Posts

How to Time Your Energy Purchase – TMT

Video Transcript

Hey guys! It’s Becky here with this week’s Two-Minute Tuesday. In keeping with our theme of kicking 2021 off on the right foot, I thought I’d address one of the commonly asked questions I receive from my clients: When should I go to market?

Now there’s no proverbial crystal ball. Everyone knows that. But we used to gauge patterns based off of following weather. So you wouldn’t buy gas in the winter, and you wouldn’t buy power in the summer.

But as the last couple of years have shown us, that doesn’t really exist anymore.

Factors Impacting the Energy Market

We had some of the lowest natural gas pricing in 20 years in March of last year when there was still snow on the ground. The year before that, the fourth of July in 2019 showed us ridiculously low electricity rates.

So how are you supposed to know when to go to market?

Well, let’s slow down and look at the facts.

Year over year, we know that natural gas is down about 25 percent from this time last year. While the rig count has be steadily increasing, it still hasn’t returned to its full capacity.

Meanwhile, exports of liquefied natural gas are at record all-time highs. They’re receiving $14 per MMBtu right now in China, whereas here domestically they’re getting a little over $2. So there’s definitely demand increasing for exports.

However, demand domestically hasn’t returned quite yet. We’ve had a very mild winter, and we’re still experiencing some of the effects of COVID-19 shutdowns. This summer should prove some volatility to return as demand comes back online for both natural gas and power. We hope that production will follow, but at this point it’s still not up to capacity.

That all said, how are you supposed to make a decision on when you should be looking at your options to make an energy purchase?

A Shift in Perspective

I’d encourage you to switch the conversation from savings to risk management. Are you willing to look at some options now and potentially pay a little bit higher than your current contract to have safety and security and lock in for the next three years? Or, are you willing to take on a little more risk and ride the market and see how the change in political parties or social and economic factors play out? How is the vaccine going to have an effect on shutdowns?

It could go either way, it just depends on the risk level that you’re comfortable with as an organization and what you’d like to see as an end result.

So, I’d encourage you to have the conversation now with your strategic energy advisor just so you’re on the same page. You can set up some market watches to start watching pricing if you’re not quite ready to take action yet. But at least you’ll be in the know when the opportunity arises to make your energy purchase.

Thanks so much for listening, and we’ll talk to you next week!

Follow us on LinkedIn!

What is a Price Trigger? – TMT

Video Transcript

Hi! Welcome to this week’s Two-Minute Tuesday where we’re going to be talking about strike prices and fixed price triggers. We’ll be answering some questions about what those are and when someone might use them.

Strike Price vs. Price Trigger

A strike price is more of a technical investment term. When you’re looking at purchasing natural gas and electricity, we’re most likely talking about a price trigger.

A price trigger is when a client authorizes a set market price that the market might go down to, at which point a transaction might be automatically executed or approved to be executed.

When should you use a price trigger?

Here are a few situations where that might be used.

1) Slower Decision Making/Authorization Process

The first is when you have a slower decision making or authorization process. Good examples of this are school boards or condominium associations where they need to have a group vote in order to approve a transaction.

Obviously this isn’t very conducive with market volatility and moving quickly on a price. So what they might do is approve a price trigger and a specific target to be executed in the near future. In this situation, it would be automatically executed based on that target price, so they don’t have to go back and get additional approvals.

2) Multiple transactions

Another situation where someone might use this is a large user who is making multiple transactions. Think of a data center or a large manufacturer for whom energy is a significant cost in the price of their product.

In this case, they’re making many transactions over time, and they want to streamline that process so they can execute more quickly based on market volatility. In this scenario, they may or may not execute automatically.

Often, there’s a buyer or someone in place who can make those decisions, and what they really want is to be notified when the price hits that level so they can give a quick yes or no and then the transaction would occur. But the transaction wouldn’t be slowed down by paperwork or needing to get things signed right at that moment; it’s all been done in advance with the price trigger.

3) Market Monitoring

The third scenario is for market monitoring purposes. We use this often when we’ve got a client with a contract that’s up at the end of the year, and maybe we’re looking to see if the market drops below the current price for a client and we want to take advantage of that.

So in that situation, there wouldn’t be an automatic execution, but that price trigger would set off a notification to let us know where the market’s at so we can look at it and bring it to a client for evaluation and then to potentially make a decision on that.

So those are three different scenarios with three slightly different outcomes on a price trigger. But the core point is setting and approving a target price at which some transaction or notification is going to be exercised in the future.

If you think price triggers might be a good fit for you or if you just have general questions, reach out to your energy advisor for further details.

As always, thanks for watching, and please comment, like, or share below!

Follow us on LinkedIn!

What Is Swing Percentage? – TMT

Video Transcript

If you watched last weekend’s Masters, you saw some pretty sweet swings out there. If you like Masters Champion Dustin Johnson, some might even say he had 100% swing.

In this week’s Two-Minute Tuesday, we talk about natural gas products and what “swing” means.

What is swing percentage?

Swing is a term used in natural gas products to determine how much you can deviate from your monthly usage. The most common products are 0% swing and 100% swing, but you could do something in between as well.

0% Swing vs. 100% Swing

For 0% swing or a fixed price per therm, your supplier will determine how much you use month in and month out based on historical data. You pay a fixed rate for that monthly quantity. Anything you use over that monthly nomination, you will pay the market rate for. Anything less than that, you will sell back to the market at the market rate.

For a 100% swing product, you pay the same fixed rate regardless of deviations in usage. Let’s look at an example.

Example

Say you use 10,000 therms every November. One November, this goes up to 11,000 therms. You were fortunate enough to lock in a rate of $.25/therm.

On a 100% swing product, you would pay $.25 per therm for all 11,000 therms.

For a typical fixed rate, or 0% swing, you would pay $.25 per therm for the first 10,000. But then you would pay the market rate, let’s say it’s $.28 per therm, for the remaining 1,000 therms.

Which swing percentage is better?

So, which is better: 0% swing or 100% swing.

The answer: it really depends on what you’re looking for and what your long-term strategy might be.

100% swing gives you budget certainty. You pay the same fixed rate regardless of deviation in usage in the coming year. Say you’re expecting increased production, maybe you’re adding new equipment, or you’re very risk averse and you’re worried about the cold winter coming up. 100% swing will give you protection from that.

On the other hand, if you’re not planning any major changes in the coming years and your usage has been pretty stable, a 0% swing product might be the best fit for you. Although there’s a little bit more risk involved with the 0% swing product, you get the advantage of paying a lower rate because there’s no risk premium included in the rate like there is with a 100% swing product.

So,  what might be happening in your facility in the near future plays a big role in choosing the right swing product for your gas needs.

When it comes to natural gas products, channel your inner Dustin Johnson and make sure you choose the right swing. If you need help choosing that swing, reach out to one of our advisors.

Thanks so much for watching! If you found this video helpful, please like, share, or comment below.

Follow us on LinkedIn!

TMT: How Oil Impacts Natural Gas Prices

Video Transcript

The coronavirus has had a huge impact on the price of commodities, with oil being the primary media focus in recent months. But did you know that approximately 16 percent of natural gas harvested in the United States comes from oil wells?

In this week’s Two-Minute Tuesday, we’re going to talk about how the relationship between oil and natural gas drives domestic energy prices and give you some tips to control your risk.

How are oil and natural gas related?

If a company produces crude oil in the United States, chances are they also produce natural gas. The two commodities are related because natural gas can be a byproduct of oil drilling. This is called associated gas — otherwise known as natural gas that’s associated with oil production.

With a nationwide average of 16 percent of natural gas (and as much as 40 percent in some areas of the country) coming from oil, it is safe to say that a good chunk of domestic natural gas production is reliant on oil.

What happened with oil prices?

Oil prices absolutely plummeted because of a perfect storm in March and April of this year. Plunging demand due to the coronavirus coupled with an OPEC disagreement on production cuts cause the collapse of oil prices.

There are two consequences of low oil prices as they relate to natural gas:

  1. The immediate impact is it’s no longer profitable to harvest oil domestically and the associated natural gas that comes with it. Oil drillers in the US have higher operating costs and a higher break-even point than drillers elsewhere in the world. The 16 percent value of natural gas coming from oil is reduce or, in some extreme cases, eliminated.
  2. In a longer-term view, sustained low oil prices will cause future development of oil and associated natural gas resources to be cancelled or postponed. This is really a balancing effect of supply and demand. So the longer oil remains low, the larger the potential impact it will have on future supply levels of natural gas.

We’ve seen oil demand come back here in July, almost reaching the same levels as 2019. The Wall Street Journal is also reporting that the worst effect of the coronavirus on global oil demand have passed but will continue to echo throughout the rest of 2020 and beyond. With resurgent cases we’re seeing in the south and talk of additional business closures, this remains to be seen.

How does this impact you?

So, what should you do with this information?

If your natural gas agreement is expiring within the next 18 months, you should absolutely be reviewing your options for renewal. Prompt month prices hit 25-year lows in early July 2020.

If you’re locked farther out, I would also encourage you to review options for extending your natural gas agreement. With the historical low point we’re currently at coupled with risks to long-term production, now may be the time to take some of that risk off the table.

Thanks for watching! If you’d like to review your options for natural gas, my team and I would be happy to help. If you enjoyed this video, please like, comment, and share below.

TMT: Choosing the Right Energy Product

Video Transcript

Let’s discuss risk. If we were having this webinar three months ago, we would be talking a lot about the cost savings versus your prior contract and how we hit some of the lowest prices in the last 20 years in February, which was just unheard of.

It would have been a very different conversation from today where we want to focus on cost aversion — avoiding any risk in the future given all the factors that we’re aware of today. Where we anticipate using those factors, where we anticipate energy prices to go, and what that means for you and your energy costs.

The biggest way to do this is through product selection. When a supplier uses “product” terminology, they’re basically meaning of all the moving components of your electricity or natural gas costs, how are you fixing those and what is the variability going to be from those month-to-month on your invoice?

Low Risk Tolerance Customers

So when we look at this meter, you see in that bluish-white area is for low risk-tolerance customers. You need a lot of budget certainty, you can’t have a lot of variation in the rate month-to-month, and you need to plan in advance for what’s coming down the pike. This would be more of a fixed product, or a fixed all-in. You’re taking all of the different components of your energy cost and locking them as much as possible.

When done correctly, you should in theory have the same per-kWh or per-therm cost on your invoice every month.

High Risk Tolerance Customers

If you go to the other side of the meter, you have the index or variable or floating type of products. These ride the roller coaster of the energy market. So you’re going to have a lot of variability.

There’s been some advantages to this certainly in the past year or two where prices have continued to come down continuously, so if you’ve been riding an index product you may have seen some of those record-low prices and been able to take advantage of that.

But on the flip side, now we’re facing volatility. And volatility, again, means a roller coaster. So if you have a little more bandwidth to have a higher risk tolerance, then this may be the kind of product for you.

Product type is going to look different for every organization. We’ve already seen where COVID-19 has affected every business (even within the same industry) very differently, and going forward a recession could affect every organization differently. So I would stress that you should really look at your internal risk tolerance — not only what it was in the past but also what it’s going to be going forward with all of the unknowns.

Current Energy Product Trends

A trend that we’re seeing right now is even some of our long-term clients that have always been on some type of float or index product are actually looking to fix as much as they possibly can. There’s a lot of uncertainty still up in the air. We don’t know a lot of things that are going to shake out from COVID and the recession and these other factors we’ve described.

So to be able to have control over a certain portion of your budget via energy, we’re seeing where people are starting to switch more to the fixed and low-risk types of products.

 

Follow us on LinkedIn!

TMT: Energy Tips for Facilities and Operations Managers

Video Transcript

If you’re a facilities manager, Director of Operations, or COO, you deal with almost everything happening at your facility on a daily basis. And if you oversee more than one facility, your tasks and responsibilities are even greater.

In this week’s Two-Minute Tuesday, we’re going to dive into energy concerns specific to you and share some energy tips for facilities and operations managers that make the process easier for you.

Concern #1: Ease of Procurement Process

One of your concerns is that you need the procurement process to be as easy as possible.

With all you have going on, you don’t have time to sift through mounds of paperwork or charts or spend hours considering every option.

To make the process easier on yourself, consider working with an energy broker or an energy advisor.

They’ll do the heavy lifting for you — requesting pricing, communicating with suppliers, and comparing supplier offerings. Based on their findings, they’ll give you a proposal that clearly states their recommendation based on your facility’s needs.

Concern #2: Efficiency

You also want your facility to be operating as efficiently as possible to reduce your bottom line. Old or outdated machinery could be using more energy than necessary and causing you to be over budget.

To combat this, have an audit performed on your facility to identify possible inefficiencies. The audit will identify both immediate and long-term opportunities for you to lower your energy usage.

And as an added bonus, many utilities currently offer efficiency incentives, reducing your overall project cost.

Concern #3: Budget Adherence and Risk Avoidance

Another important aspect of your job is making sure you’re adhering to your budget.

Can you explain to your CFO why your projected energy costs were ten percent over budget? Are you sure it was due to increased production? What if it was something else?

Taking unnecessary risks with your energy can easily blow up your budget, and you don’t have time to examine the details of every available energy product.

An energy advisor or broker is well-versed in supplier product options and can help you select the one that makes the most sense for your facility. This should be based on your production schedule, sustainability requirements, and any upcoming energy efficiency projects.

Concern #4: Looking for Competitive Advantages

Lastly, you’re looking for ways to give your facility a competitive advantage.

In addition to a strong procurement strategy and doing efficiency projects, consider enrolling in a Demand Response program.

Facilities that choose to participate earn money for voluntarily reducing their usage during test events and peak usage times. The more you can curtail, the higher your payout, and the more funds you have at your disposal for site upgrades.

 

As a facilities or operations manager, you deal with so many variables every day. Your energy consumption and spend is an important aspect of this, but it doesn’t have to be overwhelming.

Keep these energy tips for facilities in mind when looking at your next project or agreement.

Thank you for watching! If you found this video helpful, please feel free to share it with other operations folks, then like or comment below.

TMT: Energy Management Tips for Property Managers

When it comes to managing energy costs, property managers face a number of unique concerns.

It’s not just you making a decision — you have to help your board make a decision and, ideally, make the best one.

You’re worried about:

  • Budget certainty
  • Getting competitive pricing
  • Showing you did your due diligence
  • Saving money
  • Proving that you saved money
  • And did I mention getting consensus from a whole group?

You can’t tackle all of those at once, but we do have some advice on how to address some of these concerns. In this week’s Two-Minute Tuesday, we’re sharing some energy management tips for property managers.

Energy Concern 1: Staying within your budget

One area you’re concerned with is making sure you stay on track with your energy budget.

To achieve budget stability over time, it’s important to stay at least a season ahead of your contract end dates. A good rule of thumb is to test the market 12 months in advance and be prepared to take action in that 9-12 month time frame.

There’s no secret sauce for timing the market. However, following this time frame will allow you the flexibility to avoid rate spikes and take some of the speculation out of the market.

Energy Concern 2: Getting a competitive rate

You’re also looking for competitive rates to save your board the most money.

For larger buildings, a reverse auction is a great option for maximizing transparency and supplier competition. The end result is the lowest possible price on a given day and a very clear documentation to provide the board with confidence in their decision.

For mid-size buildings, you can create similar results with a multi-step bidding process.

Energy Concern 3: Managing board expectations

Lastly, you want to manage your board’s expectations regarding savings potential.

When you’re working with efficiency projects big or small, managing board expectations is critical.

So often I’ve heard about boards who are dissatisfied with a project that is saving them lots of money because it isn’t as much as the sales guy said it would be.

Providing independent savings projections and establishing key performance indicators up front will go a long way to providing your board with the confidence necessary to move forward. It will also make verification of project success much easier.

Keep these energy management tips in mind.

As a property manager, you have a lot on your plate. But keeping these energy tips specific to property managers in mind will make this part of your job easier and keep you looking good to your board.

Thanks for watching! If you found this video helpful, send it to a fellow property manager, then like or comment below.

Follow us on LinkedIn!

Wall Street and Natural Gas

By Michael DeCaluwe, CEM

This winter, natural gas rates have continued their fall below the $2 per dekatherm price point. Weather and decreased production typically create a floor to gas prices. However, neither has been able to slow our run to historically low gas prices.

What’s Wall Street’s role in the market?

Typically, Wall Street’s venture capital firms invest in a company and assume an eventual payout.

  • For example, think of Amazon, which lost money for many years even while its stock price went up. Wall Street was investing in the potential of the company to eventually make money.

Investors applied the “loss leader” strategy to the energy sector, but they haven’t seen the same results. Venture capital firms invested heavily in shale during the post-2008 boom. Yet natural gas rates have continued to decrease, and so have the returns from energy companies.

Debt-riddled and highly leveraged, many natural gas producers have been unable to produce a return for investors.

How did Wall Street get it wrong?

The biggest aspect of the natural gas market that investors didn’t consider is the decline rate in production at the well head.

Gas Well Decline Rates

A decline rate is the decrease in the amount of gas a well is expected to produce year over year. For instance the amount of gas that a shale gas well produces declines by an average of 70 percent in Year 2 versus Year 1.

Natural Gas Decline Rate

Production and Royalty Declines in a Natural Gas Well Over Time — Source: geology.com

The chart above illustrates why the loss leader approach to investing in the natural gas industry has led to big losses.

If these wells aren’t making money in Year 1, the rate of decline means they surely won’t be profitable in future years.

Producers have had to drill new wells to keep production and cash flow up to repay their creditors. This, coupled with the lower domestic gas demand, has created a vicious cycle that has resulted in today’s sub-$.20 gas pricing.

What happens now?

The party might be over for the natural gas industry.

Investors are starting to pull their money out of energy companies, and natural gas rates are at 20-year lows. Shale producers decreased spending by six percent in 2019 and are forecasted to decrease by another 14 percent in 2020.

The number of natural gas-directed wells also decreased by over 35 percent in 2019.

In spite of this decrease in investment and rig counts, gas rates have continued to fall in 2020. It could take a year (or more) of decreased investment in the market to affect natural gas supply.

How This Impacts You

As a buyer, it’s important to understand Wall Street as a market factor. Here are some articles that explain this concept in more detail:

If you’d like to learn about other macro factors affecting the markets, check out our February Chronicles of Nania or feel free to contact me.

 

About the Author

Michael has served as the Senior VP of Commercial & Industrial Sales at Nania Energy Advisors since 2007. He believes that listening to and 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 at mdecaluwe@naniaenergy.com or via phone at (630) 225-4552.

TMT: Benefits of a Reverse Auction

Video Transcript

What’s the difference in electricity and natural gas supplied to you between one supplier or another?

The answer? None. They’re both commodities. There’s absolutely no qualitative difference if your supplier is Constellation, Direct Energy, or any of the other dozens of retail energy suppliers.

So, what does matter? Making sure that you’re getting the best effort from all qualified suppliers to provide your organization with the best results.

In this week’s Two-Minute Tuesday, we’re going to talk about how a reverse auction for energy procurement can compress supplier margin and drive energy savings for you.

How does a reverse auction work?

In a reverse auction, all qualified energy suppliers are invited to compete against each other in a live event that you can watch through an online portal.

With each bid, suppliers attempt to win your business by under-bidding one another. They can’t see who the lowest supplier is, but they can see the price to beat. This gives each supplier “last look” and dramatically improves the level of competition.

What happens when the auction ends?

At the conclusion of the auction, when no supplier is willing to go any lower, you’re left with the supplier who was willing to put their money where their mouth is. And the lowest possible energy rates achievable.

You’ll also have a report with time and date stamped bids from all suppliers during the auction.

Consider using a reverse auction for your procurement.

For commodity procurement, there is no more efficient and transparent platform than the reverse auction. But it’s important to note that the auction is just one tool in your energy management toolbox. You aren’t guaranteed the best results just by virtue of using one.

Your consultant or broker should also be:

  • Helping you develop an RFP that defines your energy goals and assists you in making the best decision
  • Monitoring the market for you to advise on the timing of your purchase, and
  • Partnering with you directly to meet the reporting needs of your organization.

When you’re considering options for your upcoming commodity agreement, check out a reverse auction. It might provide some valuable competition you might be missing from your process.

Thanks for watching! If you found this video helpful, please like, comment, or share below.

Follow us on LinkedIn!

TMT: Liquefied Natural Gas

Video Transcript

Did you know that natural gas can be turned into a liquid?

In today’s Two-Minute Tuesday, we’ll be talking about why liquefied natural gas (or LNG) is an important factor in the cost of energy in the US.

Liquefied Natural Gas: Fast Facts

Liquefied natural gas, or LNG, can be exported on ships.

At export terminals, natural gas is cooled to about -260 degrees Fahrenheit, at which point it becomes a liquid. It’s then shipped using special ocean tankers to import terminals. There, LNG is heated and returned to its gaseous state.

Historically, the United Stated imported LNG, so most of our ports are designed to heat LNG to turn it into a gas.

However, recently we’ve seen a rise in shale fracking and an increase in our natural gas production. This led to the opening of the first US LNG export facility in February 2016.

Since then, we’ve added five more export facilities, with more scheduled to come online in the coming years.

Why is Liquefied Natural Gas important?

LNG can affect the price of natural gas both domestically and internationally.

Historically, the price for gas in Europe and Asia has been 80-100% above the cost of gas in the US. This matters because of how it impacts our supply market.

Domestic natural gas producers can get a higher return for their natural gas in the international market versus the US market.

Although we only export a small amount of LNG right now, our exporting capacity could increase because gas producers are driven to capitalize on the market differences. Could this siphoning of supply cause the cost of gas in the US to rise to the level of the international market?

The Future of LNG

The future of LNG exports has a lot riding on the upcoming election. Depending on who wins this contest, the US LNG market could continue to expand or could be cut back. Regardless of the election, LNG exports will continue to influence domestic energy prices for both natural gas and electricity, and its expansion is a factor to watch over the next decade.

Thanks for watching this Two-Minute Tuesday, and look forward to future videos! If you found this video helpful, please like, comment or share below.

Follow us on LinkedIn!