purchasing decision approved helps you determine when to start looking at rates.

  • Can you execute a contract same day?
  • Does your board takes months to make a purchasing decision?

Being able to answer these questions allows you to facilitate your internal processes and start the buying process sooner rather than later.

3) Be proactive, not reactive.

Exploring rates less than 3 months before your contract expires doesn’t give you enough time to evaluate your energy purchasing strategy — especially if you have a long internal purchasing process.

Be aware of when your contract expires and take the early call from your advisor, even if your contract isn’t up for 12 to 24 months. They can update you on market trends and help you develop a plan that fits your needs.

Don’t Wait for the “Best” Time to Buy.

Rates are near historic lows, and seasonality  is gone. Take advantage of current opportunities in the market to protect your organization before the market turns. Call your energy advisor for a market update and discuss your buying strategy.

 

About the Author

Sarah has been in the energy industry for over 12 years. Her background is in customer care, account management, pricing, and energy solutions.

As the Director at Nania Energy Advisors, she oversees all internal core functions of the business, including marketing and client relations. Her specialty is her experience in energy pricing and understanding the evolving energy markets. She most enjoys being an advocate for clients and helping make things easier for them.

Sarah holds a Bachelors in Psychology from Illinois State University. In her spare time, she enjoys spending time with her daughter and family, practicing yoga, traveling, and watching college basketball.

Sarah can be reached at (630) 225-4553 or via email at srousseau@naniaenergy.com.

Your Easy Guide to Selecting the Right Commercial Energy Product

By Sarah Rousseau

April 23, 2018 – So many options. So many details. So many “what-ifs…”. What does it all mean?

There is no disputing that energy procurement is extremely complex. The process takes a lot of time (something that, let’s face it, you don’t always have in great supply). It requires evaluating several factors between your business needs and the energy market. One of the most important to consider is product selection.

My clients tell me all the time that when it comes to picking the right product, they simply don’t understand their options. They have a solid grasp of their own business challenges, but it’s difficult to determine what product is right for their business with those challenges in mind.

Strategic Energy Advisors empower clients to make these decisions by bringing all that complexity down to an easy-to-understand level. Whether it be electric or gas, product selection comes down to understanding your needs, knowing your risks, being informed and taking advantage of your opportunities – not only when buying, but after the transaction is over.

Understanding your Energy Needs.

Allowing your Strategic Energy Advisor to perform a needs analysis will uncover your must-haves and help you define your risk tolerance (what you can or cannot afford to lose). Answering a few simple questions in the beginning phase of energy purchasing can really make a difference and will help position you to select the perfect energy product.

Knowing your Risk Tolerance.

Energy markets will experience volatility, which is normal and healthy. My job is to help you navigate those periods of uncertainty with the security of the perfect product. After performing a needs analysis, I use the risk tolerance spectrum below to help clients identify their organization’s place on the spectrum and their complementary product options.

 

Commercial energy products risk tolerance spectrum.

Being Informed of your Energy Product Options.

Understanding how energy products align with your organization’s risk tolerance is essential before making a decision. Envision your organization in the description of each product and see if the benefits cover your needs.

Fully-Fixed Energy Products.

Fully-fixed solutions are designed for customers that have little to no tolerance for market risk. These low maintenance options are a good fit for those who need to know their costs upfront and like the peace of mind that those costs will not change during the term of their agreement. That certainty allows businesses to make other long-term decisions without worrying about unexpected increases in energy costs. It’s a straightforward option with no surprises.

Benefits of Fully-Fixed Energy Products

  • Budget certainty
  • Peace of mind
  • Easy
  • Protection from market volatility = high

Managed Energy Products.

Managed solutions are designed for clients with a slightly more moderate tolerance for market risk. With the help of a Strategic Energy Advisor, a client will develop a plan for making fixed purchases throughout the term of an agreement that is in line with their goals. Outlining timing, triggers, and percentage locks are some of the ways to remove the guesswork and make a managed solution successful without regular maintenance.

Benefits of Managed Energy Products

  • Flexibility to take advantage of market opportunities
  • Clearly defined purchasing strategy
  • Protection from market volatility = moderate
  • Balanced buying approach

Layered Energy Products.

Layered solutions are designed for clients with a moderate risk tolerance. With these solutions a portion of the clients’ energy load is on an indexed or variable rate. The client and their advisor make decisions to layer-in fixed volume purchases at opportune times throughout the term of the agreement. The decision to lock in a fixed layer may help take advantage of historic low market pricing, or it may be to mitigate the risk of an upward trending market. No matter the reason, this solution provides customizable flexibility.

Benefits of Layered Energy Products

  • Flexibility to take advantage of market opportunities
  • Power to make regular purchasing decisions
  • Protection from market volatility = moderate
  • Balanced buying approach

Indexed/Variable Energy Products.

Index solutions are designed for clients that have a high tolerance for market risk. They are particularly valuable for clients who work closely with Strategic Energy Advisors and who are comfortable with the dynamic nature of the market. With their entire load floating on a variable rate, they can take full advantage of market lows and have the flexibility to lock in fixed purchases at any time.

Benefits of Indexed/Variable Energy Products

  • Avoid paying risk premiums
  • Take advantage of low market prices
  • Flexibility to lock in fixed purchases
  • Protection from market volatility = low

Taking Advantage of your Opportunities.

The product selection process is full of opportunity. Products with greater risk give you greater flexibility to take advantage of falling market prices. In contrast, products with lesser inherent risk will also possess less flexibility but provide you peace of mind that comes with price certainty. It comes down to finding which product is right for your organization.

Now that you have a better understanding of energy products, you should schedule an appointment with your energy advisor to discuss your opportunities. Strategic energy advisors add a personal touch to energy purchasing and will help guide you through each step of the complex process.


About The Author

Sarah has been in the energy industry for over 11 years. Her background is in customer care, account management, pricing and energy solutions.

As the Director at Nania Energy Advisors, she oversees all internal core functions of the business including marketing and client relations. Her forte is understanding how energy pricing and events affect the course of the market. She most enjoys being an advocate for clients and helping make things easier for them.

Sarah holds a Bachelors in Psychology from Illinois State University. In her spare time, she enjoys spending time with her daughter & family, yoga, traveling & watching college basketball.

Sarah can be reached via email at srousseau@naniaenergy.com or via phone at 630-225-4553.

Winter Is Coming: Finalizing a Short & Long-Term Natural Gas Strategy

By Michael DeCaluwe

November 27, 2017 – The energy industry is dynamic. It can be intimidating, especially when you consider that energy costs can account for as much as 15-20% of the annual budget for many manufacturers, property managers and/or municipalities. It takes a true expert – someone who has been around the industry long enough to understand the market and the trends associated with it – to really hold your organization’s hand and walk you through it without fear.

Natural gas is king during the winter months. The winter of 2017-2018 is going one of two ways – 1) warmer than usual or 2) colder than a Charles Dickens novel. Not only should you account for your costs in the short-term, but you’ll need a long-term (5 years and longer) approach to ensure the decisions you make with regard to fixed/indexed billing rate, usage, storage, etc. are the right ones.

What’s more, you’ll need to be honest about what kinds of risks you’re prepared to take (or for that matter, which ones you’re not prepared to). Understanding your risk tolerance in planning for energy needs is really half the battle. So here are a few things to consider when planning your natural gas strategy in both the short and long-term.

Short-Term Energy Planning for Natural Gas.

Understand the pricing structure of your current energy plan.

For each pricing structure, there are benefits and risks that can save you money. Reconciling your pricing structure in the short-term can help you plan in advance and maximize savings (or minimize damage). Fixed rates save you money in a particularly cold winter (especially if you’ve locked in early and/or participate in a pooled billing system). For a warmer season (like what we have seen in the past couple of years), you potentially run the risk of overspending. In this case, we’d recommend a variable rate in the short-term (especially if you can hop into a pool and help mitigate risk). Another way to address it might be a fixed rate swing plan. A swing gives you a range or tolerance that you can use over or under (determined by a two-year monthly usage average) and still pay the same fixed rate. In any case…

Lock in your gas prices now.

Due to the dynamic nature of our industry, there’s a lot of “hurry up and wait” in our business. What do this mean? It means that deciding on a natural gas energy strategy requires both thought and urgency. Whether it be a fixed or variable rate, single or dual billing, we advise our clients to be opportunistic – give thought to which product and plan are most appropriate for their business and the season and move on it.

Long-Term Energy Planning for Natural Gas.

Consider long-term market trends when deciding on term length.

It’s important to know and review long-term market trends when deciding on a term length of your current gas service. One major market influencer of the natural gas market is our country’s export of natural gas. As our nation’s volume of exported gas continues to climb in the coming years, it will be important to see if the worldwide price of gas (which is 3 to 4 times what it is in the U.S.) starts to influence gas prices here. These long-term market influencers help determine a proper buying strategy and term length for your gas needs today.

Look for efficiency opportunities.

Energy efficiency projects have particular benefits for your long-term energy costs. Not only do many of these projects have great ROI (return on investment) periods, but there are utility rebates in place to help fund many of these types of projects. Outside of raw energy costs, investing in new energy-efficient equipment can also cut maintenance costs and provide reliability to your operations, providing you peace of mind. But again, the decision regarding whether to invest in efficiency opportunities lies in having a sound long-term energy strategy that takes these types of projects into account as you attempt to lower and control natural gas costs.

It bears repeating that once you’ve found the right natural gas strategy for your business, you should act without hesitation. This means understanding your product pricing and the terms it includes (rate, usage, storage, contract length, etc.) and being decisive. This is underscored by the necessity to keep an eye on those outside forces that affect the natural gas market (like exports and foreign trade). Of course, not everyone has time to do that. So when planning your natural gas solution, look for someone who can act as a partner and resource for you while you’re focused on other things – like running your business.

Whatever your energy budget may be, we can help work with you and our supplier partners to tailor a natural gas solution that is friendly. Contact us at 630-225-4557 and we’ll help you go over your current and future energy strategy to maximize its value to your organization.


About The Author

Michael has served as the VP of Commercial & Industrial Sales at Nania Energy Advisors since 2007. He believes that understanding clients’ energy needs is vital to becoming a thought leader in the industry and forming a mutually beneficial business relationship. In his spare time, Michael enjoys being a dad, staying active and playing basketball.

Michael can be reached via email at mdecaluwe@naniaenergy.com or via phone at 630-225-4552.