Be Your Own Power Broker

Now that the electric supply market has existed for a full decade in Illinois, BOMA/Chicago member buildings enjoy lower prices than their counterparts in other metropolitan areas.  In many cases, like New York City for example, the prices are much, much lower.

Competition certainly isn’t the only reason prices are low.  We have fewer transmission constraints along with several nuclear and coal plants instead of the higher-priced natural gas plants in most other regions.  But competition is certainly a major factor. 

The economic lessons of competition are demonstrated quite well in energy markets.  Competitive power suppliers compete against each other to provide the best possible service at the lowest cost in order to attract and retain customers.

But monopoly providers like regulated utilities have no incentive to innovate or support energy efficiency to attain lower costs because ratepayers are captive.  To top it off, they generally get paid per kilowatt-hour, so the more power they produce, the more money they bring in.

The Advent of the Energy Power Broker

Now that competitive supply has become available to residential customers, billboards and commercials for different suppliers are popping up.  And with this increased attention, there has been a multitude of upstarts that act as energy brokers for customers by helping select the best possible deal.  As with any competitive market, it will take time for the truly valuable brokerage firms to stand out and for the rest to fall by the wayside.

But the problem with brokering retail power is that a true apples-to-apples comparison is practically impossible when it comes to forecasting savings.  We’d need to somehow predict prices, weather, usage, and a host of other factors to properly risk manage the different suppliers.  Perhaps more importantly, every supplier has a different contract that would have to be analyzed.

In far too many cases, though, energy brokers simply request pricing from a few energy suppliers on a flat rate, pick the lowest one, and then embed their bill in the supplier’s billing.  This simple method can only reach the optimal result by chance.

I’m not saying that you shouldn’t look to a power broker or an alternative supplier.  I’m saying you should look to an analysis with a good background of how buildings can use energy brokers or perform the analysis themselves.

Fixed and Variable Supply Products

There are only two basic types of electric supply products that are offered by all suppliers: fixed and variable.

If you want to fix your costs to achieve budget certainty, but pay a modest premium to do so, then a fixed price contract may be what you are looking for.  But do yourself a favor and at least split the fixed costs between on- and off-peak pricing.  In ComEd’s territory, on-peak pricing is between 9 a.m. and 10 p.m. on weekdays; off-peak is everything else.

On- and off-peak pricing does not add more risk.  In fact, it’s closer to the prices that the supplier is actually getting on the wholesale market.  A flat rate, on the other hand, would be calculated from the supplier’s variable rate.  It costs much less to supply power at 3 a.m. than 3 p.m., and the alternative supply agreement should pass the savings on to you.

The other basic option, the variable product, can run the gamut from being mostly fixed to real-time pricing.  Over the long haul, the hourly price is generally the cheapest because it’s not hedged with premiums to fix the cost for some period.  But an hourly price can be the most expensive during certain periods of shortage, and prices can increase to shocking levels over the short-term.

Understanding how and when your building uses power, your building’s tenant vacancy, any operational changes, and your risk profile will go a long way in determining which product to choose.  Once a type of product is chosen, an RFP that takes into account the suppliers’ contractual differences can result in a beneficial, properly risk-managed energy procurement strategy.

So instead of simply looking for an off-the-shelf quote, consider putting in the legwork to really find a company that meshes well with how your building is run.  Many choices for brokers exist, and the best one may be the one that knows your particular building better than anyone:  You.

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About Mike Munson

CEO of Metropolitan Energy, LLC
This entry was posted in Uncategorized and tagged , , , , , . Bookmark the permalink.

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