February 11, 2021 — How does knowing the end date of your energy contract affect your bottom line? In this video, Mike Zaura highlights the importance of your end date and how it relates to timing your energy purchase.
Hello! I’m Michael Zaura, and welcome back to Manufacturing Energy Success.
Tell me if this scenario sounds familiar to you. Last night, your phone starts blowing up and you’re getting a bunch of emails a production on second or third shift. You get to the office this morning, and now all of a sudden someone’s out, and you’re short staffed. Or maybe certain production materials didn’t come in when you expected.
The point to all this is: you have a lot on your plate as a packaging manufacturer. You guys have been busier than ever, and energy might not be high on your priority list. In this week’s video, we’re going to touch on why something so simple as knowing the end date of your electric or gas agreement can make a big impact on your bottom line.
Does seasonality exist in energy buying?
Let’s back up a little bit. There’s an old rule of thumb in energy that says “Buy your gas over the summer and your electric over the winter.” The thought process was that you used a lot less gas over the summer and less electric over the winter, so prices would be much lower during those times.
That’s not necessarily the case anymore. There’s a number of reasons behind this, but primarily natural gas is used so much in making electricity now that the market produces buying opportunities throughout the entire year. You don’t know which month you might find a market opportunity that presents itself.
Why is your contract end date important?
Let’s look at two different scenarios when it comes to the end date of your agreement.
(Note: the timeframes discussed in these two scenarios is based on the date of filming, not today’s date)
You rifle through all your paperwork and you find out the end date of your current gas agreement is at the end of March. You have a short timeframe in which to look at your options.
The first day you look at is the number of days you have to terminate with your current supplier. It could be 30 or 60 days. You might love your current incumbent, but you do want to shop the market and see what’s out there. If you have a 60-day termination clause, now you have to go with your current incumbent and you can’t explore the market.
Couple that with the weather pattern we’re currently having and prices that have risen dramatically over the past couple weeks. Now, prices have gone up, and you really have no other options to look at besides your current supplier.
You look through your current power agreement and find out that the end date is December 2021. What are your options?
You can go to market and get rates from suppliers for a December 2021 start date. This gives you a benchmark so you can set up a market watch. A market watch enables you to set a trigger point for a price you’re looking for over the course of the next few months.
Say it’s June, and you wanted a five or ten percent savings against that benchmark rate. Now, you have even more options. You can sign with your current incumbent and renew your contract with them starting December 2021. You can go out to market again and see which suppliers might be offering even lower rates than your trigger point.
A third option — and maybe the best — is using a reverse auction. You can utilize technology to get the best of both worlds.
Knowing your end date gives you options.
So, you can see in Scenario 2 you have many more options to impact your bottom line when it comes to your energy procurement than you do in Scenario 1.
So whether it’s two months, ten months, or even 24 months from now, knowing the end date of your energy agreements can have a significant impact on the options you have. The earlier you look at your agreements will increase your opportunities to make the best decision at the best time for your facility.
Thank you for watching! I hope you found today’s video valuable. In our next segment, we’ll be exploring a way to create a new revenue stream for your facility in the form of a demand response program. Stay warm out there, and have a great week!